The Life Insurance Framework 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 and in a recent blog post he states this uncertainty has a flow on effect to clients as well.
In the post, Gardner details his top 10 observations on how advisers charge clients and the impacts of those decisions and has generously allowed riskinfo to reproduce the post below:
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.
1. 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.
2. An Adviser being hesitant about fees is the number one reason for a client being hesitant about costs. My observed correlation is above 95%.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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.
10. 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?
Once again, this article along with every article I have read, has been written based on research around holistic advice.
The LIF is the future of Life Insurance, not Investment or the plethora of other services that clients are sufficiently interested in to agree to pay fee’s.
Not one “”EXPERT”” consultant has come up with a model that works, where clients are prepared to pay sufficient fee’s to cover a fraction of the work required to provide Life Insurance advice and the mountain of administration to do the job properly.
Baz, will you please clarify – are you referring to Risk Insurance only or are you including Investments, Super and other services provided by advisers?
C’mon Baz, answer WB’s specific question. How do you charge fees for RISK ONLY ADVICE, particularly to Mums & Dads. I keep hearing from self-promoters who say they have the answer, but drill down and its all fluff, and there is typically some investment or SMSF advice allowing a little cross subsidization fee recovery on risk advice. Either that or some planners do not understand the difficulty of being a risk adviser with compliance overload.
And as you say, you can only charge what the client can afford, but the compliance work is the same whether its one or three policies being recommended and regardless who is the client, and God help you if there is replacement. So you are not even getting cost recovery with those clients, which means you cannot afford to service them properly
That’s why the commission system helped those who cannot afford your advice eg a middle age divorcee back in the work force with wavering support from a FIFO ex-husband and with two kids and no money to pay fees for your advice AND pay premiums.
The FSC hopes those folks who won’t pay your fees will turn up at the banks for TV Direct products sold on an ASIC special – General Advice, but in all probability they will turn up at an ISN fund where the insurance outcome will be the same. They will be at the banks because they want a loan ( no third line forcing, of course ) or they have been data-mined as your monthly premiums pop up on the customers bank statements
I once agreed to operate under a fee / commission rebate basis for insurance for a partner of a major accounting firm who refused to participate in a commission model as he “only believed in fee for service”. To cut a long story short, when it looked like he was going to be declined he immediately threatened to bring in the lawyers if I tried to charge him. “I’m paying you to arrange insurance for me. Not to give me advice relating to a product I can’t buy!”. When I finally got him underwritten with much time wasting on his end I let him know the fees were higher than the rebate. His response was I’d over charged him because it was impossible to spend that many hours arranging simple insurance. I ended up getting the 1st year comm. When I called to review the policy the next year we talked for about 15 minutes before he decided there was nothing further to be done. I asked where to send my bill for the time we’d talked and all the compliance work I had to do in the background. He told me payment wasn’t an option. I informed him I was no longer available to be his adviser and he got upset citing a lack of professional behaviour. The policy wasn’t renewed. Welcome to the new world.
Good to read some frontline, in the trenches, risk advice experience there Guy. This is the world the supposed ‘experts’ wish they knew but of which they are secretly afraid – because they have no REAL answers for the scenario you outlined. They may say that the client of which you speak is unusual. I say that he is not unusual but becoming more mainstream by the day in this world of help-yourself to google environment. As a ‘risky’ myself, the best we can do, while ASIC allows it (my god!) is to simply offer the client two options – fee or commission and explain the full details of both. I, for one, would leave the industry immediately if commissions were tossed. I would then have confirmation that the politically correct inmates had finally and completely taken over the asylum. Has worked admirably AND within the CLIENT BEST INTEREST for me and my clients for 32 years – enough said!
Yes, I too would very much appreciate hearing from Baz, the author, on this subject just as ‘Old Risky’ has requested. It does indeed seems, as he and Jeremy Wright states, that the self proclaimed experts always seem to dodge true and workable answers to the question of charging fees for pure risk advice. My best estimation is that is does not work. 32 years of working with risk clients has taught me this. I have wanted to find a way, don’t get me wrong. I have NOT decided I do not want to charge the fees. I have simply been unable to formulate a way. Remember, ‘experts’ we are talking normal people not people with hundreds of thousands in an investment portfolio to subsidize risk fees. Tell me how I charge $1,500 – $3K+ to a family where their risk premium will be $4K all up. Please don’t tell me I have to value my service more. Just don’t. I do! Fees are doomed in this scenario as the people will walk straight down to the bank for the ASIC special, have No advice, NO ongoing service and NO claims assistance. The family won’t appreciate they need this until they claim and then it is too late. THAT is ASIC wonderfulness working – right there. Client best interest – BALONEY! ASIC and the regulators should hang their collective heads in shame. Tell us the answer for ‘riskys’ please Baz. Baz, are you there? We need you Baz . . . calling Baz . . . .
Hey everyone, appologies I had a full day today so this is the first chance I have had to jump on and reply.
For clarity I will answer your specific questions and then give some context around why these lessons are valuable to the Risk Advice profession (in my opinion only).
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 wholistic Advice firm. I have had more than 14,000 client meetings as an Adviser and always incorporated Risk Advice as part of that Advice. That doesn’t make me an expert and to be direct I don’t consider myself an expert on anything.. however I do have insight that I am happy to share.
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 am probably the most connected person in the Australian Financial Advice space and that gives me an opportunity to talk with and observe a lot of professionals and business. BTW when I say connected I mean to Advisers not the larger ‘ecosystem’ which interests me much less these days. The coal face is where the impact to Australians happens and it is what interests me.
I would also like to be clear that I do not destinguish between how someone is remunerated (See point 10 above). When I say ‘Fee’ or any other varition 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 Risk Advice. 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.
Peter Sobels who I believe is a champion of Risk Advice in this country, read my blog post and asked to share the message (I naturally agreed).
My Opinions on the application for Risk Advice.
Commission vs Invoice
– I can say from personal experience that it is completely viable to build a fee for service profitable Risk Business (hold up before you send the lynching party). However there is a very big set of caveats for this statement.
1) It requires a completely different business structure / set of protocals and different thinking.
2) 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 process… client process….
3) 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 endevours.
4) It is more expensive to run this system, which means an overall increase in cost to client (at least in my personal expereince).
5) 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 (I’m just being honest about my contrarian nature).
6) Commision 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.
My Actual Point
How you charge or are remunareted 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 blieve is fair and effecient.
What you blieve 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.
Baz
Baz, Thank you for your reply and the time taken. I respect the position you’ve taken and your reasons. 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. I am always open to being convinced however it would take a nuts and bolts explanation on the fllowing scenario: A ‘mum and dad’ family situation with some kids, who see the value in IP/trauma/death cover, are wanting the max cover for as little premium as possible.
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While they appreciate I am there to offer valuable advice they are baulking at the high premiums and we are doing all we can to reduce them. They want quality cover and we’re looking at $4K – $5K as a total for a family bringing in $80K gross. They finally come to terms with a figure and are fine to progress. Then comes the conversation of remuneration (some will argue this should come first however). I will explain the options and 10 out of 10 times the client will opt for the one where they do not have to put their hand in their pocket for more outgoing cost.
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These clients I’m referencing are intelligent people – they want advice and are prepared to pay for it but waving a $3K++ invoice for fees in their face in ADDITION to a $4K premium will quickly have them running to the bank for ‘free’ implementation of their chosen insurance. We know how dangerous that is for a hardworking mum or dad but this IS what will happen if fee for service is introduced by force – this IS the ultimate game plan for the legislators and life companies whether they’ll admit it or not. Reducing the commission to zero and charging a fee will not offset this fee by a huge margin. Commission used properly is the ideal answer for risk-only. This whole issue is not only caused by the few rogue advisers but even more so by the life companies, dealerships and lawmakers that STILL allow churners to flourish. The life companies and dealerships have always had the power to stop them dead. It is sickening to think but these entities are responsible for the ongoing issue around churn and all of us have to pay due to their ineptitude and failure to act. Why aren’t the life companies and associated AFSL dealers forced to fix this mess? They are the only ones who, TOMORROW, could get rid of the known churners and leave commissions for the true advisers who look after their clients truly in their clients best interests.
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Baz, I’m always willing to learn and if there is a magic formula or secret phrases that instantly change a client’s perception of money I am all ears. I won’t hold my breath though.
Thanks also Baz for your comments. Just two things – in your point 3 above, you state that you were “only able to switch to charging for Risk Advice because I could support that through other business endevours.” So by your own admission you couldn’t charge a fee for Risk Only advice without other means of financial support.
Secondly, you state that if you were to start a risk only practice from scratch, you would do so on a fee for service basis. May I challenge you, or anyone else who thinks it can be done, to do just that. Let’s see how long you last! If it is a success, then share you secrets on riskinfo.
Baz, I agree with Brian and his comments above. However, if there is a formula for risk advisers charging a fee, then I am open to it as well.
It reads as “Making the shift to Invoicing clients for Risk Advice would require a transition time and capital requirement”. I.e. the financial element was supporting the TIME TAKEN to make the shift NOT about supporting that element after the implementation. Two totally different things.
Sorry, Mrs Blue – I do not agree. Regardless of whether Baz needed other sources of income or for that matter a capital injection to keep the business going while he made the transition, it is the second part of his comment that I am referring to;
“I was only able to switch to charging for Risk Advice because I could support that through other business endevours (sic).” i.e. he could only support charging for risk only advice by supplementing any such fees with income from other sources – and this is AFTER he has made the transition from commission to fee for service. If that is not what he meant then he should have expressed it more clearly and succinctly.
The real issue here is that a number of so called experts have been telling risk only advisers for the past 12 months that clients are happy to pay a fee for service AND an insurance premium, yet after being given ample opportunity to share their insights on risk info, not one of them will! However, risk only advisers, those who actually work in the real world, have demonstrated by sharing real life examples on riskinfo, why a fee for service for risk only just will not work. That’s why so many advisers have lost faith in the AFA and FPA, as they should have fought harder to save commissions rather than hoisting the white flag so quickly.
Hey Brian,
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 Commissions 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.
I’m certainly not saying I have any magic pills, I’m just like you sharing my observations.
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 consistant.
However making this change cold turkey would commercially obliterate the existing Advice infrastructure. At least as best I can tell. Not a good thing….
WB: You are 100% correct that 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 assertation of what is the right model (or what anyone other than I would do).
I’m also not going to do it, because I already have a purpose and a focus which is to help Advice evolve. So please (as I know you will) take my suggestions with a grain of salt.
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 deffered cost to match with reduced premiums, through commission offset) and with an enhaned value add through technology, online resources and a focus on the broader development of family / lives / balance and risk mitigation.
It’s amazing how much value you can create to support people by levaraging community, group work and online resources. In other words I would diversify the value proposition to be about reducing risk to family’s / individuals.
Any upfront load would be deffered by longer periods of ongoing fees/ membership and the perecption value gap would be mitigated by a broader relationship spread.
That sense of community would be channeled through online and Social Media and the business growth enhanced by the resultant very leveraged word of mouth spread.
In other words I would re-engineer the value proposistion 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.
Summary
– The conventional model of a Risk Only Business doesn’t work with a direct switch to fees.
– Reframing of value, cost defferal and enhancement of ongoing relationship is an essential requirement for any move away from Commission. (Whether adding additional services or innovating the model)
– Cold turkey removal of Commisisons would destroy the current ecosystem.
– 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. ie if you try to deliver Risk Advice by only switching the commission to an Invoice the model will fail (as you already know).
Baz, you appear to be contradicting yourself.
You said in 5) if you were to start from scratch as a risk advice practice, you would do a fee for service model, though now you state it does not mean it is a workable model for the Industry.
You are correct in that the removal of commissions would destroy the retail Life Industry. ( which directly and Indirectly helps employ several hundred thousand Australians.)
My Business alone has spent millions of dollars over the years paying for software and hardware technology, office supplies and numerous other entities products and services that are not linked directly to retail life Insurance, though without the Billions all of our collective Businesses have paid into the economy, PAID BY COMMISSIONS, that if removed or reduced to unprofitable levels, clients will not pay a fraction in fees to cover these costs, to enable us to stay in Business.
You are spouting a plethora of theoretical analysis, based on thin air.
Jeremy,
Appologies if I have not been clear.
I have not disagreed with you in your assertions. I am not suggesting this should happen. We all agree on this, my context and experience comes from your shoes.
I said clearly that my input on options for fee models was hypothetical.
Just because I believe I could do it, doesn’t make it a workable option for the existing industry. Even if I’m completey right in how I would do it (and I have helped many businesses achieve similar strategic value / revenue model shifts). Doesn’t mean it would work as a transistionary model.
But it does make it worth talking about and sharing. Especially since the ideas are aimed at putting value control in the hands of Advisers.
If there is one thing I know for sure 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.
I only add my thoughts to spark conversation and to perhaps to encourage some of that disruption to put change into the hands of Advisers.
Brian is 100 percent correct and it also flows to Business Insurance.
Self employed people are also doing it tough and also question fees.
We have written Buy sell / Key person Insurance premiums of over $100,000 which takes many months to finalise and even though these Companies turn over Tens of Millions of dollars and understand the work and expertise required for us to advise them on their Business needs, they all still baulk at paying a fee to us that covers a fraction of what it costs us to provide them our expert advise and service.
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