Opinion: FDS: A closer look

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At the outset, I’d like to emphasise that no advice model is unimpeachable. It’s in everyone’s interests for a variety of business models to operate. But every adviser, regardless of their business model, will ultimately be forced to consider issues of cost, price and value.

It’s the question of value that I think is the real point of contention; the FDS has caused some advisers to consider the remuneration they receive and the services they provide, and they are concerned that the “value” of the services they provide is not evident. I understand that many advisers struggle to articulate the value of the services they provide, but I also appreciate that their clients do significantly benefit from the advice and services they provide.

Admittedly, many advisers consider the FDS to be an inferior engagement tool to their current processes. Some practices already exceed the FDS’ minimum requirements and tailor their services to their clients’ needs. Unfortunately, other advisers principally see the FDS as a threat to their revenue streams (and would no doubt see best interests and the client priority rule in similar terms). As one adviser asked me recently, how are clients likely to react when they see what they paid for “quarterly newsletters and the opportunity for an annual review?”

In my experience, the great majority of good advisers legitimately provide valued services, and these changes provide them with an opportunity to promote their value and the professionalism of their offering. Some advisers may struggle to rationalise and defend their passive income stream model and subsequently disappear from the industry, but I don’t think that this is either an undesirable nor unintended consequence of the reforms.

Whether we like it or not, value – not remuneration source or association – will be the new battleground for financial advice, so we are best dealing with the new reality and turning our minds to better explaining the significant benefits advisers provide to their clients.

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  • GAB on 6/09/2013 10:11:39 AM

    Financial planning services are a consumer choice, it is not compulsory. Doctors fees are government subsidised, accountans fees are tax deductible and paying tax is compulsory.

    Should the government one day decide to subsidize advice fees and/or make obtaining advice compulsory, then sure....happy to oblige with a fee disclosure statement.

    At the moment it is a costly time consuming and futile exercise, successful in stifling productivity. I think ASIC mentioned an FDS shouldn't be used as a marketing tool....correct me if I'm wrong.

  • James Smith on 6/09/2013 9:52:44 AM

    David do you have any idea how much money has been spent to conform with the FDS ?
    Do you realise that the FDS only covers service fees and excludes ongoing commissions ? Do you understand that clients want to understand the total cost of managing their financial affairs ? Do you realise that the total costs for running their affairs are included in their SOA when they engage an adviser but these are not being disclosed in the FDS ?The FDS is ill conceived and unneccessary red tape. To argue that it is a good thing for clients to understand their fees and service is a given. The FDS does not achieve that.If they want to understand their fees they would be better placed reverting back to their most recent SOA which is a far more comprehensive document than the FDS. If you are concerned that they may not have their SOA to refer to perhaps you could suggest they contact their adviser who will have a copy on file ( a compliance requirement) .

  • David on 6/09/2013 9:23:33 AM

    I've read the article but I wonder whether some of the commentators have. Maybe they've read it but not understood it.

    The author argues that instead of complaining about the FDS advisers should recognise the consumer benefit it offers and use it to show the real value they provide. He's suggesting that the FDS is directing focus to the services provided (and their cost) and this is worrying some advisers. That seems reasonable to me. He's not arguing for the FDS just suggesting that the FDS isn't the real problem.

    He's certainly not saying the FDS is a solution for anything or a great thing for financial planners. Craig's right - it's hard to convey the less tangible benefits but the author thinks these benefits should be explained.

    I think that a lot of FOFA was designed to benefit industry funds and push out some existing planners or push them into the arms of the banks. We've talked about this a lot and none of us like it but it's happening.

    And aren't the lawyers already running the show GAB? Really, play the ball not the man - no one likes it when financial planners get bagged for being financial planners (eg Storm, CBA, Westpoint)

  • James Smith on 6/09/2013 8:11:28 AM

    The key issue in this debate is that those that are promoting more and more legislative demands on advisers show a lack of understanding of both the current legislation in place and the services provided by financial planners. Their arguments are full of incorrect assumptions or rely on cherry picking examples of poor behaviour. What is clearly required is a more informed debate where the large industry funds and retail funds do not dominate . Their agenda is to increase their FUM by whatever means they can. What is indisputable is the gap in the service and advice quality between advisers running their own business compared to big institutions that see service as a cost. Past behaviour is the best indication of future performance. The cost cutting of the big instos and their transfer of jobs overseas is on the record and the subsequent drop in service levels is evident. Advising businesses on the whole have had a demonstrably better quality advice and service track record and offer real hope for job creation. Such quality service comes at a price so any attempts to steer clients into a low cost structure or increase red tape will have the adverse consequence of either a drop in service/advice quality or increased costs due to red tape. The communication from the coalition government to date have shown a clear understanding of these points. We need to vote them in and then hold them accountable to deliver on a more balanced approach to the regulation of our industry.

  • James Smith on 5/09/2013 4:16:20 PM

    Be careful about your assumptions Pat.
    We regularly refer clients to a broker who will get them a better deal than their bank and yes the clients do move. We have referred 4 in the last few months. You really have a low opinion of the average person if you think they will not shop around for better value. Presumably you would - what therefore is the basis of your assumption ??

  • Michael O'Hara on 5/09/2013 4:07:40 PM

    Hi world, Old Dinosaur here.

    Amongst the chatter about rights and wrongs and obligations, can we please retain a little bit of understanding of the legacy issues surrounding what is a generational change in the way financial planning is costed and paid for?

    Trailing commissions and up-front commissions, were originally a distribution cost to product providers, and clients did not directly pay for the advice, services or adminstration support they received. In effect, advisors took the risk of being underpaid for their work. Accounts had to stay in force for a long time to make the business profitable. As a balance-up, that smaller ongoing income could convert to a larger lump sum if the advisor built a strong enough business. Now an argument is being made that payment for previous work/services/business must involve the provision of additional services/work.

    Under some of the language that peddles as informed comment, my acceptance many years ago of a minimal up-front compensation on work done in return for an ongoing fee/trail/brokerage, stops me qualifying as a "good" adviser - or worse still, boxes me as one of the "bad guys" that need to be weeded out of the system. This was deferred compensation - not a payment for ongoing service. Feel free to pull out 3rd standard deviation examples to negate my comment, as that is the standard response.

    If you think i am taking all this personally then please understand that i very much am. If anyone needs a history lesson on how the financial planning industry was labelled as crooked, and forced to move from "up-front" costs to "ongoing" costs and now back to "up front" costs then feel free to buy me a coffee sometime.

    The article suggests that as an old dinosaur whose business has included a component of the "passive income stream model", i will "subsequently disappear from the industry". i would suggest that such commentary is misinformed and implies a lack of understanding of the dynamics of what is a highly diverse, and robust financial planning sector. i expect to stick around. Just don't expect me to lay down and let people label me as a "bad advisor" because of my time in the industry.

  • Michael O'Hara on 5/09/2013 4:06:25 PM

    Hi world, Old Dinosaur here.

    Amongst the chatter about rights and wrongs and obligations, can we please retain a little bit of understanding of the legacy issues surrounding what is a generational change in the way financial planning is costed and paid for?

    Trailing commissions and up-front commissions, were originally a distribution cost to product providers, and clients did not directly pay for the advice, services or adminstration support they received. In effect, advisors took the risk of being underpaid for their work. Accounts had to stay in force for a long time to make the business profitable. As a balance-up, that smaller ongoing income could convert to a larger lump sum if the advisor built a strong enough business. Now an argument is being made that payment for previous work/services/business must involve the provision of additional services/work.

    Under some of the language that peddles as informed comment, my acceptance many years ago of a minimal up-front compensation on work done in return for an ongoing fee/trail/brokerage, stops me qualifying as a "good" adviser - or worse still, boxes me as one of the "bad guys" that need to be weeded out of the system. This was deferred compensation - not a payment for ongoing service. Feel free to pull out 3rd standard deviation examples to negate my comment, as that is the standard response.

    If you think i am taking all this personally then please understand that i very much am. If anyone needs a history lesson on how the financial planning industry was labelled as crooked, and forced to move from "up-front" costs to "ongoing" costs and now back to "up front" costs then feel free to buy me a coffee sometime.

    The article suggests that as an old dinosaur whose business has included a component of the "passive income stream model", i will "subsequently disappear from the industry". i would suggest that such commentary is misinformed and implies a lack of understanding of the dynamics of what is a highly diverse, and robust financial planning sector. i expect to stick around. Just don't expect me to lay down and let people label me as a "bad advisor" because of my time in the industry.

  • Fred Smith on 5/09/2013 3:16:12 PM

    Pat, don't you think that if clients feel they are not getting value out of a service that they signed up for, yet are too apathetic to do anything about it, it should not become someone else's problem? Surely they are adults, and perfectly capable of making a decision, and taking action on that.

  • GAB on 5/09/2013 2:51:13 PM

    Good point Pat....what exactly is good value? Being told you're a Diamond client and getting blitzed with movie tickets, newsletters, seminars from sporting heros? ....or having you're adviser actually try and kick some goals with the original strategy?

    I doubt an FDS demonstrates value. I think advisers think they have kicked some goals when they send them out....but I don't reckon the client sees any value in it.

    Some clients love all the bells and whistles and think that's good value....some don't and won't. Some want a contact only if the adviser thinks something needs to be changed, some want to phone every week to make sure their adviser hasn't fled the country. They're all different.

  • Pat on 5/09/2013 2:37:23 PM

    GAB, do you really think clients are that astute that they will change behaviour if they are not getting good value? Take the banking experience - people continue with their banks out of apathy rather than knowledge they are getting a good outcome.

    Same with insurance, telcos and many other services.

  • James Smith on 5/09/2013 2:27:33 PM

    The continual assertions from the likes of Graham that clients don't know what fees they are paying is both ignorant and offensive. Of course clients deserve to know what fees they are paying. They have it disclosed before they engage the adviser , whenever a change in a portfolio is made or whenever they request it from their adviser. My last experience with a lawyer was one who prepared a will for a client - he charged 4 times the cost of the lawyer we usually use and then wanted the client to pay extra fees at his hourly rate to fix errors that we had identified ! Furthermore, their fees were not disclosed BEFORE the work was done ( as is the case with most financial planners ) and the client was expected to cop it. Isn't it reasonable for a client to know in advance what they will be charged rather than being given a vague hourly fee scale. Isn't it reasonable to expect that if a lawyer makes a mistake he/she will fix it without fees. Perhaps Graham should look in his own back yard before throwing stones.

  • GAB on 5/09/2013 1:45:48 PM

    It's simple really....if a client doesn't think they are being looked after they will take their money elsewhere....plenty of competition out there. I've spent a good part of this morning generating a few FDSs and I double check the amounts. Then I check my file notes and reviews to see whether I should include all that detail. Then I decide whether to email or post it based on previous communication channels.

    Now...these are fees that were only just disclosed in their annual statements. I've already done a review prior to this FDS due date. Now I have to prepare another load of paperwowk and make sure the client realizes this is not an additional layer of fees but ones that are already being paid and disclosed at least annually.

    If you need a government legal requirement to make you do your job, well sorry to say....go live in a communist country.

  • Alistair on 5/09/2013 12:33:23 PM

    Now coming from a LAWYER. Are they part of the problem or interested in being part of the solution. The disclosure element is a must. Duplication and confusion though ought not be part of the solution. Surely to implement the story properly ALL fees regardless of provider be they an industry fund or otherwise should be spelled out. Leaving this process to an adviser would leave a small business without the infrastructure to implement in a compromised position. So the solution ought be - adviser with SOA discloses the cost both initially and ongoing and these costs are then reflected and administered via the provider or platform. Its that simple - of course unless we need some over thinking lawyer to muddy the waters to justify their existence. By the way anyone know what you call 1000 lawyers at the bottom of the ocean....a good start.

  • Justin Brand on 5/09/2013 12:26:37 PM

    I note some of the comments about lawyers in this thread are similar to those broad criticisms levelled at financial planners.

    I think Sean Graham is correct when he says that most people would struggle to understand why someone shouldn’t be told what service they have paid for and actually received. I think if you asked the public if they thought it was reasonable to expect a statement each year (often several years after the initial SoA) outlining their ongoing service against the fixed fees they are paying, then a resounding majority would say that it should be mandatory.

    Rather than focus strictly on the legal aspects, Sean discusses the FDS from the point of view of the client and ultimately makes the case that he feels advisers should focus on the great value we provide.

    I don’t think good advisers need to worry. Yes, there is an additional admin burden, depending on your business model. But I for one am happy taking on some additional admin to help force the small number of advisers who don’t already do the right thing to do so. I don’t think we should be flippant with something as important as documenting a justification for the fees we charge. Whether the FDS is the ultimate solution or not, it is forcing many advisers to revisit the service they offer and make sure its valuable in the eyes of the client who pays for it.

  • Scott on 5/09/2013 9:56:07 AM

    My one and only experience with the legal system via a lawyer left me with an everlasting bad taste in my mouth and a feeling I had been shafted financially for the work he said he had done.I paid the account and would never go back to him and if possible avoid the profession as a whole.Is this where Financial Planners want to be?

  • Craig on 5/09/2013 9:53:48 AM

    I was at a conference some years ago and the key note speaker started by asking what is our role as Advisers. The usual responses followed such as educating clients, asset allocation portfolio management etc etc. He agreed this was all part of our role, but wasn't the real core purpose. He then went on to say that our main purpose is to keep our clients faces off A Current Affair! He wasn't being flippant.
    My point being it's often difficult to convey in an FDS letter the less tangible, but ultimately much more important, things we do for our clients.

  • GAB on 5/09/2013 9:35:31 AM

    Hard to believe a client would engage a planner, pay fees and do an investment strategy without being told at the start what it's all about. Do they need to be reminded every year by a piece of paperwork they probably don't read and pile up with the rest of the paperwork.

    Always a worry when lawyers start running the show.
    Seems clear to me, that unless the client gets this FDS everyone thinks the client isn't getting any ongoing care, which couldn't be further from the truth. In fact, one could argue that the more time we spend on paperwork like this the less time we get to spend on atually reviewing clients situation. " ahh thank god I finished that FDS, my job is done here, can rest easy for another year knowing I'm am compliant with the law".

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