Solid Foundations
When it comes to pricing, many master trusts face an endless dilemma – what, if any, rebate should be paid to advisers and what, if any, rebate should be paid to dealer groups?
The quest for optimum pricing on a platform is one of the biggest challenges faced by investment administration companies when it comes to competing for adviser and dealer attention.
On the one hand dealers (in some cases their parent institutions) decide if a platform will be made available to its advisers, while on the other hand once a platform gets in front of advisers, it has to be competitively priced and offer the desired options, functionality and service for advisers to channel client funds through it.
In terms of pricing this means two things.
Firstly, the charges adviser clients have to shoulder (primarily a manager expense ratio and admin fee) need to be reasonable and at least in line with the rest of the market, while the adviser rebate, which some planners pass back to the client reducing the cost of the above fees and instead charging an upfront fee for their services, also needs to be competitive on the upside.
Secondly and before the above can happen, platforms need to get the nod from the dealer groups themselves.
Beyond this a platform then needs to demonstrate proficiency in doing what it is meant to do – efficiently administer investments – for planners to have any inclination towards using it.
The dilemma for the platform is how much of its costing is directed at the dealer group and how much is set aside for the planners themselves?
There is a lot of debate in the industry around the costs of running a dealer group, with the general consensus being that it is not an overly profitable exercise for many groups.
Servicing a network of planners – large or small – is an onerous task and not something that can necessarily be done profitably simply through charging planners an annual license fee.
Therefore rebates to dealers as you know assist many groups in staying in the black. It is then up to the dealer as to how it distributes any of this rebate on to its planners and how much it retains as its own margin for the costs of running the business?
What does this mean for the industry?
Well, it means the industry is unlikely to curry flavour with the media, and thus the public mindset, for some time yet.
This subsidisation of the financial planning sector is holding the industry back and is one of the prime reasons it often faces scrutiny and criticism.
Last week there was significant debate on this website after an article was written relating to fees and commissions (actually it was more about industry funds versus the rest of the industry).
Some people took the moral high ground that commissions are always bad no matter how you look at them.
If this is the case then how come only 3.8 per cent of more than 800 financial planners who participated in this year’s brandmanagement annual platform research study, Fragile Trust, noted they were remunerated purely through a fee for service arrangement, while 42.8% of planners pointed to making their living through a mixture of fee for service and commission?
Perhaps therefore the debate shouldn’t be around fees and commission per se and whether advisers get paid by clients paying an upfront fee or through the investment products themselves, but rather about ways the industry can evolve in an efficiency sense and help reduce planner and dealer reliance on these so-called subsidies?
There are always going to be fixed costs behind delivering financial advice to clients that administration providers cannot reduce through better technology and systems, but any step in the right direction by reducing costs in other areas is good news for planners and clients.
There should always be an option for clients who want advice but do not want to pay or cannot afford to pay a fee themselves to a planner i.e. priced into a product, but if the industry (investment platforms) can strive to help lower some of the non-fixed costs behind giving advice then perhaps advisers can charge clients fees that more people can afford and move financial planning as a profession one step further forward?
Sam says:
Vertitas seems to be speaking with a great deal of authourity about what is happening at Genesys – most of which is rubbish.
Under the new regime at Genesys planners are better off if they use particular platfroms but as I understand it thats not about bias but business efficiency – how can they continue to run a business with a myriad of platfroms? Its just layering cost for Genesys and delivering dubious benefit to the client.
As far as I am aware the only planners that are leaving Genesys are the ones that they don’t want to stay there.
I think its great that people can comment here but it shouldn’t be a forum for planners who can’t cope with the fact their cheese has moved to have a whinge.
C’mon veritas – aren’t you just an Associated Planner operative who doesn’t like the new regime?
Nick says:
It’s nice for many people to take the moral high-ground with respect to commissions, but there is nothing essentially wrong with them. There are numerous business transactions based upon this practice – travel industry sales commissions, recruitment placings, mortgage broking, to name a few. This is disclosed in our incredibly heavily regulated industry. In how many other industries is a client function, lunch, sports event or gift required to be registered and therefore perceived, prima facie, as a sign of systemic corruption?
Shall we move to a system where the client pays for 6 minute units of time, such as in the opaque and unverifiable method in the legal industry? One would find few clients who like this system.
Fee-for-service and commissions have their place. It is up to the client to choose the one that suits them. I am an informed investor as well as a participant in the finance industry. I prefer to pay via commission for several services. The industry will shift to suit client desires, in spite the noisy faddism of various commentators. I don’t think that it needs to be pushed by people whose main agenda is not focussed on the central issue of what the client prefers.
veritas says:
The Genesys Group is currently having a minor revolt over a new business model based on platform rebate. Interestingly most planners were better off financially but had other concerns. The discussions have been very robust and the key areas of concern were;
*rebates are seen as biasing advice toward particular platforms and the press will continue to hammer this point
*assuming the current federal government loses office then Labour has stated it will ban rebates so why base a plan on such a short lifespan
*most people did not like the concept of product paying for advice and would like to see a new model that reflects this.
The Genesys responds was that they had looked at a number of models and this was the best that they could come up with.
Discussion continues but there will be/are a number of planners leaving Genesys over the proposed model.