Finding the Balance Between Fees and Commissions

 

These articles explore the issues associated with charging fees for advice, including fees for life insurance advice…

 

Why Value Proposition Determines the Level of Adviser Pricing

A national adviser webinar organised by The Advice Movement featured Elixir Consulting’s Andrew George and Graham Burnard, who reflected on the debate around the ‘right’ pricing model for advisers, which has been re-ignited since Covid-19 and the downturn in markets.

 

Whatever pricing model a business operates under – whether it be asset based, a fixed dollar rate, commission, an hourly rate, or a mixture – there is much more to getting the pricing ‘right’ than simply number crunching.

Importantly, Elixir Consulting’s Andrew George and Graham Burnard say, the first step is in fact, to get clear on the type of clients – and the value proposition that is being delivered in exchange for the price. The most successful practices they see are those with a highly targeted client base and those who had learned to say ‘no’ to clients they did not wish to work with.

When consultants from Elixir work with practices to determine the right pricing model for their business, says Burnard, they always start with the client base.

The more targeted the practice, the more successful it is, says Burnard, who stressed the importance of building up a key profile of the practice’s client base – both their existing, and who they’re seeking.

He says when an adviser or practice is explicit about its target client market and knows who they are dealing with (for example, they might be a business owner with small children and large aspirations) that means they can more effectively design their services to suit their clients, rather than trying to deliver ‘all things to all people’.

“What advice solutions do I offer to solve the unique challenges and desires of my chosen client market?” is the question advisers should be asking themselves, says Burnard.

An important step for advisers, according to the consultants, is to deliberately ask clients what they value most about working with their adviser. They guarantee the response won’t just be about great returns, but rather about the intangible outcomes and benefits they achieve.

“Ask yourself what services you need to deliver, and how you deliver them. These are the inputs to start working out your price. Start by assessing the cost of delivering those services, and include your targeted profit margin to gain clarity on your minimum price points,” says Burnard.

Once an adviser knows what they need to charge to stay in business, they then reflect on the value they’re delivering, and ensure there is mutual benefit for all – both in the initial advice engagement, and the ongoing client experience.

Fees and profitability

George noted that Elixir has benchmarked differences between firms and found that tight client targeting drove a higher EBIT return.

He also noted that while firms in the research were targeting an EBIT of 32% on average (once income to principals had been paid), the average EBIT actually being achieved was only 23%, meaning that many firms were a long way off achieving their targeted profit.

Meanwhile, the consultants laid out a step-by-step process to determine a minimum advice fee:

  1. Define the target client base and client value proposition
  2. Establish onboarding and ongoing service processes, including how much time it takes from the initial contact
  3. Determine your charge out rates, including a profit margin. (“I am not saying go to an hourly rate, but understand how valuable your time is and use that to understand your minimum fees”)
  4. Determine the costs involved in servicing the client
  5. Build out your minimum fees for a ‘typical’ client scenario/experience
  6. Determine the additional complexities that may be present for some clients, and a price premium for those, to enable you to price each client in a consistent, yet bespoke manner

Elixir also has a fee calculation model based around three different service levels that can be refined to suit any business. The base services might be defined around a life stage – such as accumulator, pre-retiree, retiree; or in the example they shared, a service style:

  • ‘Do it for me’
  • ‘Do it with me’
  • ‘We have done it’

The consultants recommend advisers determine the costs associated with delivering each of these three service level propositions and how to allow for more complexity within each.

The webinar was told advisers needed to look at the nature and complexity of their clients’ circumstances. While the size of the portfolio may be one of these elements of complexity, there may be other factors such as:

  • How many different entities the client has (trusts, corporate structures etc)
  • Whether they’re co-ordinating with other advisers (accountants, lawyers etc)
  • Whether there are travel costs

Then, they say, the ‘value overlay’ comes in, and that can be subjective. It could include:

  • How ‘high touch’ a client may be
  • Whether they want to engage extensively
  • The complexity of a family situation

If great value has been created by the adviser that is difficult to quantify or allocate specific time for, it was suggested that advisers may apply a percentage premium to their minimum fees to arrive at the appropriate fee for each client. One that is suited to their needs, and that the adviser is confident they can meet their FASEA obligations of providing value for. If they cannot provide the value for the fee they need to charge, go back to step 1 and perhaps redefine the clients they choose to work with. Or deliver services differently, to close the value gap.

How to have the conversation around raising your fees

George and Burnard explained that when advisers first undertake a robust pricing analysis, it’s not uncommon to discover a need to increase the fees they’ve been charging existing clients, and in fact, to remove themselves as the adviser for some clients who no longer need an ongoing service. They told advisers it’s important for them to carefully consider their wording before they sit in front of the client, which can help them to gain genuine confidence around what they are going to articulate.

“We see it time and time again, that advisers say it went better than expected.”

Sometimes clients do depart, warned the consultants, but they pointed out that in most cases where the client has made the choice to decline the services, they’re the clients the adviser expected to leave in any case.

Burnard told the webinar that in the experience of the advisers they work with, 95% to 98% of clients are agreeing to fee increases or moving from asset-based fees to fixed fees, and those who are choosing not to re-engage are easily replaced by new clients that better suit the proposition of the firm.

Reflecting on their experiences in working with numerous advice businesses, Burnard said he and his Elixir Consulting colleagues have been finding very little push-back from clients, with George noting that the acceptance rate was very high “…and when you have a great process to not only articulate – but deliver value to your clients, that only increases the success rate of having a great conversation, and builds a more sustainable future for your business and your clients.”

During the webinar two sets of polls were conducted for adviser participants. The first set of questions revolved around ‘Where are you at right now?’, while the second set asked advisers ‘Where will you be in 3 months’ time?’. Scroll below for the outcomes and click the charts for a larger image view…

 

Andrew George and Graham Burnard are senior consultants with Elixir Consulting. The Advice Movement is a practice management school for financial advisers which provides online and on location training such as events (LTMA), live webinars, and on demand courses teaching modern and practical technical and client focussed skills.

Reality of Fees for Risk Advice Challenged

Victorian risk specialist adviser, Andrew Dwyer, challenges the premise that a risk advice business can successfully operate under a model which includes charging fees for life insurance advice…

 

Having been open to the prospect of charging fees for risk advice in tandem with risk commissions – and having invested serious time, resources and effort into attempting to implement this model – Dwyer remains unconvinced that this proposition is a realistic, viable business model.

This conversation relates to risk specialist or risk-focussed advice businesses. It does not extend to business models where the adviser’s offer includes a financial planning proposition in which the cost of delivering life insurance advice can be absorbed or subsidised within the broader service package.

Dwyer was motivated to have his voice heard following the recent debate in Riskinfo sparked by our report on the release of the fifth edition of Elixir Consulting’s Adviser Pricing Models Research Report series (see: Fees for Risk Advice an Emerging Reality).

Significant debate followed the publication of this story, while the outcome of a poll we conducted which sought the views of Riskinfo readers appears to support the conclusion that the majority of advisers agree with Dwyer (see: Most Advisers Reject Fees for Risk Advice).

This chart summarises the results of the poll:

In speaking with Riskinfo, Dwyer was at pains to point out that his efforts in exploring the possibility of fees for risk advice reflected a ‘real-life’ rather than a theoretical experience.

He says that as an adviser whose passion is providing life insurance advice services, he has always been open to both sides of the ‘commissions versus fees’ debate and to trialing an advice proposition built around a combination of advice fees and commissions.

Dwyer’s blunt message, however, based on his own experience, is that this model does not work.

While he had already been moving to a hybrid commission model prior to the implementation of the Life Insurance Framework reforms, Dwyer says he seriously explored the business proposition where fees for risk advice acted as a supplement to the 80/20 hybrid commission model, followed subsequently by the 70/20 and eventually 60/20 mandates.

In exploring this model, he included different fee options in his clients’ Statements of Advice, which offered fees-only, a combination of fees and commission and commission-only options. In this trial phase, Dwyer says 100 percent of his clients and/or prospective clients rejected any pricing option which included fees.

He says the demographic range of his clients in this trial process extended from high-end ‘full advice’ clients who were also charged advice fees on superannuation and investment advice to ‘mums and dads’ clients whose annual life insurance premiums were $2,000 or less. He also noted that his under 35-year-old clients overwhelmingly rejected any fee option, including the combined fees/commission model.

In 2017 Dwyer says he began modifying his client conversations around fees and commissions to include smaller fee levels in the region of $200 – $300. While he says he was beginning to experience some engagement at that level, the advent of the Covid-19 pandemic has seen this willingness from clients to pay even a small fee evaporate.

At present, Dwyer says his advice business only remains viable because of the smaller proportion of his client base who receive a more holistic, comprehensive advice service including super consolidation services, cashflow and pre-retirement advice.

His point, though, is that he would prefer to focus almost entirely on life insurance advice because this is where his passion lies and this is the area where he believes he can make the biggest difference in the lives of his clients. He doesn’t want to extend the scope of his advice proposition just to ensure his advice practice remains viable. But he believes he has no choice.

Dwyer says he has left no stone unturned in his willingness to find a solution for his business which at least incorporates some form of fees for risk advice to accompany his commission income. This includes engaging business and financial coaches, seeking feedback from licensees and advice peers and subscribing to research and other publications which address this issue.

“In the end, listen to your clients,” says Dwyer, who have delivered him a resounding ‘no’ to any form of meaningful fees for his advice, whether stand-alone or in combination with commissions when appropriate.

While he appreciates the argument from business coaches about how to enhance the value he delivers to his clients, “…if the clients don’t see it, well, that’s where it’s at.”

Referring to other examples reported in industry media, including in Riskinfo, which have pointed to the successful implementation of a combined fees and commission model for a risk-focussed business proposition, Dwyer says: “No-one can really show me the true, hard stats that say ‘this is how you do it’.”

He adds: “If they can do that, then I’m still onboard and I’m happy either way.”

Bombora Advice case study

Lending weight in support of Dwyer’s position is Bombora CEO and Founder, Wayne Handley. Referencing another ‘real life’ case study, Handley highlighted Bombora’s experience in dealing with one of Victoria’s largest and most successful regional accounting firms. He told Riskinfo the firm had reached an impasse in their business in which their financial planners – following referral of the client to them by the accountant – had introduced fees for providing life insurance advice.

Handley characterised this initiative as ‘spectacularly unsuccessful’ – an initiative which led to ever-increasing reluctance from the firm’s accountants to refer their clients to the planners where the client was required to pay a fee for the ensuing life insurance advice.

Bombora was called in by the firm to take over that portfolio for reviews, claims services and ongoing advice, the outcome of which Handley described as ‘spectacularly successful’. He says Bombora advisers provided advice to 50+ of the accounting firm’s clients in the first six months of the arrangement, which experienced a three-point ‘Win/Win/Win’ outcome, namely:

  1. The client is now in a far better position because they’ve been able to access life insurance advice
  2. The accountants and financial planners have met their best interest obligations
  3. The risk exposure to the financial planning part of the accounting business has been significantly mitigated

Handley reinforced the point that charging any form of fee for life insurance advice – in the cold hard light of day – does not work and will not support a viable advice business because, in reality, clients are rejecting the notion of paying fees for life insurance advice.

In affirming that Dwyer and Bombora were in the business of saving lives and saving livelihoods, Handley said their future rests in focussing on ways of engaging more consumers in life insurance discussions: “…not charging more, but seeing more people.”

Handley continued: “We want more clients receiving more life insurance advice in Australia and we know the current [commission-based] model works.”

Meanwhile, the agenda for Dwyer is to find the hard data – the ‘proof’ that demonstrates it really is possible to operate a successful risk-only advice business on a model that combines fees and commissions. His preference is to not deviate from the specialist model.

Handley’s final message was also clear: “In the end, it’s about client choice. And at the moment, our clients are choosing 100 percent – one way.”

Andrew Dwyer is a Geelong-based financial adviser, specialising in risk advice and Wayne Handley is Founder and CEO of risk specialist advice licensee, Bombora Advice.

 

Your quiz questions start below and you can scroll up if you need to refer back to the article.

There are five questions and you’ll need to get at least four correct to earn your CPD points.

If you get less than four correct, you can re-take this quiz. But only two attempts are allowed!

Scroll to Top