This article by Mike Taylor in Money Management Nov 26 2015 regarding how the Canadians see Australia’s removal of commission as a fail is discussing the advantages that the commission system has over a fee for service business structure for some consumers. ONeil Financial Planning runs predominantly on a fee for service basis however this is an issue that has resonated with me for a number of years.
Under the commissions system a consumer could see an adviser and pay very little or nothing for the plan and then the adviser would get paid on the implementation of the recommendations. The consumer does not need to pay anything upfront for the advice and if you dont like the advice when received you are free to walk away and see someone else. Normally you can see two or three advisers and then proceed with the plan that you feel bests suits the outcomes that you are looking for.
In this case the cost of implementing the overall recommendations could be $3-5,000 however it is only paid once to the adviser who you felt best understood your goals and reflected those with recommendations that you could see achieved the outcomes that you wanted.
Under the fee for service model you generally pay upfront for the plan and you are obligated to pay for the plan whether you like the advice or not. When you then consider that the plan may cost $3-4,000 with a $1,000 implementation fee the overall cost is largely the same however you can not get two or three opinions as you can do under the Commission model.
On this level and forgetting anything else the consumer is biased toward the commission model as it is the only way that you can see a few planners to see who best connects with you.
At the 2005 FPA conference there was a CFP day on the day before the conference and the then Deputy Commissioner of ASIC Jeremy Cooper was presenting an open forum with the advisers.
During question time i asked him about shadow shopping and whether the ASIC ever asked the shadow shoppers which advisers they saw and why. He said they did not seek that feedback from the shadow shoppers.
I wanted to ask a few more questions around this subject however i was asked to sit down by the MC so i wasnt able to discuss any of these issues in the ASIC Open Forum with advisers.
ASIC Shadow shoppers are real consumers looking for real advice and the only instructions that the ASIC give them is that they must see 3 or 4 advisers.
That being the only requirement it could cost a shadow shopper between $9,000 and $20,000 to see the planners that the ASIC require them to see. As a result you can imagine they see planners that are giving free plans and that is because this consumer is biased toward the commission model.
The Canadian research highlights the same issues and that is that the fee for service model makes it expensive for the average person or the young person to see and adviser. I am not saying that the commission model is good and as stated previously we charge for our advice as that is where the value is to you however that does not mean that it is easy to pay for the advice.
We are happy to advise all clients including younger people and the plan fees can be an issue that needs to be addressed with them.
We have had a few cases with clients where we charge our usual fees for advice and we then arrange a suitable payment schedule that is acceptable to us and the client. This ensures that the clients receive good advice and we can get paid and stay in business so we can assist our clients long term.
This issue highlights the importance of asking your friends, parents or people that you respect who they deal with for their financial matters. You need to get onto a professional adviser with integrity the first time and that is best done by having a strong introduction by someone you respect and trust.
It is never to early to start planning.