RECENTLY, THE U.K. AND AUStralia essentially banned commissions as a method of compensation for financial advisors. Whether you agree that such a change should or could happen in Canada, let’s acknowledge that there’s been a dramatic increase in the number of advisors being paid on some sort of fee basis rather than on commission. The question, then, is how that fee should be calculated.
Although a small segment of our industry describes themselves as “fee-only,” whereby clients are charged an hourly or a flat rate for work completed, most “fee-based” advisors tie their compensation to assets under management (AUM). This typically is on a declining percentage scale as the size of a portfolio increases.
The error in logic with that approach is that AUM doesn’t always equate to the amount of work that you have to do on behalf of individual clients.
Jim Stackpool, a respected advisor coach in Australia, argues in his book, What Price Advice: The Secrets to Maximizing Success in a Commission-Free World, that there is no rationality at all to the percentage of AUM approach. Instead, he advocates a new, three-tiered pricing paradigm:
1. the relationship price would be paid by clients each year to have you stay on top of things and look out for their best interests. Stackpool equates this to the annual fee you pay at a private golf club that gives you access to the facilities and a certain level of services.
2. the services price would be paid when additional work is required due to changing circumstances, revised legislation, new economic conditions, etc. Continuing with the golf analogy, this would be like taking a lesson with the pro to correct your slice.
3. the project price would be paid when there is much work to be done, often involving other professionals whose efforts need to be co-ordinated. The golf equivalent would be an overhaul of your game, with your pro providing the core instruction while overseeing a golf club-fitting expert, a swing coach and a sports psychologist.
Stackpool offers two strong arguments in favour of his approach: First, the price clients pay should be directly related to the work done for them. Second, advisor compensation should never be based on things that are beyond the advisor’s control, such as legislation, economic downturns, product performance or the number of hours worked.
The pricing model described above is one step in a five-part framework Stackpool proposes for establishing your pricing. Other elements include identifying ideal clients for advice; being a “price-maker” rather than a “price-taker”; managing the depth of advice you provide; and implementing a client-engagement process. A bonus section in the book outlines how and when to apply “premium pricing.”
I’ve seen several books about the transition to a practice based on fees from one based on commissions, and have written on the topic and been very active in the conversation myself. In fact, it was at an event in 2011 at which Stackpool and I met, traded books and shared thoughts on this subject. My signed copy of What Price Advice has been sitting on my shelf ever since because, although I was personally interested, I wasn’t sure the Canadian industry was hungry for a treatise on advanced pricing theory as it applied to advisors’ practices.
Now, however, I believe we are. The new client-relationship model will, in my view, further the debate regarding commissions as a basis of advisor compensation. Whether we actually go as far as Australia or the U.K. remains to be seen.
Forward-thinking advisors, however, will get themselves prepared. In the process, a more thoughtful approach to fees just makes good business sense.
To get the book, you have to order it from Stackpool’s website (www.jimstackpool.com) and wait for it to arrive from Australia. In my view, the effort is worth it.
What Price Advice: The Secrets to Maximizing Success in a Commission-Free World
by Jim Stackpool,
Engage Custom Media; 168 pages, AU$39.95
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