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 facilitate training programmes in behavioural coaching an 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 commission-oriented 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.
