Transitioning a business from grandfathered commissions to fee-for-service is a big undertaking, but it’s also an opportunity to re-examine your client value proposition.

In its final report, the Hayne Royal Commission recommended that ‘Grandfathering provisions for conflicted remuneration should be repealed as soon as it’s reasonably practicable’.

In its response to Recommendation 2.4 – Grandfathered Commissions, the FPA says it supports the phasing-out of grandfathering provisions over three years, with all commissions on investment and superannuation products to be subject to the Future of Financial Advice reforms.

Noting the potential adverse consumer outcomes, which could occur through a phase-out of grandfathering provisions, the FPA says it will work to ensure the Government meets the following five principles:

1. The change is in the client’s best interest – no client will be worse off;

2. Commission payments are actually refunded to clients and not retained by the product provider where the client has not authorised their payment to their adviser;

3. Tax relief is provided for any adverse tax consequences (including GST);

4. Centrelink benefits are protected from any adverse Centrelink consequences; and

5. Exit fees be banned in line with the Government’s 2018/19 Budget proposal on both super and investment products.

With the Royal Commission’s strong view on grandfathering provisions for conflicted remuneration and the FPA’s support for the phasing out of these commissions, for those financial planning practices yet to do so, time is running out to transition to a fee-for-service model.

But, where do you start?

Anne Graham CFP^® LRS^®, the CEO and Senior Financial Planner at Story Wealth Management, and Brian May CFP^®, the Managing Director at Horizon Wealth Management, have both successfully transitioned their business models. They share their insights.

1. What was the process/steps you undertook to develop your strategy to phase out grandfathered commissions?

Anne Graham: Our practice has been predominantly fee-for-service since inception, back in 2001. The fee structure was initially a mix of asset based fees and flat dollar fees, and we have evolved to flat fees. We had a small number of grandfathered clients due to various acquisitions over the years.

Our starting point when converting the per cent based fees or commissions to flat fees, was to review the cost to serve and add a margin. We would then discuss the proposed fee change to clients at review meetings, with most clients accepting the change, even when fees increased.

We receive commissions from insurance products, however, we are also in the midst of phasing out commissions and introducing advice fees for risk.

Brian May: As a business, Horizon Wealth Management has been fee-for-service for our wealth clients since our inception in February 2006. Our grandfathered clients had emerged through some legacy products we took over or where fees could not be added at that time.

When it came to developing a strategy to phase-out the grandfathered commissions, we looked at the most suitable products for clients that were both commission-free and fee-for-service, and also where there may be CGT relief.

Fortunately, we only had some old MLC Masterkey Super clients and MLC had subsequently created a commission-free product called Fundamentals under the same trustee structure, which meant there were no CGT buy/sell costs for the client when they moved.

2. What does your business revenue model look like by exiting grandfathered commissions?

Anne Graham: It took about 12 months for most of the existing asset based fee clients to move to the flat fee model, and as new clients came on board, we applied the new fee model.

There are a handful of clients on the old fee model, including risk clients, and we have the fee discussion with those clients as reviews come up.

Revenue from risk commissions is less than 10 per cent of our overall revenue and revenue from grandfathered payments would be less than 3 per cent of overall revenue.

Brian May: Our revenue is marginally higher but that wasn’t the driver. The client is paying a bit more in total, although the overall increase has been immaterial, as the administration fee is a lot lower under the new style products but our fee is higher than the grandfathered commission we were previously earning.

All up, it took us about three months to move our grandfathered clients to the fee-for-service model, but we didn’t have many to move. For other businesses with more commission-based clients, I’d expect the overall process to take longer.

3. What has been the impact to your business as a result of this change?

Anne Graham: As a business, we’ve always had to articulate the value added via advice (both initially and ongoing) and the fee payable. It has made the planners (and the team) more comfortable with those conversations. We can also articulate our service proposition more confidently because it’s focused on advice.

New clients appreciate the transparency of this model, particularly that the recommendations are not based on the commission we might get.

Our revenue stream has changed slightly over the years but it’s quite stable and consistent, and not held hostage to investment markets. During the GFC, when most of our fees were dollar based, our revenue was not impacted by the markets and the vast bulk of our clients remained.

Brian May: Our grandfathered clients were all ‘smallish’ with large insurance premiums that essentially we were trying to preserve an advice home for. The alternative was to hand them back to the provider or suggest to them that they should find a new planner. As such, the change hasn’t impacted our client base or revenue stream.

4. How has this change affected your clients?

Anne Graham: Clients find non-conflicted fee arrangements easy to understand, transparent and it gives them confidence that we are acting in their best interest. Clients understand a fee-for-service model – after all, other professionals operate under this model.

Clients don’t like surprises and appreciate when you explain the service you are providing, and the cost of that service. We explain this before the service is provided and provide an Engagement Letter to confirm our understanding.

Brian May: This change hasn’t impacted our client base or revenue stream. However, it did require a lot of modelling, research and time to explain to clients the reason, rationale, options, costs and implications to change to a fee-for-service model, or the implications for them if they didn’t want to.

In terms of our clients adjusting to a fee-for-service model, it hasn’t really been a problem. Since the inception of the business, we have treated all our clients as if they were fee-for-service.

In fact, of all our clients, there are probably only two who will most likely leave, as they were already looking to become self-directed.

5. Would you have done anything differently?

Anne Graham: Our model suits our business and operating rhythm. Clients understand what they are paying and what service they receive.

To do it again, I would ensure fees remained in line with the service provided, which means more frequent adjustments. I think there’s a risk of undercharging when fee-for-service is involved, as we tend to underestimate the value we provide, so I would make sure fees are in line with services provided.

Brian May: No, we wouldn’t have done things differently. In fact, we should have done it a few years ago but the amounts were immaterial, so it really wasn’t a necessary focus for us. Our clients were fortuitously paying a little less in total, even though the administration fee was high, as it included the commission (as there was no fee-for-service).

6. What advice do you have for other advice businesses transitioning from grandfathered commissions to fee-for-service?

Anne Graham: Know the cost to serve and have a system for estimating fees. Make sure you are consistent across your practice.

Role play and practice the conversation you will have with clients and be confident of your value proposition.

If you are proactively rolling out a change from commissions to fee-for-service, approach it as a project and do it in tranches to manage the workflow. Finally, don’t be afraid.

Brian May: Don’t underestimate how time-consuming and expensive this process is to undertake. A lot of thought needs to go into the overall transitioning process. Understand your cost to service each client. I suggest segmenting your clients into the ones you want to keep long-term and those who you may wish to terminate your relationship with.

Articulate your value proposition and focus on the clients you want to keep by upgrading them to fee-for-service and move on. Let the others go.

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What value do you offer?

As Tony Sandercock CFP® writes, in a world where grandfathered commissions and fee-for-no-service will no longer subsidise the active client base, clients must pay their way. So, unless planners can justify that fee and deliver on it, clients will stop paying.

In the interests of full disclosure, I did not make a transition to fee-for-service in the traditional sense. I started my business – wetalkmoney – from scratch about six years ago, and drew a line in the sand at that point. This business has only ever been fee-based, so I didn’t have client transitional issues regarding commissions to fee-for-service.

However, having said that, in a previous business, I made a partial transition to flat fees in 1999, so I have been grappling with the concept for quite some time.

What I have discovered is that the transition to fees has very little to do with the mechanism of payment and everything to do with the value provided, what is charged for that value, and how that equation is articulated and ultimately delivered. And this is a massive challenge for our industry.

In a world where grandfathered commissions and fee-for-no-service will no longer subsidise the active client base, clients must pay their way. That means advisers can’t do plans for $2,000 anymore, because the cost of quality advice is two or three times that.

So, unless the adviser can make a promise to justify that fee, and deliver on that promise, people will stop paying.

Moving forward, there are tough questions planners need to ask themselves. They include:

• What is value?
• Am I really adding value?
• Where is the value in what I do?
• What will someone pay for that?
• Can I deliver that value efficiently and profitably?
• Do I really know what my clients need, or do I have a superficial understanding of their needs?

Transitioning a business to fee-for-service is a substantial undertaking. By answering these questions, you will better know whether your client value proposition stacks-up in a fee-for-service environment.

Good luck!