Blue Chip Journal - June 2019 edition

FEE MODELS
Clarifying value
Negotiating the shifting landscape
of fees for financial advice
Our profession is in danger of succumbing
to a price war unless
those who have the most to
offer lead us bravely.
As pricing specialists Simon-Kucher
note, “We’ve seen time and time again
that industries on the brink of price wars
can be saved through ‘value warriors’,
who understand the worth of their proposition
and charge appropriately and
transparently.”
“Robo-advice” services are yet to affect
financial planners as once predicted, but
what they have done is force businesses
to become clearer about the value they
bring to clients.
Around the country, advisors are
engaging in behavioural coaching
workshops and conferences, believing
that their most valuable contribution
to client relationships is the ability to
influence behaviour under uncertainty.
As large parts of the investment
management process get commoditised,
developing the skills for real human
connection will be the key to advancing
our profession.
Unfortunately, this value proposition is
incongruent with how fees are currently
calculated. This makes our work more
difficult than it already is.
It’s simple. Clients love transparency
and a clear articulation of value.
RDR (Retail Distribution Review) is
bringing greater transparency. As a
result we will need to express our
value more clearly. But consumers
also love fairness and choice. This
means that greater flexibility and
different fee models are likely in the
future.
The current AUM-based fee model is
better than what we had before. The fee
is reasonably transparent and easy to calculate.
The advisor and client’s interests
are more closely aligned, but when fees
are expressed in rands and cents rather
than percentages of AUM, the pressure on
showing value will increase.
So, in the current environment of
growing fee pressure there are a few
reasons to expect that the AUM-based
model will change:
• It does not effectively reflect the true
value delivered. Two clients with differing
asset levels can pay vastly different
fees for effectively the same service.
• The model relies on wealthy clients to
finance the majority of the client base,
which often includes a large group of
unprofitable clients. Given the introduction
of choice, there is no incentive for
wealthy clients to keep doing this.
• It does not cater for clients who are yet to
accumulate the minimum asset level, but
are willing to pay a fee for advice. These are
typically younger clients who will become
tomorrow’s target market.
• Under the scrutiny of fee-sensitive consumers,
it leads to unfair comparisons
with other investment-focused
services. If an investment manager is
charging an AUM-based fee for managing
a client’s money, why does a
financial advisor have the same model?
The AUM-based fee model may continue
to work for businesses serving retired
clients who all require the same service.
But even here the wealthier will subsidise
other clients.
For the large group of consumers who
fall outside of this group, choice seems
inevitable.
In “The Future of Fees”, Simon-Kucher
examines eight new fee models for
wealth management that have been
implemented successfully in the US by
forward-thinking practitioners.
The diversity in models reflect the need to
appeal to a wide range of non-traditional
segments.
In contrast to the current model they:
• recognise that the complexity of a client’s
situation should be a fee driver,
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