Blue Chip Journal - June 2019 edition

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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, 58 www.bluechipjournal.co.za
FEE MODELS • offer choice as a way to differentiate value and price, and • understand that there needs to be a coherent story around the fee calculation. The range of fee models suggest that there will be no one “new fee model”. The future will simply be more diverse, allowing our profession to profitably serve different client types with different value and fee models. Most importantly, any new fee model that an advisor adopts needs to align the value provided to the fee being paid, and needs to suit the market being targeted. This is not about finding the “right” fee model. It’s about finding one that works best for the specific client group you are serving. As Simon-Kucher concludes, “Moving to a new pricing paradigm will not be easy, but it is possible to take note, heart, and insight from entrepreneurs who have walked the walk and are blazing a trail for the future of financial advice." Pierre Taljaard, Independent Financial Advisor and Consultant www.bluechipjournal.co.za 59
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Issue 72 • June/July 2019 www.blu
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CONTENTS 7 ON THE MONEY The latest
Page 5 and 6:
Actual investors look to the future
Page 7 and 8:
FOREWORD We’ve also made the deci
Page 9 and 10: On the money Making waves this quar
Page 11 and 12: The world is changing. Why have emp
Page 13 and 14: 100 % SAVINGS 0% TAX WOULDN’T YOU
Page 15 and 16: COVER PROFILE It has been said that
Page 17 and 18: solutions are well aligned to best
Page 19 and 20: 24 32 47 59 91 85 78 63 51 What are
Page 21 and 22: FPI in Financial Planning and becam
Page 23 and 24: Establish yourself as a financial p
Page 25 and 26: JURISDICTION Nicole Paige, Partner
Page 27 and 28: FOREIGN INVESTMENT The rapid rise o
Page 29 and 30: ESG Setting a precedent Shareholder
Page 32 and 33: HEDGE FUNDS Future value ESG increa
Page 34 and 35: BOUTIQUES Facing the boutique fear
Page 36 and 37: ADVERTORIAL How well do you know th
Page 38 and 39: RETIREMENT FUNDS Smoke and mirrors
Page 40 and 41: Invest in a carefree retirement lif
Page 42 and 43: RETIREMENT In it for the long run T
Page 44 and 45: RETIREMENT GOALS Hustle on the side
Page 46 and 47: ADVERTORIAL Making a dent in the un
Page 48 and 49: INSPIRATION Breaking bad Gerald Mam
Page 50 and 51: EVENTS How behavioural finance crea
Page 52 and 53: EVENTS Andy Hart, financial planner
Page 54 and 55: CLIENT COACHING Meeting the challen
Page 56 and 57: CLIENT COACHING consider the level
Page 58 and 59: INSURANCE Undoing perverse incentiv
Page 62 and 63: LEADERSHIP Who dares, wins The call
Page 64 and 65: TRANSFORMATION No, no, and no Advoc
Page 66 and 67: RETIREMENT SOLUTIONS For a better r
Page 68: Rewarding career opportunities to m
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Blue Chip Journal - June 2019 edition

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