FoFA – the bottom line for commission-based financial planners
Gary Weigh Managing Director
Business consultancy Australia
If you are a financial planner wondering what all the fuss is about with a change from commissions to fees, here’s what it will mean for you.
At present, you are receiving commission income from super and non-super investments that you wrote some time in the past. Yes you do pride yourself on reviewing clients and providing a service, but will clients continue to buy it at your new fee-based price?
If you have been in the industry for some time you will have accumulated a lot of clients. Some you already give a lot of service to and others you give little of no service. To many, you are only there if they need you.
Under the FoFA proposals, from 1 July 2012 it has been indicated that you will retain your book of commission based business, but you will not be able to add to your commission income, except if you write risk insurance. Therefore over time, your commission-based book of business form investments and super will gradually diminish.
That will occur for many reasons – people die, divorce, retire or they may change their servicing adviser to someone who provides better fee-based value for money. One way or another there will be some attrition.
Meanwhile you will build your post 1 July 2012 income base from client fees. All products recommended to new clients and new products recommended to existing clients will be subject to the new remuneration rules. That means you will either invoice a fee directly to the client or ask the client to authorise a deduction from their investment / super fund.
The former will require and invoicing and debtors system. The latter will invoke the opt-in provisions where the client must actively renew your deduction authorisation every two years and must receive a disclosure notice from you every other year.
Welcome to the world of administration and financial management! As if you don’t have enough compliance and paperwork!
But there is more!! If you have a lot of clients, you are unlikely to have sufficient hours in a day to provide a fee-based level of service to them all at a price that would match your current level of commission income. Many clients simply will not pay what they are paying now.
On the one hand, you could provide a very low level of service at a low price to all of your clients or, on the other hand, you could provide a lot of service to your very best clients and do something else with the rest.
So this brings you back to the core issues that strike at the very heart of your business. They are, developing your new service package, costing it and pricing it appropriately. And it may be more than one service package.
Commissions to fees will be no simple changeover. That is why you need to stop and do some real business planning, sooner rather than later!!
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