Blue Chip Issue 89

BLUE
CHIP
COLUMN
Perception is reality
This is why how financial planning fees are charged is important.
Rob Macdonald, Head of
Strategic Advisory Services,
Fundhouse
Rob Macdonald has held
several senior positions in
the investment industry.
At Fundhouse, he acts as
a consultant and coach
to financial advisors and
develops and facilitates
training programmes in
behavioural coaching and
practice management. Before
joining the financial services
industry, Macdonald was
MBA director at the UCT
Graduate School of Business.
He is co-author of the book
Rethinking Leadership and has
consulted, written and spoken
widely on a range of topics.
Macdonald has a Master’s
degree in Management
Studies from Oxford University
and is a CFP® Professional.
At the recent HUM SA conference,
Alan Smith, a London-based financial
planner and the founder of Capital
Asset Management, shared some
of the lessons he has learned in building his
business. His talk was entitled Failing my way to
success, reinforcing the reality that the path of
progress is inevitably littered with both success
and failure. Smith says that he started Capital
with a clear vision to do things differently and
wanted to challenge conventional thinking in
financial services.
One area where he did this is how Capital
charges fees. Smith wanted to separate advice
fees from a client’s asset base. In so doing, he is
agnostic as to where a client’s money is invested
or what financial products a client may have.
Capital looks after the client’s total financial
life for a fee. Smith saw this approach as giving
him a competitive advantage as there are so few
other financial planners who operate like this.
The simplest analogy for Smith’s approach is
the medical profession, where a client pays their
doctor for assessment, diagnosis, advice and if
necessary, a prescription. The client then pays the
pharmacist for the products they are prescribed,
even if there is an in-house dispensary, a
separate payment is made. As difficult as it may
be to envisage, the separation of advice fees
from product fees must be an important step
for financial planning to take its rightful place
as a fully-fledged profession.
In my recently released book, The 7 Pillars of
Financial Health – Partnering with a Professional to
Thrive, as the title suggests, I encourage people
to partner with a financial planning professional
to achieve financial health. A common response
from readers who do not have financial planners
has been that while they recognise the benefits
of partnering with a professional, they don’t like
the way financial planners are remunerated.
Sadly, many still perceive financial advice as
an incentive-driven, sales and commissionoriented
service. This is despite the incredible
work that so many financial planners do for
their clients.
Alan Smith has been able to counter this
perception, saying he doesn’t have to worry
about having conversations with clients about
the link between his fees and products. His fee is
for advice only. Whenever I have fee discussions
with financial planners, the principle of
separating advice and product fees is not
necessarily disputed. The obstacle that many
see to adopting this approach is how to charge
the fee. Smith has solved this problem by
charging a retainer fee to clients. He agrees on
the scope of work and service with a client and
the requisite fee the client will pay, irrespective
of what products the client may need.
Many financial planners are trying to go this
route by charging fees for work done, whether
for initial consulting with clients, drawing up a
financial plan or implementing advice. But the
real challenge is when it comes to ongoing
fees. Here financial planners have legitimate
concerns about having to invoice clients
monthly and chasing debtors who get into
arrears. However, product providers already
have sophisticated and efficient systems for
ensuring financial planners are effectively
remunerated on an ongoing basis.
Adapting these systems to enable financial
planners to stipulate rand-based retainer
fees to be paid to them regularly (monthly or
quarterly), no matter the product type, would
be a huge step in enabling financial planners
to charge clients ongoing fees in the way that
Alan Smith has shown is possible. It would also
help people recognise that financial planning is
a genuine and complex profession that focuses
on helping clients achieve true financial health,
rather than one that many still see as simply
selling financial products.
14 www.bluechipdigital.co.za