Fee, fi, foe or fum: Fee options for financial advisers

The topic of adviser remuneration in risk insurance has again surfaced, and so it is timely to take a look at what is driving the latest round of fee-for-service conversations and some of the options available to advisers. After all, you don’t have to believe in magic beans and a golden goose to create a successful business model.

Alternate models for financial advisers seeking to implement a fee for service option can take many forms, such as charging a fee for service depending on client complexity, working off a statement of advice (SOA) fee-set price, incorporating a claims fee at initial point of sale, or charging a hybrid commission but incorporating a cancellation fee that covers any clawback before year two. And of course, the option for hourly billing, providing the client with an itemised account at time of billing much like a solicitor.

The issue of fee-for-service models has risen as Australia’s hardworking risk advisers continue to persevere and shape their service offerings in the aftermath of heightened regulation and the ongoing complexity of risk insurance product design and ongoing client needs.

This all comes at the end of a tough few years for those in the risk industry. Legislative change has sparked new education requirements and a raft of product offerings. The reputation for the advice profession also took a hammering with the Hayne Royal Commission proceedings and ensuing regulatory actions including the Financial Adviser Standards and Ethics Authority (FASEA) regime.

However, in 2023, there is the sense of a new era emerging with fresh opportunity for advisers to rewrite their future business success.

The good news is that advisers have emerged as technical experts, backed by enormous sector knowledge and experience. Higher education standards have been achieved (thanks to FASEA) and it is high time the industry gained deserved recognition, backed by appropriate fee-based remuneration models.

Clients expect and will seek out technical competence, education, and experience. No one consults their solicitor or accountant and expects not to pay a fee. Charging a fee sets your stance as a professional. It validates the quality of your advice and will also enhance your future standing.

So, the question is: why should financial advisers be any different to other professional groups? Why is advice one of the only remaining service sectors working for free? The main hurdle is the optics of commissions.

In the past, this industry experienced commission rates payable almost double of that paid today. Commission structures in 2023 are based on a hybrid model of 66 per cent upfront and 22 per cent ongoing, or a level commission of 27.5 per cent upfront and ongoing. An upfront commission of 66 per cent, for young, healthy, clean-skin clients, may incur an acceptable profit. But the reality is that few young people wake up in the morning and contemplate their desire to buy a life insurance policy.

Thoughts of wealth protection happen when clients create a family and accumulate their own debt. The average first home owner is now in their mid to early 30s in Australia. With age, with life — comes health issues, financial complexity, and other consequences of adult life.

As an adviser, you need to understand your client’s personal circumstances, navigate potential health/financial issues to a successful outcome, liaise and negotiate with underwriters, business development managers (BDMs), and call centres. You then have to recommend benefit amounts based on strategic formulas and find the right product (out of 10 strong risk offers in the market) to protect your client. How many hours of work goes into this? And does your upfront (and potentially ongoing) commission cover this?

The fee for service concept is linked strongly to your personal client value proposition (CVP). As an industry, advice has undersold its duties/capabilities by not educating clients about the complexities of a risk insurance application. Even if that application does not go into force, the adviser has still invested many hours to complete the SOA and recommendations. Time requires compensation. Compensation that is not reimbursed if the insurance application does not go into force.

The success of an adviser managing their client’s claim at claim time far exceeds that of a litigation lawyer. The adviser:

1. Is familiar with the risk products and how they are to function at time of claim.
2. Is familiar with the risk processes of the insurer.
3. Has the technical knowledge to navigate the claim (or has the contacts at the insurer to find the correct technical response).
4. Has the industry relationships/connections to help that claim through.

Solicitors do not have a relationship with the head of claims or sales. You as an advisor may do. These factors should be mitigated to create a strong, individualised CVP for your clientele.

Charging a fee gives you control over your revenue. You can work towards profit margins set for your business, year on year. You can choose to charge on complexity, size, or type of client. You could charge for complex claims handling, an intricate review process, even your SOA.

In my view, nothing surpasses personalised advice. Robo Advice is great for a “one size fits all” approach, but that is the exact antithesis to what personalised advice is about. Just like the adage, “you get what you pay for”. Charging a fee can also eliminate clientele who do not see the value in your advice; you save yourself a lot of time finding this out upfront.

Removing commissions and charging an upfront and ongoing fee gives your client a 25 per cent discount on their premium for the life of the cover. A discount that should be incorporated into a fee structure, but more importantly could be sold as a “buffer” advantage against future repricing. It also validates your stance as a professional providing professional services.

Charging a fee consolidates that you are experienced, knowledgeable, and maintains a strong relationship with the insurance providers you do business with. It gives you control over your upfront and ongoing revenue. It will change the social perception of the value add of consulting a financial advisor; it confirms that no one does this better than you do.

It is time as an industry that we start charging for our worth. So go on — get out there! Trade the cow for those beans … and watch them grow!

Sophie Gacomi, business development manager NSW & ACT, PPS Mutual