Hello, I’m from ASIC and I’d like you to justify the advice fees you charge?
Are you ready for this question?
Reminds me of the gag about the tourist in Ireland who asks a local for directions to Dublin.
The Irishman replies: “Well sir, if I were you, I wouldn’t start from here”.
ASIC’s question might not be the best starting point, but it is the start of something significant for all advisers.
ASIC’s new role
ASIC isn’t the demon.
They are just doing their re-vitalised new job overseeing advisory services and related fees to minimise the potential repeat of another fees for no services.
Justice Hayne was clear in his royal commission that the duty to clients was too often side-stepped for the shareholder, profit and institutional ‘best interests’. ASIC are responding showing ardent willingness to extend their former boundaries of role, responsibility and authority.
We should be expecting more of this.
Being an election year, we should also expect a significant drought of any constructive professional leadership and debate due to the din of pre- and post-election political grandstanding.
The distracting beauty-parade praising false models such as who is going to be toughest for ‘honest working families’ only serve to catch votes rather than build confidence for professional advice. The political consequences will probably ensure much of Justice Hayne’s good work will be decided upon by new government with an increased number of cross-benchers more eager to establish their political careers rather than stronger boundaries for our fledgling financial advice profession.
So how best to respond to the fee questions from our newly energised ASIC?
There are at least two parallel paths to consider when reflecting upon a response.
What about Value?
The first clue is what was missing in Justice Hayne’s final report.
Value.
There is little to no mention of value in Justice Hayne’s report.
Specifically, the value of advice.
This is totally understandable as it wasn’t what the Royal Commission was tasked to do. The word ‘value’ was not used in the Royal Commission’s terms of reference.
Also, defining value is as easy as defining notions of quality, safety, taste, class, reputation and confidence. That is, it’s a harder concept to quantify than more objective measures such as costs and fees.
While hard to measure, we are all self-wired experts on what value is for each of us – based upon our own deeply forged and often invisible bias and anchors, while usually effective for our day-to-day decision-making, can lead us, as Israeli psychologists Kahneman and Tversky suggest, to systematic and predictable errors of judgment.
For instance, following the cues from our bankers, value means lowest cost. An effective approach when buying milk, maybe.
If you listen to the industry funds, value means no scandals and lower fees. Even our Productivity Commission heralds cost as a core driver of value. An understandable, even non-negotiable aspect of value, but hopefully more a foundational feature rather than a defining one.
Ok, value is subjective, so what?
We’re lucky enough to live in a place where we can truly prize and pursue what is valuable to us. The importance and uniqueness of what we value is akin to the importance and uniqueness of our identity. What we value should be a non-negotiable for each of us, not dictated to us by anyone. Respectfully challenged when required, but like our other unique notions of quality or taste, our unique sense of what is valuable must be treated just as importantly and respected as the next person’s.
This creates difficulty for the ASIC officer asking the justification question.
Thus, the first path to consider when responding to a fee validation question is potentially not a client-by-client discussion of fee-for-value, but a broader conversation about how all remuneration is only ever linked to the value required and provided, without any real or perceived conflict that might indicate otherwise.
Unfortunately, this is a core issue side-stepped by Justice Hayne as being too difficult. For most Australians, the separation of advice from product would make it clearer to everyone the separation of remuneration for valuable advice from the remuneration for valuable product.
For instance, the recent debate surrounding mortgage brokers might be framed as simply an industry clearly arguing they are in no way ready for a remuneration model that rewards the provision of value paid for by a consumer seeking their services.
Extraordinary really.
The anchors used successfully by the brokers to challenge the recent recommendations and maintain the status quo – protecting the best interests of Australians – were the very same used by amendments to the Future of Financial Advice legislation in 2014 which allowed the carve-out of grandfathered commissions which now thanks to Justice Hayne, has been overturned. If history is any guide, the value challenge for mortgage brokers has just been postponed.
And it’s not just the mortgage brokers.
In this regard, ASIC’s justification question will not only be aimed at financial advisers and brokers, but will eventually include the accountants, lawyers and all professionals pertaining to be paid for value provided.
If a remuneration model totally based upon what the client values is the first path, David Maister and Justice Hayne provides plenty of clues to the other parallel path to consider when responding to ASIC’s queries.
The Value Checklist
Maister is a master writer and adviser on practical professionalism forged from his work with legal firms. His writings are applicable for all professionals that aim to provide greater certainty for their clients. Particularly his writing in True Professionalism, provides key foundation stones for the inevitable value versus fee conversation with our own teams and regulators.
Equally, Justice Hayne provided clear checklists to consider for delivery of valuable advice:
- Hayne was adamant – conflicts should be eliminated not managed. Any perceived or real conflict associated with advice needs to be removed in Hayne’s view. This is an inevitable evolution rather than an over-night revolution for many of today’s advisers, but it is another non-negotiable for the future of professional financial advice as opposed to professional product advice;
- Maister is adamant – valuable advice is not to be confused with valuable products or the quantity of hours worked. Just as our doctors don’t boast about how sharp their scalpels are, when valuing our financial advice, we need to provide whatever hours are required and then whatever products are required without bias to achieve what is uniquely valuable for each client;
- Hayne is adamant – advisers cannot tolerate any practice or intent to claims that the trust between themselves and their clients has been previously earned. Hayne’s clear recommendation for an annual review of the trust, the value, and the fees is another non-negotiable for an adviser’s on-going valuable relationship with their clients. As with all relationships, this requires on-going empathy, re-education and effort as to the value required and how best to deliver it;
- Maister is adamant – as advisers aim to deliver their highest possible standard of advice they must also be prepared to share, with obvious respect to privacy, the evidence of their work, the recordings of their client meetings, the questions that they asked, the strategies they recommended, the evidence of paths being managed and progress made, whilst developing an internal methodology that consistently delivers value, pricing and strategy, rather than just the technical papers required for product sales and compliance.
The anchors of our past will instinctively challenge the cost of delivery of checklists like this, which is ironically, like the road to Dublin, is not the best place to start this growth debate. Affordability considerations have their place but only after an understanding of value – let’s get things in order – firstly understand what people uniquely value, then what people can afford.
Whether ready or not, advisers who are intent on delivering valuable advice need to be prepared for ASIC’s door-knock. It won’t just be ASIC, as we should expect similar queries from our networks, our clients, our teams, our alliances, our prospects, our partners and our buyers.
While some might see the fee justification question as a new form of Orwellian leadership from ASIC, it’s a leadership opportunity for every firm excited by the opportunities in a profession focused on delivering value to every client.
What do you reckon?
About Jim Stackpool
For nearly 30 years Jim has influenced, coached, and consulted to advisory firms across Australia. As founder of Certainty Advice Group, he leads a like-minded team of professional advisory firms seeking to create greater certainty for their clients. As an author, blogger, columnist, and keynote speaker, Jim is regularly called upon for his professional insights into the advice industry. His latest book Seeking Certainty is available now.