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Fee for service versus commission based planners

Discussion in 'Financial Planning' started by Jono, 10th Jul, 2009.

  1. Jono

    Jono Member

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    Hi everyone, just wondering what your thoughts are on this, particularly the financial planners lurking in this forum :)

    I've always felt that consumers are best off going with fee for service advisors, even though the initial costs are typically higher.

    I'm in the process of writing a blog post on just this topic, and would really appreciate some input.
     
  2. Jacque

    Jacque Team InvestEd

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    Hi Jono

    Not speaking as an FP here but instead a consumer.
    I've always been an advocate of a fixed fee system, due to the conflict of interest that commission based fees can obviously represent. No matter how unbiased you say you are, it's near on impossible to remain totally objective when Source A is paying you more for their product that Source B. To call yourself a truly independent FP it's my opinion that a fee system is the only way it can work, but I'm sure others here will disagree.
    Just my two cents worth anyway
     
  3. Jono

    Jono Member

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    Hi Jacque, thanks for the reply.

    I'm of the same opinion as you are. As you say, a non fee based service seems to lead to a serious conflict of interest.

    I'm actually wondering whether we need legislation to make commissions in the FP industry illegal.

    Any thoughts? Want to get both sides of the story here, so would be very grateful for any FP's who want to weigh in on this.
     
  4. nitro-nige

    nitro-nige Well-Known Member

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    Fee for me.

    Wasn't there a news item in the last few days about the FP industry wanting to ban commission based services? Something do to with improving there image and reputation.

    Personally I lean towards fee for service. My wife and I are in the process of finding an FP. But there is part of me that looks at it from a cost verse earnings point of view.
    E.g.
    If you paid $1,000 dollars in up front fees, the FP gets nothing in commission, and you earn $50,000
    Verses you paid $500 dollars in fees, the FP gets a commission, and you earn $40,000.
    Which is better?
    Unfortunately in reality you can't make those comparisons.
     
  5. bigbuddha

    bigbuddha Well-Known Member

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    Hello,

    Unfortunately the commission vs fee for service is not a black and white one. I have been an FP for 10 years and currently own my own firm.

    Here's a few points from a business owners perspective and a clients perspective.

    BUSINESS OWNERS

    1. What right does the government or any professional body have to dictate to a business owner how they are to be paid. Remember, MUSSOLINI defined fascism as "... the combining of the Goverment and Private sector ..."

    2. Why should I as a business owner not be allowed to provide choice to clients as to how they pay? Not everyone wants to pay upfront, but others do, why shouldn't I be able to cater for both?

    3. Charging fee for service has tremendous lag on a businesses profitability and cashflow, as in late payment of invoices, actually getting invoices out to clients etc. Whilst a commission structure allows a business to not have to worry about being an invoice centre.

    4. The affordability or ability for clients to pay upfront fee's maybe limited or prohibitive, therefore using commissions as a payment vehicle is a viable alternative. For example PERSONAL INSURANCE. Would you as a client want to not only pay for the insurance advice upfront but the actual insurance premium as well? I charge $150 per hour, a typical insurance client from start to finish takes 10 hours, that's the insurance plan writeup, application and followups for medicals and such, so i'd have to charge $1,500 upfront before the client even pays the insurance premium. Also I am obligated to review that client each year, so i'd be invoicing the client for that as well.

    There's just a few things from a business owner's perspective. Now for my business, we are actually a fee for service firm for everything except personal insurance, which for reasons stated above is generally impractical.

    FROM THE CLIENTS PERSPECTIVE

    1. Generally fee for service creates an environment of unbiased advice. The payment for "advice" is totally removed from the "products" recommended. So no matter what is adviced upon or products recommended the payment is the same. That's a good thing.

    2. Costs are as transparent as can be. You use this particular service this is how much it costs as opposed to "commissions" which can be multi layered and hard to shift through, believe me, even after 10 years of this stuff, I often find undisclosed commissions, whether they are stated as "commission" or not, you know that they are. Look for the word like "marketing payment".

    3. Clients must still be aware that just because someone charges fee for service doesn't put them above doing dodgy stuff or biased strategies. One strategy which has been heavily promoted and in alot of cases is unjustified is the use of SMSF's. Clients are hearded into SMSF's, which costs alot to start up and maintain, when in fact a normal industry fund or retail wrap/fund would be more than sufficient.

    So there you go just a few points from an industry and client perspective from someone who has been in the game for 10 years.

    regards,

    bigbuddha.
     
  6. AsxBroker

    AsxBroker Well-Known Member

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    Hi BigBuddha,

    I do wonder why people are happy to pay for a mortgage broker via commission but not a financial planner. Who actually has meetings every year with their mortgage broker? Especially if they aren't selling you another loan? It comes back to perceived conflicts of interest.

    Like you said "it's not very black and white", I think we will probably find in a few years a standard servicing fee will come out of the client's account replacing the existing commission which currently does not come out of the client's account and not transparent. Or we will see more wrap accounts and a service fee will be agreed on and will come from the client's account. Naturally servicing fees have a wider variety, eg, flat dollar base per year, %, etc.

    Jono it would be very interesting if the industry were to make commissions illegal as many financial planners can also write loans and insurance which are paid via commissions (ie, mortgage broking and personal insurances).

    Cheers,

    Dan
     
  7. Jono

    Jono Member

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    Nige, as you say, you can't really do a cost vs. earning analysis in real life, and it's true that in some cases the customer will end up less out of pocket with a commission based service.

    I guess what really irks me is that if I go to advisor, I want him to be thinking purely about improving my financial situation, not his own.
     
  8. Jono

    Jono Member

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    BB, thanks for the indepth reply. Much appreciated.

    Though even after reading your post I would still maintain it is in fact a fairly black & white issue from the client's point of view.

    Your primary justification for a commission based system seems to be the ability for clients to essentially defer the upfront costs generally associated with a Fee for Service system.

    While that might be true, the cost of this privilege - namely, the person managing your money now has a conflict of interest - is, in my opinion, far too high.

    Another thought: Why does Fee for Service necessarily have to imply paying for everything upfront?

    I do see where you're coming from on the insurance thing though.
     
  9. Jono

    Jono Member

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    Dan, it would be interesting, but I feel like we'd see some very creative solutions emerging to keep premiums down.
     
  10. bigbuddha

    bigbuddha Well-Known Member

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    Unfortunately,

    Fee for service, does mean the client paying for things upfront. Unless business owners wouldn't mind going broke very quickly.

    In terms of the dollar cost of fee for service vs commission, if you calculate the dollar value there isn't that much difference. And to be perfectly honest from a business point of view, you would just bump up the cost of the fee for service to effectively match the commission. I know alot of practices down in sydney/melbourne charge upto $20,000 per year for their service, and honestly they really don't provide that much more than your average planner. Like I said, the commission structure is for alot of FPs just a payment mechanism.

    And basically by saying you see the point on insurance your assumption that it's black and white for clients actually makes it somewhat grey doesn't it? Because that was just one example theres alot more.

     
  11. bigbuddha

    bigbuddha Well-Known Member

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    Unfortunately,

    No one in their right mind would do a service for anyone without thinking about the impact it has on them personally at some point. Such a utopia unfortunately does not exist.

    As a business owner, I have to think, ok, I potentially may take this person on as a client, however, does the amount I am going to make from him/her justify providing him my time and services, and if it doesn't well either he/she has to stump up more cash or I'll just have to say there are probably other providers which can meet your needs.
     
  12. APerry

    APerry Active Member

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    The changes that have b een proposed for the FP industry really worry me. If advisers have no certainty as to their income, because the client can switch off the service fee, then they will have to charge more. Also, it will not be financially viable to give advice to people who do not already have a decent net wealth (the very people who most need advice) if there is no option to take contribution fees.
     
  13. FinSpec

    FinSpec Member

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    An age old debate indeed!

    When I started working for a fee only non-commission firm, it was like a weight had been lifted off my shoulders - I could recommend anything that I wanted to and not had to worry about the financial consequences for either myself or the firm.

    In theory, how a professional gets paid should not really matter, but when it happens that they will ONLY get paid if you transact on an investment, then you're created a conflict. I'm afraid that it's going to be around for a while.

    I believe that stripping the commission from the industry in the short term will provide more harm than good, but I think that a 3 year or so transition away from commissions could be a good thing. If a finacial planner can't present their value proposition to a client before the end of a 3 year time frame, they don't deserve to be earning money off them.

    My old boss used to tell me - never charge for your time, becuase that way, you're limited how much you have to sell. Those were the old ways I believe - I just hope that planners don't go the way of lawyers :eek:
     
  14. Jacque

    Jacque Team InvestEd

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    But the difference here is that MB's are paid their commissions by the lenders, not the consumers (at least not directly!) Big difference.
     
  15. greygoose

    greygoose Member

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    The problem is that if all commissions are gone, this is what will happen. i believe the best option is the adviser review fee. the whole problem people have with commissions is that they can be hidden. when using platforms the trail can be dialed out and a review fee added, the client sees exactly what the adviser is getting paid and they can then decide whether they r worth this. this is how we run our office.

    insurance cover is a different story, i think it needs to stay as it is, as Australians are vsatly underinsured as it is, and asking people to fund all the fees for the adviser's service would just make this worse. I also believe the argument against insurance commission should include jobs like mortgage brokers, as insurance commission is paid from the underwriters margins, just like a mortgage brokers trail.
     
  16. AsxBroker

    AsxBroker Well-Known Member

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    Hi Jacque,

    That's exactly what the problem is. A commission is an amount paid by a product/service provider and not directly by the consumer and not an amount agreed by the consumer.

    Why is it different for someone borrowing money than someone investing money?

    How easy is it for a mortgage broker to say "Lender XYZ is better than Lender ABC because of better customer service/better rate/better package/etc" when the reality is they want the borrower to take a loan from XYZ because they get a higher commission?

    Another potential scenario is:

    Product A costs slightly less than Product B,
    Product A pays more commission than Product B.

    Potential conflict of interest as the commission is higher? Or good advice for the client? I've specifically avoided specifying whether the product is an investment or a loan as we are talking about commissions and not financial products/services.

    Cheers,

    Dan
     
  17. bigbuddha

    bigbuddha Well-Known Member

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    Hmm,

    The commission fee would be wrapped up in the interest rate paid and general fee's being charge by the bank. No free lunches.
     
  18. APerry

    APerry Active Member

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    The argument that brokers should not receive commissions from banks is naive, there is no other way for it to work. Banks are not going to discount rates for loans through brokers, to allow brokers to charge a fee and still give the client the same rate they can get through a branch. If the banks did this they would have no direct customers, the alternative is that people pay extra to use a broker, this would kill the broker channel.

    The changes being made to the Financial Planning industry will not have as drastic an affect as FP's are able to give greater ongoing value and clients are likely to be more willing to accept ongoing fees, but they will almost definately price a lot of less wealthy customers (who are in most need of advice) out of the market.
     
  19. GregR

    GregR Reid Consultants

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    Mortgage Broker Fee for Service

    AsxBroker, in another thread, asked me to explain how I charge a fixed fee for service (it was a different discussion on RHG and the new RAMS). I am a finance strategist and build models put together strategic long term plans for clients based on a finance strategy utilising property. I am a professional accountant. I charge a fixed fee for that service and if the clients choose to use me as a mortgage broker, I will rebate any upfront commission I am paid by a lender back to the client. I provide some other services at my cost, credit check and valuation, so most investors are ahead by hundreds of dollars after tax (clients will rarely say that a rebate is income for tax declaration).

    I have based my fee on a combination of a win for the client with a median property loan ($350k) and an approximate hourly rate for my professional time spent building their models and plans with documentation that I would charge as an accountant. If they purchase a higher priced property and the loan is higher, they get the higher rebate.

    The reason I moved to that model was to take away the perception of lender bias or even amount of loan bias. I present a number of lenders that suit their needs and it becomes their choice. The commission goes back to them. I keep the trail as that is just too time consuming to factor in and I continue to provide an ongoing service. With the changes to commission structures, some lenders no longer pay trail at least in the first 12 months.

    I have seen clients where their previous broker just uses one lender time and time again and it is to the clients detriment. The conclusion is either commission driven or they are an ex-banker and they know that lenders system (and get branch referrals perhaps).

    I have also seen many brokers refinance clients (churn) to another lender as they would only get paid on any increase with the existing lender but the full whack with the new lender. I think it is wrong unless it is a better deal for the client.

    I am not sure all brokers could add value as I do but then I specialise in the multiple property investor market. It would not work for all market segments, I also do some work with seniors and pensioners could not pay a fee, so I get paid as a normal mortgage broker via commission, although the loans are generally so small the costs to provide the service often outweigh the commission.

    I hope that explains why I have moved to that fix fee for service model.
     
  20. AsxBroker

    AsxBroker Well-Known Member

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    Hi Greg,

    Thanks for filling us in about your Fee for Service model. I thought it was interesting and relevant to the discussion in this thread. I imagine most client's are very happy when they receive their rebate as well.

    Cheers,

    Dan