The Battle Within
The Australian financial services industry is waging an increasingly fierce war on it itself, however it is a war, like so many in the world, that is lost on the average consumer.
The primary issue for most consumers when making a purchase is ‘what do I get for my money’ – not ‘what is the payment structure?’
This is no different for the planning industry.
Therefore the ongoing – some may say, repetitive – debate over financial adviser fee and commission structures is a debate many consumers are oblivious to.
In economics, Rational Choice Theory or at least the concept of Utility Maximisation within it, states that for consumers, spending is all about optimising utility and comparing a buying decision with the alternative utility that could be derived from making a different purchase.
When most people go to see a financial planner, and you would hope, after the transparency of the industry reveals whether that planner is to receive a fee, commission, trail and/or rebate (regardless of whether it’s passed on to the client) – the issue for the consumer is whether the benefit of the advice justifies the cost.
This is the overriding issue holding the financial advice industry back today – demonstrating the benefit of advice at the point of purchase.
If people aren’t clear as to what utility they will reap from any given purchase then how can they make a rational economic choice – irrespective of the payment method?
The Financial Planning Association of Australia is actively running a campaign around the value of advice.
However beyond the value of advice, from a consumer utility perspective, is the value of advice from a planning perspective.
Or, to phrase it differently – the cost of advice.
The provision of advice is expensive and the cost has to be borne by somebody – be it the consumer or subsidised by product providers.
Just as critical for the financial planning industry therefore is shifting consumer perception around the value of advice from a cost perspective – for there to be perceived value from taking advice there needs to be perceived cost in bringing that advice.
Some super funds are moving the debate to the centre and are arguably hindering the industry in the process.
By offering highly subsidised or free access to financial planners, it could be argued that this erodes consumer perception of the value of advice (from a cost perspective).
Would a person who once received free advice, shell out thousands of dollars in the future for additional advice – perhaps, depending on how much utility was derived from the free advice?
Once people are clearly able to gauge the utility of taking financial advice, perhaps that’s when the industry should focus on how people should pay for it.
The nature of consumption and how people derive utility from consuming means that the commission structure, while people may end up paying more in the long run, is the more preferable payment method for many people.
This is based on the theory that if people don’t actually get to hold the physical cash or have to pass the money over then it’s easier to part with.
This is the science behind why some people accrue huge debts on their credit cards or from playing electronic gaming machines.
If an individual has to physically hand over a cheque for a few thousand dollars to an adviser then there is a direct ownership link with the purchase and the advice.
This will only start to happen en masse once people fully understand the benefit of the advice itself.
3 Comments on “The Battle Within”
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David says:
The article shows that clients are not idiots and know that there is a cost for obtaining advice.
Clients main concern is not how much it is going to cost for the advice, but what the advice will do for them. Yet, the provision of advice requires that the SOA contains the recommended strategies in at least 4 places and seems to be not about the advice provided, but disclosure and how much it is going to cost the client!
An additional problem is, industry funds with their perception of no adviser commissions and free advice are affecting the provision of financial services and leading the public down the road of “Why pay for advice when I can get it for nothing?”. Industry funds are eroding the financial services industry so much that the general public is becoming uncertain about the whole thing and don’t want to do anything. This attitude means that there will be a lot more poor people depending on social security in their old age.
As the song goes – ‘nothin’ ain’t worth nothin’, but it’s free’. I applaud
Burning Pants for making a stand on the subject!
Craig says:
Hi Fish, in response to the first part of your comments, the article was stating that at the end of the day consumers are driven by their own sense of value when making a purchase, irregardless of how a payment is made.
In terms of cost, the context was around the cost of bringing advice to the client and building the perception of value of this to the client on that basis and not the direct cost to client.
Meanwhile in terms of the role trust has to play in the decision making process of clients – CoreData research has identified a string of key triggers and drivers behind would-be clients’ decisions to utilise the services of planners.
Trust is one of four aspects of ‘engagement’ that has been identified as having a very high correlation with consumer decisions to adopt a planner in a recently completed shadow shop we’ve conducted of the planning industry.
There are also several other factors, that when combined with ‘engagement’ serve to increase the likelihood a client will use a planner.
FairGo says:
Why is it that nobody ever questions or asks doctors, lawyers, bank tellers, and any number of vocations for full disclosure of their remunerations, yet Financial advisers are viewed upon with such contempt?
If a lawyer, doctor accountant etc disclosed he was on $1m/yr, and another on $65k/yr, would the public boycott the expensive one and treat them with contempt too?
If a person is good at their job, why should they not be able to be compensated for it? People in the Finance industry have a right to earn a living just like anyone else. And just as in every other industry their are really good players and bad players. That is a side effect of the freedoms we enjoy.
If we have to disclose our incomes, our remuneration for WORK we do, then why shouldn’t everyone else?