The Life Insurance Framework debate has raised the issue of financial advisers having to consider changing their remuneration structure, with some advisers questioning how they can make the transition to a fee for service model. According to The Social Adviser Founder, Baz Gardner, a lack of clarity around fees and the services they cover is a common issue among advisers. In this article he looks at the reasons for this and in his response to riskinfo readers, proposes a very different model for a risk based advice practice…
A recent article released by riskinfo, relating to observations around charging clients for advice, sparked an immediate reaction from readers who challenged the views of its author, former financial adviser and founder of The Social Adviser, Baz Gardner.
Gardner’s blog post has been included in this article, along with an edited transcript of Baz’s response to riskinfo readers, in which he states that advisers can and should be able to use commission as a valid payment option for securing cover for their client.
Gardner says it is possible to charge fees for risk insurance advice but does not advocate that this should be the only model for the industry and advisers should not be forced into such a model if it diminishes the quality of advice to consumers and the ability of advisers to deliver it.
He states these are his observations, based on his own experience as an adviser, and may not suit other advisers or their business models. In that context, Gardner proposes a new model for a life insurance-only advice business which focuses on a wider spread of issues, while keeping insurance at its heart:
My 10 best observations – Charging Clients
In the professional world, one of the single biggest determinants of success I have found is the ability to charge appropriately for the value you provide.
Having worked with hundreds of businesses in the Professional Services space I have heard just about every rationalisation for what level of fees/cost is, or is not appropriate, to charge a particular client.
I am obsessed with patterns, and the patterns when it comes to Advice related professionals are pretty clear. So let me get right to the point and share with you what I have learned about Professional Services and Fees/Costs.
- Most (I estimate 60-80%) are hesitant about the discussion of fees/costs with clients. It is a topic to be ‘massaged’, ‘brushed over’ or a million other variations of obfuscation.
- An Adviser being hesitant about fees is the number one reason for a client being hesitant about costs. My observed correlation is above 95%.
- Most Advisers fail to paint a suitable value hypothesis for a client and attempt to explain value in terms of ROI (tax saving or investment return etc) or in the amount of time spent to carry out the process (over emphasis on a service offering that shows actions and process). Hint: a real value hypothesis is about the effect on the client’s life and the nature of the relationship.
- Many of the best Advisers I have encountered are significantly undercharging their clients. This means they fail to build scalable businesses and create efficiency models that allow them to serve their existing clients better and help more people.
- The principal reason Advice Professionals under charge is that they struggle with their own concept of self-worth. The pattern has shown me over and over that you are always worth what you believe you are worth.
- Charging is not about ethics, it is about value. If you are trapped by a fixed perception of how to give value to your clients and what that value is, then you are also fixed in the amount of value you can provide and how you can articulate it.
- The happiest clients I have found are most often the clients of the Advisers I have worked with who are charging the most for their services relative to their client’s ability to pay.
- The reason they are the happiest is because, in order to charge those fees, the Advisers in question are 100% certain of the value provided and continuously explicitly state it to their clients. That is to say, the Advisers are not in doubt about the value provided and so neither are their clients.
- The firms that overcharge clients almost always do so by hiding and confusing the cost to clients. This is always a strategy for short term gains and long term loss.
- All of the above 9 observations are true irrespective of whether a business charges fees directly or indirectly (via commission or invoice).
I am not writing this to suggest that you all increase your fees. However, I do suggest that you take a look in the mirror and ask yourself whether you are charging enough that your clients are getting what they deserve, that you are building a truly sustainable business and that you are honouring your ability to attract and serve more people who need your help?
Based on the comments received riskinfo readers are keenly aware of the fees vs commissions debate and the need to show value with some asking how the observations above translate into the work of a risk only adviser, rather than one who may also offer advice on investments and superannuation.
One adviser was sceptical that a fee for service risk only advice model exists and that after more than 30 years he had yet to see a workable model for fee based risk advice, which is why he did not charge this way, stating, “I have not decided I do not want to charge the fees. I have simply been unable to formulate a way.
“I remain unconvinced about risk advisers being able to successfully charge a fee. Success is relative of course so let me define it; a fee at the level of a commission that is currently in place,” he added.
I have not decided I do not want to charge the fees. I have simply been unable to formulate a way
Taking this further another adviser related a case where a client, an accountant, was only interested in paying a fee. When presented with the total cost of the advice, however, the accountant argued the adviser had over charged him because it was impossible to spend that many hours arranging simple insurance.
As another adviser comment stated, “You can only charge what the client can afford, but the compliance work is the same whether it is one or three policies being recommended and regardless [of] who is the client…so you are not even getting cost recovery with those clients, which means you cannot afford to service them properly.”
Other advisers said they were keen to see a working model of how fee based risk advice could be sustainable, with one asking “Tell me how I charge $1,500 – $3000+ to a family where their risk premium will be $4000 all up. Please don’t tell me I have to value my service more. Just don’t. I do!”
Others were more pragmatic and gave clients the choice of how they wanted to pay with one commenter stating “As a ‘risky’ myself, the best we can do, while ASIC allows, it is to simply offer the client two options – fee or commission and explain the full details of both.”
In response to the comments made by riskinfo readers, Gardner posted three separate comments and these have been arranged below to form one response.
Firstly, while I do not give risk advice, I did for nearly 15 years. I have been a risk only adviser and also built a holistic advice firm. I have had more than 14,000 client meetings as an adviser and always incorporated risk advice as part of that advice. I also work directly with some of the best risk only advisers in Australia with the aim of helping them to evolve, innovate and remain relevant.
I would also like to be clear that I do not distinguish between how someone is remunerated (see point 10 above). When I say ‘fee’ or any other variation I really mean remuneration (although I will talk a little later about charging by invoice, etc for risk).
Next up, I did not write this piece specifically for riskinfo. However, if you take into account point 10 (and the fact that I am talking about remuneration rather than invoice vs commission) then my points are equally relevant / consistent for risk only advisers.
My Opinions on the Application for Risk Advice
I can say from personal experience that it is completely viable to build a fee for service profitable risk business. However, there is a very big set of caveats for this statement!
- It requires a completely different business structure / set of protocols and different thinking.
- Expectation management becomes the key driver. In the example quoted in the comments about an accountant I would say that this person would be unlikely to make a suitable client for any professional seeking to charge by invoice. Structure, certainty of value and clearly articulating expectations are the keys to charging for risk advice. Even more so is the client process.
- Making the shift to invoicing clients for risk advice would require a transition time and capital requirement that would be unviable in my opinion for the vast majority of existing risk only businesses. I was only able to switch to charging for risk advice because I could support that through other business endeavours.
- It is more expensive to run this system, which means an overall increase in cost to client (at least in my personal experience).
- If I were establishing a risk only business from scratch right now, I would absolutely create a fee for service business. But that is because I know it can be done, I like challenges and doing so would create a significant competitive advantage. That is not the same as suggesting that you or anyone else should.
- Commission or Invoice is irrelevant to the value given to clients. Charging appropriately is the issue. A removal of the commission ecosystem would result in the short to mid-term decline in the appropriate insurance of Australians (in my opinion) which is not a good thing.
Just to confirm I was not, nor have been, advocating a removal of the ability for risk advisers to be remunerated through commission. If I were building a risk business based on fees it would be through an evolution of the business and it would also require my different knowledge and skill set (see below). So just because I could build one, doesn’t mean it is a workable model for the industry.
The only way this would work (for the middle class majority) is if no one was able to be remunerated through commission including banks etc. Premiums would need to come down as a direct result and in 100% correlation. This means the direct cost to clients/customers remains consistent. However, making this change cold turkey would commercially obliterate the existing advice infrastructure. At least as best I can tell. Not a good thing…
I admit that I was only able to build a model for this previously because I had the capital/cash flow infrastructure to do so. My discussion for building a fee for service risk business is hypothetical; not an assertion of what is the right model (or what anyone other than I would do).
With that said, if I were building a fee for risk advice business now, it would require capital/resources and my knowledge set. The business would be focused on longer term engagements/contracts (ie deferred cost to match with reduced premiums, through commission offset) and with an enhanced value add through technology, online resources and a focus on the broader development of family/lives/balance and risk mitigation.
It is amazing how much value you can create to support people by leveraging community, group work and online resources. In other words, I would diversify the value proposition to be about reducing risk to families/individuals.
Any upfront load would be deferred by longer periods of ongoing fees/ membership and the perception value gap would be mitigated by a broader relationship spread.
That sense of community would be channelled through online and social media and the business growth enhanced by the resulting leveraged word of mouth.
In other words, I would re-engineer the value proposition and the impact on the clients’ cash flow. The business would not look anything like a traditional risk only business, but that is exactly what it would deliver.
Commission or Invoice is irrelevant to the value given to clients. Charging appropriately is the issue
- The conventional model of a risk only business doesn’t work with a direct switch to fees.
- Cold turkey removal of commissions would destroy the current ecosystem.
- Reframing of value, cost deferral and enhancement of ongoing relationship is an essential requirement for any move away from commission, whether delivering additional services or innovating the model.
- Destruction always creates opportunity for those willing to think differently and adapt.
- You can’t solve the problem within the same thinking with which the problem was created. That is, if you try to deliver risk advice by only switching the commission to an invoice, the model will fail (as you already know).
My Actual Point
How you charge or are remunerated is irrelevant. Clients will pay what you believe you are worth in relation to the change in life benefit you provide them.
I have had these conversations with accountants who believe that business owners will not pay for advice if compliance (P&L, reporting etc) is unbundled from their service.
For every example of one adviser saying what clients will and won’t pay for I can give counter examples of other advisers charging well for exactly what others believe can’t be done.
What matters is what you believe is valuable. What you believe clients will or won’t pay. What method of remuneration you believe is fair and efficient. What you believe to be true will be true for your clients… this is what I have observed.
This is the heart of the issue for all advice professions and they all are facing significant rethinking as the dynamics of value are being re-engineered either through legislation or technology.
This is relevant for risk advisers, financial advisers, accountants and lawyers. I believe advice is essential to our future and evolution is the only way to avoid redundancy.
If there is one thing I know for sure, it’s that disruption is the normal from here on out, whether you or I like or agree with what that means. The change and evolution of risk advice is going to be in the hands of disruptors who think differently. That is the nature of evolution and change.