All forms of adviser remuneration are imperfect! (Part 3)

Welcome to Ray Griffin’s third and final article in the series: All forms of adviser remuneration are imperfect. In Part 1, Ray discussed the imperfections in the hourly rates method of charging and in Part 2 he pulled apart the problems with asset based fees across financial advice and banking. In Part 3, he looks closely at how the government raises its revenue and then investigates the perfect charging system.

Taxing

It is very noteworthy that the Australian government of the day charges all tax payers a commission on their earnings and transactions for the services it delivers to them as citizens. While some argue that the so-called rich and big business should pay a higher share of the taxation burden, undeniably some such stakeholders already subsidise the cost of services to many citizens who either pay no tax at all or very little by comparison. While we will never hear of a government referring to taxation as a ‘commission’ it nevertheless remains that tax is not an hourly based fee – and nor could it ever be – and it’s not a fixed fee. Even the most strident of political conservatives would have to concede that tax is a (very complex) socialisation of the costs of running a nation, of paying for the services governments deliver to their citizens.

With this in mind and considering the deficiencies evident in both hourly and fixed rate fee systems, it really is difficult to accept an argument that asset portfolio based fees are entirely wrong; that they have no place as a charging system in financial advice.

Full information – freedom of choice

In the context of portfolio management, with full information as to how much and when fees are charged, clients can withdraw from the services if they deem them too expensive. If sufficient clients ‘walk’ it is the market speaking. Eventually, sufficient clients leaving and citing excessive fees forces the business owners to adjust their pricing and expenses in order to survive. This is the commercial risk that every business owner undertakes every day; misprice your services and/or under deliver on your service promises and your business’ future will be in question.

Let’s just look back to disclosure – or the total lack thereof – in savings and term deposit accounts (Part 2). There is no disclosure yet banks and the like are charging fees for the services they provide. The Net Interest Margin (NIM) is the principle of income generation by banks across the world. If we contrast Australian bank NIMs in 2015 to NIMs before banking deregulation in the 1980s, then the decline has been quite substantial. Ironically, the decline in NIMs for banks is what largely drove their entry into the personal financial advice arena. They either generated profits from other services or they were out of business due to competition entering the deposit and lending markets and putting downward pressure on NIMs.

In financial advice services, the overriding fee issue is that clients must have full and accurate disclosure of all costs at all times. While this is a first principle of ethical conduct, it is also a legal requirement. With all fee information available, clients of financial services business can run ongoing ‘value for money’ assessments. If they believe they are paying too much they have options; look to negotiate lower fees with the licensee or leave.

The perfect fee charging system?

It does not exist. There is no perfect fee charging method; they are all flawed in some way. They all have advantages and disadvantages for clients and the firm.

Hourly rates can be abused to the detriment of the client and to the lives of practitioners pressured to work hideous hours per week in the hope of advancing higher in the firm based on their billings. Fixed fees have the potential to see lower portfolio clients subsidise higher portfolio value clients and vice versa. Under asset based fees clients pay more in good times and see subsidisation of small portfolio clients by higher portfolio clients. Lastly, asset based fees are open to abuse if advisers recommend investing over debt reduction. There is no form of charging that for results in a ‘win win’ for all parties all of the time.

At law there can be no excuses for disclosure breaches. Disclosure gives clients the information needed to make a value for money assessment at any time and allows them to make a decision to remain as a client, or leave the firm, or seek to negotiate lower fees or even the same fee with increased service levels.

The bottom line is if clients perceive what they pay and how they pay is not good value for money, they will leave. If they’re happy they will remain as clients. It is their decision to stay or leave.