There has been much speculation about the financial advice/planning industry being forced into a fee-based or fee-only remuneration model, especially if we are going to follow the UK and Australian regulatory environment (which is something that our FSB is keen to do).
While some planners and advisors have already seen the light and have started preparing for the “inevitable” transition there are plenty of advisors, industry representatives and commentators who believe that it will “never happen in SA” or that it will “kill the industry” and that “planners will not be able to make a decent living”. And the biggest objection seems to be that people cant afford to pay for financial advice.
“Rubbish” I say, to all of the above! Simplistically, there seem to be 2 major areas of objection and resistance to the fee-only model. Firstly, that consumers cant (or wont) pay for advice and secondly, that as a result of the first objection, advisors wont be able to survive.
While it is true that some consumers might not be able to afford to pay the fees that advisors are currently used to, we need to remember that it is not only the wealthy people who visit (and pay) their doctors/dentists/accountants/lawyers/other professional. In fact, just about every professional service is paid for directly by the person making use of the service. I suspect, however, that one of the major reasons that advisors believe that they wont be able to survive is that most advisors don’t have their own financial planning affairs in order.
If this seems unlikely or unbelievable then consider the issue of “cash flow”, the foundation of good financial planning. It is common sense that income needs to exceed expenses or else you will end up in debt and yet stories persist of how many of the insurance companies encourage new agents to buy a new car or to make some other major purchase when they sign up. The rationale behind this is that the debt that they have just taken on will keep them “hungry” and focussed for sales.
While this might well be the stuff of urban legend the lack of attention to cash flow seems to continue when advisors leave the insurers to set up their own independent businesses. Speak to just about any broker consultant and he/she will readily recount plenty of stories of advisors who submit business with one hand and demand their commission payments with the other. If we are in the business of financial planning and advice and we are advising our clients to “get their cash flow under control” then surely we should be doing the same? If we are so dependent on a commission cheque to make it through the day/week/month then I suspect that we have no idea about budgeting or cash flow control and that perhaps we need to spend some time taking our own medicine in this regard.
I advocate that before anyone takes advice from a financial planner that they ask them a few questions about their own financial planning affairs. Questions like:
- Do you have a budget?
- Do you have any debt and if so, when will you be debt free?
- Do you have any life/disability/dread-disease cover?
- Do you have retirement annuities and investments?
- Do you have a will (and is it current)?
The answers to the above will reveal a lot about the financial planners own affairs – I certainly would not be taking advice from someone who does not have his/her own financial planning affairs in order. If only we spent a bit of time on our own financial planning, budgeting and cash flow management then perhaps we would not be so desperate to sell products and then we could focus on financial planning (which would be a major threat to the product providers – but that is the subject of another debate).
Back to the fee model: if my cash flow is under control then I can afford to allow people to pay my fee (for the service provided) over a few months if necessary (as opposed to in one go). I also have the ability and discretion to reduce the fee where necessary and this then makes fee-only advice accessible to just about everyone!
As for the objection that advisors wont be able to make a decent living from fee-only financial planning, I guess that decent is all relative. But if we consider that there are around 7 working hours each day, and if we assume that we work 5 days per week for 46 weeks each year, that would be 1610 hours worked. At a rate of R750/hour then the final income would be around R1.2million! I think that is decent in just about anyone’s definition.
I realise that this is simplistic and is also not “popular” and that there will have to be a major mind-set change (from advisors and consumers) before fee-based or fee only financial planning takes hold, but having done it this way for the past 8.5 years I know that it is entirely possible to survive and also to make a decent living from this model – the biggest challenge now is how to cope with the demand for the service we offer.
