Advisers need to learn how to price their services
It's only a matter of time before commissions are banned and advisers need to decide whether they would prefer to jump or be pushed according to professional service firm pricing consultant Richard Burcher.
Thursday, July 22nd 2010, 5:24AM
by Jenha White
Speaking at the Institute of Financial Advisers (IFA) conference yesterday, he said there is an international trend away from commissions as seen in the UK and Australia.
Burcher believes if trends in the New Zealand industry are any indicator, it is only a matter of time before advisers incomes from commissions are history.
"These days you don't have to just be clean, you have to be seen to be clean," he said.
"Those that are smart will see the writing is on the wall and they will start preparing themselves as it is not a quick and easy transition to a new pricing strategy."
Burcher acknowledged that the political climate at the moment supports how the industry works, however he envisages that changing.
"Clients are demanding transparency, value for money and no conflict of interest."
He says financial advisers are going to have to learn an entirely new skill set on how to price their work and how to "sell" a proper fee to clients.
He suggests it would be better to jump away from commissions, to take time and choose a new pricing method, rather than be pushed by legislation.
The Investment Savings and Insurance Association plans to introduce a policy that its members can't pay commissions on the sale of investment products.
It is in the process of finalising an announcement that will result in a voluntary policy to discontinue the payment of commissions on investment products, including KiwiSaver.
The association said it is going to give investors the opportunity to negotiate a separate fee for the level of service they receive to hopefully engender confidence.
Burcher looked over four pricing strategies in his presentation - commission, time recording and hourly rates, reasonable fee factors (a subjective value based analysis) and also the blended approach which is a mix of strategies.
He said the public do not like time recording and hourly rates which is seen evidently in the law and accountancy professions.
He said hourly rates have no correlation with the clients sense of value, they encourage and reward inefficiency, reward efforts rather than results, have no incentive to manage costs and do not reward superlative performance.
The second model looked at was the reasonable fee factor model which contains 13 factors which lawyers are meant to work under. Burcher said it is a largely subjective analysis which requires a lot of thinking and consideration.
He says the financial adviser industry may need to look at creating its own equivalent of reasonable fee factors.
He recommended the final pricing strategy - the blended approach, saying there are varied investment products, so there should be a multi-faceted nuanced approach to pricing.
Burcher also acknowledged the general observation that the public do not like paying for professional advice as it's a discretionary spend.
"One thing advisers can do is create a value discussion rather than a price discussion," he says.
"You need to paint a picture to help the client ‘get' the value of the service."
Burcher suggested an industry-wide approach is required which needs to be right from the start.
He believes the industry has an opportunity to do so as it is on the cusp of change at the moment.
Jenha is a TPL staff reporter. jenha@tarawera.co.nz
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