Financial Planning Association's CEO explains how a fee-for-service model can apply to brokers
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The financial Planning Association of Australia [FPA] has provided support for financial planners making the transition to a fee-for-service model as far back as 2012, and many of our members have successfully adapted. The lessons we have learnt along the journey to a FFS model for financial planners can also apply to mortgage brokers.
With the passing of the Life Insurance Remuneration Bill on 9 February 2017, the amount of commission that financial planners can receive from recommending life insurance products will decrease starting next year. This will put revenue pressures on financial planning practices, and in a lot of instances, financial planners will have to start thinking about whether they will need to supplement the commission with a fee for service, or fully abandon the commission model and move to a FFS model.
While many financial planners feel that moving to FFS is a very difficult proposition, the ones who have successfully completed the transition are finding that their businesses are much more profitable. This is because clients are much happier and more engaged with the financial advice process – they have certainty around what they are paying, so they value the services and advice a lot more.
Similarly, for mortgage brokers who adopt the FFS model, their clients can be certain that the broker is working for them because they are paying for the service, rather than the broker working for the lender via a commission. Under the FFS model, once the commission is received by the mortgage broker, it will be refunded back to the client.
Our advice to mortgage brokers making the switch to the FFS model is outlined in our six principles for remuneration below:
Clients must be able to understand the fees they are paying.
Simple and consistent fee disclosure should extend to all documents given to a client. The value of the advice, and the associated cost of that advice, should be clearly conveyed to ensure the client understands the value and the cost.
Clients must be able to compare the fees they are paying.
Improving the consumer’s understanding of the fees they are paying means improving comparability in fee disclosure across business models. Disclosure should enable the client to compare the value they receive from one professional with that offered by another.
Clients must be presented with a fee structure that is true to label.
Brokers utilising commission-based models should be required to provide additional information directly to consumers on the impacts of commission-based remuneration. These might include comparative information on charging models and questions to ask your broker about how they charge for services, including the difference between upfront and ongoing commissions and associated services.
Clients must be presented with fees that are separated between advice and product.
Fee disclosure must separate the costs of the product from the costs of advice. Product costs are the costs charged by the product manufacturer – in this case, the lender – for the creation and management of the loan. Costs of advice include the initial client consultation (often free); initial client investigations; identification of client objectives, needs and circumstances; analysis of client objectives; and development of strategy.
Clients must agree on the fee with their broker and can request that the fee be switched off if no ongoing advice is required.
Charges for broking services should be determined between the broker and the consumer. If a client wishes to terminate their agreement with their broker, or the broker wishes to withdraw their services, the fee should be switched off.
Clients, not product providers, should pay for broker services so as to remove potential for bias.
Payment for broking services should come from the client, not the product provider. In the case of payment for ongoing charges, these should be matched to regular deductions from the client’s account, and ‘factoring’ an upfront payment to the advisor or advice licensee would not be permitted.
Dante De Gori has been CEO of the Financial Planning Association since March 2016. He is a Certified Financial Planner and works to advance the financial planning profession and build widespread consumer trust.
With the passing of the Life Insurance Remuneration Bill on 9 February 2017, the amount of commission that financial planners can receive from recommending life insurance products will decrease starting next year. This will put revenue pressures on financial planning practices, and in a lot of instances, financial planners will have to start thinking about whether they will need to supplement the commission with a fee for service, or fully abandon the commission model and move to a FFS model.
While many financial planners feel that moving to FFS is a very difficult proposition, the ones who have successfully completed the transition are finding that their businesses are much more profitable. This is because clients are much happier and more engaged with the financial advice process – they have certainty around what they are paying, so they value the services and advice a lot more.
Similarly, for mortgage brokers who adopt the FFS model, their clients can be certain that the broker is working for them because they are paying for the service, rather than the broker working for the lender via a commission. Under the FFS model, once the commission is received by the mortgage broker, it will be refunded back to the client.
Our advice to mortgage brokers making the switch to the FFS model is outlined in our six principles for remuneration below:
Clients must be able to understand the fees they are paying.
Simple and consistent fee disclosure should extend to all documents given to a client. The value of the advice, and the associated cost of that advice, should be clearly conveyed to ensure the client understands the value and the cost.
Clients must be able to compare the fees they are paying.
Improving the consumer’s understanding of the fees they are paying means improving comparability in fee disclosure across business models. Disclosure should enable the client to compare the value they receive from one professional with that offered by another.
Clients must be presented with a fee structure that is true to label.
Brokers utilising commission-based models should be required to provide additional information directly to consumers on the impacts of commission-based remuneration. These might include comparative information on charging models and questions to ask your broker about how they charge for services, including the difference between upfront and ongoing commissions and associated services.
Clients must be presented with fees that are separated between advice and product.
Fee disclosure must separate the costs of the product from the costs of advice. Product costs are the costs charged by the product manufacturer – in this case, the lender – for the creation and management of the loan. Costs of advice include the initial client consultation (often free); initial client investigations; identification of client objectives, needs and circumstances; analysis of client objectives; and development of strategy.
Clients must agree on the fee with their broker and can request that the fee be switched off if no ongoing advice is required.
Charges for broking services should be determined between the broker and the consumer. If a client wishes to terminate their agreement with their broker, or the broker wishes to withdraw their services, the fee should be switched off.
Clients, not product providers, should pay for broker services so as to remove potential for bias.
Payment for broking services should come from the client, not the product provider. In the case of payment for ongoing charges, these should be matched to regular deductions from the client’s account, and ‘factoring’ an upfront payment to the advisor or advice licensee would not be permitted.
Dante De Gori has been CEO of the Financial Planning Association since March 2016. He is a Certified Financial Planner and works to advance the financial planning profession and build widespread consumer trust.
