With an increasing number of countries now banning commissions for planners, many practitioners impacted by the changes are finding fee-only services actually benefit their businesses -- if they structure fees to match their strengths, according to panelists at FPA's annual conference in San Diego.
Their lessons are valuable take-aways for practitioners considering the transition in other countries that have yet to take regulatory action -- including the U.S., experts say at the Friday session of the Financial Planners Association conference.
The United Kingdom, Netherlands, Australia, India and other countries have banned commissions in whole or part, and practitioners in those countries have to change their relationships with their clients, says Robert Reid, a planner with Syndaxi Chartered Financial Planners in London.
"Client education is absolutely essential if we're going to take this forward," Reid says.
A number of surveys recently conducted in the UK show that clients are in favor of fee-only practices because of perceived lack of bias, the ability to have face-to-face meetings with the advisor and the likelihood of good explanations from highly-qualified practitioners, Reid says.
However, many clients are not clear on how particular fee structures translate into different types of services, and hence, may not have a clear idea on how to best shop for an advisor.
"We have to not only educate clients on the cost, but we also have to educate them on what it's worth, what exactly is entailed and what is going to be delivered -- getting across the whole question of value," he says.
Steven Helmich, director of advice based distribution for AMP Ltd. in Sydney, Australia, says his firm in July, 2010 chose to move to a fee-only structure for practitioners that market its product, ahead of Australia's ban that takes effect in July, 2012.
Since then, feedback from affected practitioners has been for the most part positive, as their confidence has been building as each individual speaks to more clients, Helmich says.
"There's been a higher-than-expected client acceptance of the new fee model -- the issue is more of a planner mindset than a client concern," Helmich says. "If you have any fears, then you need to get out, because it's your fear and not your clients' fear."
Susan John, president of Financial Focus Inc. in Wolfeboro, N.H. and current chair of the National Association of Personal Financial Advisors, outlined the pros and cons of several types of fee structures -- hourly fees, percentage of assets under management and retainers -- and discussed potential conflicts of interest with each of them.
For example, hourly fees are easy to explain and it's easy to charge for financial planning services separately. But there's also the perception that the "meter" is always running, it's more cumbersome to track, bill and collect and there are only so many hours available, John says.
Conflicts can occur if the client asks a "high-value" question that takes the practitioner just 15 minutes to answer, but is tempted to charge more because of the expertise required to answer that question quickly. Alternatively, if the client asks a "low-value" question that requires the practitioner to spend a long time researching, the practitioner might be tempted to charge the full time for that non-expertise.
"If you're going to start charging for your services, you need to clearly understand your value-proposition and be able to clearly articulate that to the client," John says.
Cory Hill, a planner at Rogers Group Financial in Vancouver, Canada who attended the session, says that he is beginning to realize that "it's not as simple as fees versus commissions."
Hill, who now mainly charges a commission but has a small component of his business that is fee-based, says that the panel experts convinced him that he needs to analyze his particular practice strengths and structure his fees accordingly.
"I need to turn away from focusing on what the competition is doing and what regulatory changes may be down the road, and look at what skills set I should base my remuneration," Hill says.
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