Around the financial advisory world, firms are moving from product-based commission to a servicing revenue model. This underlying shift has become widely known as “fee-for-service”, hereafter referred to as FFS.
In certain jurisdictions, “voluntary” conversions have taken place. In others, regulatory bodies have initiated the change. South Africa is not isolated and RDR is very much on the table…
Often with change or uncertainty, there is an element of fear. However, seeing how other countries are dealing with changes, provides insight into what is coming your way.
This series of articles starts with the benefit of FFS for consumers, advisers as well as advisory businesses. Future articles will also look at what is happening in Australia and the FFS path being taken by Aussie advisers.
Benefits of FFS for clients, advisers and advisory businesses
“…What business are you really in…?”
The “What business are you really in?” term stems from a 1960’s article “Marketing Myopia” 1. Harvard Business Review2 says this piece of writing introduces the most influential marketing idea of the past half-century:
“…businesses will do better in the end if they concentrate on meeting customers’ needs rather than selling products…”
FFS aligns with this marketing idea. FFS requires a change from a product sales mind-set to a service sales one. In the FFS world, “fees” are paid for a “service”. One of the key steps in implementing a FFS strategy is speaking to clients to find out what they see as valuable in their relationship with their advisers. Hence, the service has to appeal to the customer. This requires understanding what clients see as “value”. Services need to be designed to satisfy needs. By concentrating on meeting customers’ needs, clients will be better off.
Customers seldom see the provision of a product as the primary value-add. However, in the past, the product sale earned the commission that paid the adviser. The adviser’s incentive was to earn as much commission as possible. If this meant selling a product with higher commission levels, then this is what often happened. In Australia, the selling of tax incentivized agricultural schemes or geared equity products (including the mortgaging of retired folks homes to buy more shares) generated lots of commission. Unfortunately, the ducks came home to roost with the GCF and a tax office ruling. Had the commission not been so tempting, customers would not have lost hundreds of millions.
Clients will develop trust in advisers when the interaction is based on the client’s needs, rather than the needs of the adviser. In time, this will make the adviser’s job easier. This is especially so when it comes to providing an ongoing service. A key driver of an advice firm’s value is “sticky” ongoing revenue. In Australia, good FFS based firms sell for over six times ongoing EBIT. This multiple is far more than would be paid for an advice firm earning only commission.
In conclusion, FFS presents the opportunity for customers to be better serviced, for advisers to develop trusted relationships and for advice business to increase their value.
In the coming articles in this series, more practical Australian FFS examples will be provided.
1Theodore Levitt 1960 Marketing Myopia Harvard Business Review – July to August 1960.
2Harvard Business Review July – August 2004