In many conversations being held at dinner parties and in the media recently, the topic of fees and services in the financial advice world are being vociferously discussed. Should we pay a financial advisor an upfront hourly fee for the service they provide, or should they simply earn a commission for the product they sell? Is their job to provide a service, or is it to sell a product? Never before, has what an advisor earned, or how they earned that income, been such a huge topic of interest.
The general consensus is that they are supposed to provide a service by advising clients how best to build a financial plan and then provide products to meet this need. But, again the question arises; how do they get remunerated for this? At present they are being remunerated through various commission structures, from upfront, to on-going, to lump sum payments. The varying sizes of these amounts, as well as the lack of information being provided on these amounts, is where much of the distrust in financial institutions has arisen from. In today’s age of corporate greed, government corruption and ongoing scandals, how do we go forward, and what are clients, as well as advisers, going to do?
From all this talk, many different ideas and products have been launched. In the investment and retirement industry, the concept of ‘clean pricing’ has arisen, where clients are provided with the exact cost of each investment, as well as how the advisor is paid. This has then lead to the rise of the passive/tracker fund. These funds remove the advisor and the fund manager from the cost and just follow an index. This reduces the cost substantially, but at what cost to performance and future growth? It also means that all the knowledge, choice and responsibility then rests with the client. Recently the Passive tracker funds have been the go-to and much lauded product in the market, because the overall markets in the world are growing, and tracking these funds has provided great returns that active fund managers can’t match.
But, what of the future? When the market goes the other way and negative sentiment takes over, these funds do not protect your money, as they are not designed too.
The next step has been the introduction of a Robo Advisor. Yes, I know it sounds a little Sci-fi, but it has been well accepted especially around the short term insurance market. Basically put, this a computer program that asks the client questions and then provides the client with a solution. The solutions are all general and the client either fits into one box or another. These solutions remove the advisor, and reduce the commission being paid. Yes, you are reading right, there is still commission being paid to the company who created the robo- advisor, but to be blunt, money still has to be earned. Some of the programs will inform you of the money being earned others will not, as it will be provided in the paper work only. There is no way of getting a tailor made plan to meet your individual needs, as you will either fall into a specific box or not. It also has to be noted that all further questions or research that needs to be done on the product, is then left to the client to perform. Again, as in Passive funds, the onus is on the client, not the advisor.
So after all this, and the continual legislative requirements being metered out by the Financial Services Board, what is going to happen to advisors? Does this spell their death knell, and are clients, that is the general public, going to be left to their own devices and hope that at some stage someone explains what all the financial concepts and ideas are about? In some ways yes, that is the future, but in others there is a new concept growing…which is, for want of a better word, a ‘pay as you go advisor’. This idea is slowly but surely gaining traction and more and more advisors are asking; how do we do this? My questions is; is the general public ready for this? Yes, certain sections of society will look at this service and see added value and their needs being met, but unfortunately the rest will rather put their trust in robo-advice. However, this service is providing a choice. The choice is; are you going to pay an hourly fee for the research and custom built plan that you will receive or not? Will you pay a monthly fee to be able to have access to this knowledge and their views? We do it with lawyers and doctors, will we do it with advisors? What are you willing to pay for and how much will you be willing to pay for it?
The above questions are the start of the discussion, the building of a whole new industry. As the saying goes ‘we are in the age of disruption’, whether we embrace this change or stamp it out, is now up to the client and not the advisor. Discuss these ideas and concepts with your advisor and ask them how they view their future and ask yourself where you see yourself and your advisor in the future.