Again this week I have a debate raging around me on fees versus commissions. It's a sensitive subject and each time a view is expressed it offends, outrages or incites another reader to voice an opinion on the subject. Nothing is seemingly more difficult than the reconciling of fees for service. How does a practice charge to distance itself from product placements?
Dealer groups struggle with the concept for advisers as much as the planners themselves and the way they express their charges also varies. Product providers pay commissions and it can be registered in different ways. It can be rebated to clients almost directly or it may be rebated to licensees to distribute to planners as shared profits or kept as a way for equity sharing between planners for redemption at a later date. How a planner is remunerated by the client, however, is something else. A recent letter to the editor (issue 359) stated that IFA columnist Kevin Bailey's company The Money Managers talked about fee for service yet charged a fee based on FUA.
The letter argued that fee for FUA was the same as a commission because it was a percentage fee on investable assets. However, it is not a commission in essence as it is not set by a product provider that has determined what commission is to be paid for placing the product. The 'fee' The Money Managers charges is not determined by where money is placed. In this way, it is not 'commission' so reviled by the industry funds in their advertising propaganda.
Bailey argues his method of charging a percentage fee for investable assets is the most appropriate for the service his business provides because it incorporates and amortises the work of his research and lobbying efforts to get the best investments at the best prices for his clients. He says it is fairer to charge more to these with more money as the liability to his business rise as investment amounts rise. Other advisers may charge on an hourly rate based on actual hours worked on the estimated size of the job. SCAT principal Jim Stackpool cautions against this method as you are limited in income by the hours in a day.
To the client two things are important: that the fee or commission may be justified in value received and that advice is not biased by commission paid to the adviser. Commissions are already being pooled by many dealer groups to eradicate the bias. More work is needed to eradicate it. Meanwhile, the value of advice campaign of the FPA cannot be stressed enough. Until the industry can charge fees that they can justify to clients it will struggle as a profession.
