Chapter 02 – Getting started in a fee for service environment

Most fee for service transition programs concentrate on fees – sometimes to the complete exclusion of services. The Dover Way is more experienced, and concentrates on services, and in particular what services you need to provide to survive and prosper under FOFA.

Fees come after services. Get the services right and the fees will follow. 

Low fee expectations

Research shows that the average Australian believes financial advice should cost between $300 and $500 up front. This amount is plainly unrealistic, quality advice just cannot be achieved at that price, and clients who expect it will either need to change their expectations or get what they pay for, ie not much.

How do you change low client fee expectations?

This is difficult and very much depends on which client has the low fee expectations. Some clients will have been conditioned to low fee expectations by a previous adviser, or even their previous relationship with you. Some may genuinely believe there is not much to what you do and that they should not have to pay for it. Others will just be out to minimise their costs without any regard to what is fair and reasonable, and necessary to create the on-going client relationship.

You need to educate and condition your clients to paying for your services.

First, make sure you have the right service, ie the right client value proposition This is explained below. Make sure the total client experience, including your space, your staff and the presentation of your work is well perceived by your clients and that they understand and appreciate the value of the work you have done for them.

Second, be transparent. Be clear, open and genuine about your fees and how they are calculated. Make sure they are in writing, and in a form that satisfies all relevant ASIC and Corporations Law requirements, not to mention basic best practice principles. In summary, never do anything for a client without clear and written instructions: this goes a long way to avoiding disputes.

Third, if this does not work and you are left with a client who is not reasonable about your fees and simply wants to reduce costs then you should ask that client to leave your practice. Try it. It‘s quite liberating. There are literally millions of potential clients out there and there is no point in wasting your time on someone who does not appreciate what you are doing for them. Invariably this frees up your time for value adding work that enriches you, and a client who appreciates what you do and is prepared to pay you for doing it.

To overcome low fee expectations you have to determine what your client value proposition is: and believe us, this proposition should focus on making your clients more money than you cost them. Do this and you become a value adding proposition and not just an unnecessary cost.

Your client’s value proposition

What should your client value proposition be? Before you answer this question, you should first ask, what is a client value proposition? Answering this question requires you to research/examine/reflect on what your clients expect of you and what is of value to them. Talk to your clients. Talk to your ex-clients. Talk to your future clients, ie the type of client you want to be part of your practice in the future, and then acquire the competencies and create a service that meets those expectations.

Matt Fogarty has written an excellent article dealing with this question: Financial planning, investment and self managed super fund article – client value proposition. Let us quote a short extract here:

A Client Value Proposition (CVP) is a business’s promise and commitment to its clients. It provides the reasons why a client should deal with their business, not another, along with the benefits articulated and communicated in a manner easily understood by the client.

Many business people struggle to come to grips with the concept of a CVP – somehow it seems too abstract. Surely the value we provide is in the integrity of the advice we give our clients to help them achieve their goals! Unfortunately, when dealing with human emotion and behaviour, things are never that simple. A CVP is a mix of tangibles and intangibles; a cocktail of client experience, expectations and outcomes that requires a degree of systemisation and process efficiency.

The success of any CVP lies in how the practice manages client experience and delivers on the expectation created. The concept of a CVP is often hard to define from scratch. Take the time to consider and even ask clients why they deal with you, instead of relying solely on your own point of view.

Take a moment to consider the following:

  • What client needs are being serviced by our practice?
  • What does value really mean to our target clients?
  • What do we actually provide our clients?
  • Are there any gaps in what we provide and the expectations our clients have?
  • When building your CVP, start by determining what your practice is good at. List the five key things the practice does exceptionally well. Consider the personality and culture of the business, unique points of difference, obvious and not so obvious competitive advantages.

Once this list has been created the next challenge is to turn these perceptions into reality by articulating them into realisable benefits and service deliverables for your clients.

What should your client value proposition be?

So, now we know what a client value proposition is, can we answer the question of what your client value proposition is?

Dover believes that the best client value proposition comprises being competent in the nine essential technical competencies of a fee for service practice that aims to act as the primary adviser to its clients on financial matters.

This means you (the adviser) are able to increase the net wealth of your clients by significantly more than your fee. This means rational clients will choose to use your services rather than your competitors and your practice will increase its profits and its (CGT free) capital value.

Remember, it’s your client value proposition, not your value proposition. You must focus on creating permanent value for your clients without undue risk or complexity.

Ultimately financial planning is about increasing your client‘s wealth. If you cannot do this you are in the wrong profession.

The nine essential competencies for a successful financial planning practice

These nine essential competencies for a successful practice are:

  1. estate planning and business succession planning;
  2. general business advice;
  3. basic taxation planning, including choice of structure;
  4. finance, and negotiations with financiers, including the management of non- deductible debt;
  5. super planning and particularly self-managed funds;
  6. record keeping, bookkeeping, accounting and basic tax compliance;
  7. risk insurances;
  8. property, including property acquisitions and tax planning strategies; and
  9. shares and other securities including managed funds.

You must be your clients’ primary financial adviser

Your business plan must establish you as your clients’ primary adviser on all relevant financial matters, to the exclusion of other competitor advisers, and ensure you control all aspects of the advice process. This control is needed to guarantee quality to your client, to keep costs under control and to ensure you are not excluded from the advice process in any way. This control is also needed to maximise your client loyalty, your income and your practice‘s value.

You must become a business general practitioner or a ‘financial GP.’ You need to know and understand the nine essential competencies, and be able to guide your clients with care and genuine empathy through the challenges each competency presents.

You must be able to meet your clients‘ needs in each competency, but also recognise complex cases where it is necessary to call in specialist assistance, on your terms, to advise you on what needs to be done to promote your clients‘ interests.

financial-planner-as-primary-adviser

How do you acquire this knowledge?

It‘s fair to say some financial planners do not have the skills and experience to advise competently on all nine competencies. Some do. But most do not. If you are one of those who don’t you should spend some time to acquire the knowledge and to integrate this knowledge into your practice and your client statements of advice.

Keep perspective: you do not need a law degree to learn all you need to know about estate planning and wills. You do not need to be a licensed real estate agent to advise your clients on buying or selling a property. And you do not need to be an accountant to advise a retiree on how to run a self-managed super fund. For most experienced financial planners the relevant knowledge can be acquired through a systematic process of self-education and book-based learning, supported by selected short courses run by government and private bodies.

Remember, your client will not expect you to have mastery-level knowledge of each of the nine competencies, (although they will probably expect mastery level of at least one or even a few of them). What they are looking for is an awareness of the main issues, an ability to identify problems and an ability to solve the problem in a practical and economical way, including referring to specialists where needed.

What courses are available?

Institutions like Kaplan offer financial planners a variety of formal courses to improve their skills and knowledge. The National Tax Agents and Accountants run fantastic SMSF seminars, and these are open to all and are not limited to their members. The CPAs and the ICAA also offer excellent training and again attendance is not limited to their members.

Open Learning Australia offers a degree course in financial planning in Australia, and there are no prerequisites for enrolment. Study is at your own pace, through internet based distance learning, and covers the full range of knowledge required to advise on these nine competencies, as well as other essential areas.

If you are uncertain about your ability with the nine essential competencies you should seriously consider completing this degree course.

When do you need to call in an expert?

You cannot be 100% expert in each competency. No one is. You do not help your client by purporting to be 100% expert when you are not, and you open yourself up to a serious risk of a negligence action if you make a mistake.

Some financial planners think calling in an expert is a sign of weakness. It‘s not. It‘s a sign of competence. It‘s the mark of a professional who places their client‘s interests ahead of their own interests and is interested in optimal client outcomes rather than short term billings. Intelligent clients see it as a sign of strength and confidence and not a sign of weakness.

Bringing in an expert seriously reduces your potential liability if something goes wrong: you can prove you took all the steps a reasonable adviser would have taken to make sure your clients’ interests were protected. Its no excuse to a court to say that you were too embarrassed to get help, or that you thought your client would think less of you if you admitted that you were not technically competent to deal with the matter before you.

If you have any doubts about where, say, the Financial Ombudsman sees the financial planners‘ duty of care lying have a look at solicitor Peter Townsends‘ comments on the Basis Capital Case, which you can download here: FOS Beats Ripoli in Raising the Standard. In this case a financial planner was ordered to pay a former client more than $100,000 in compensation for amounts lost on an investment that was inappropriate to the client‘s financial profile.

Competent professionals refer clients on all the time. No one is best at everything, and you owe it to your clients to refer on whenever it‘s in your client‘s interest to do so.

A competent financial planning professional knows when a client problem is beyond his or her skill level and an expert needs to be called in. It‘s an intuitive process and each case is different. For example in the case of an estate planning exercise the circumstances where s financial planner may need an expert may include:

  1. larger than normal wealth;
  2. second or third marriages;
  3. mentally disabled or otherwise disadvantaged children;
  4. high probability of imminent death, such as advanced cancer;
  5. extra-marital children;
  6. dependant adult relations; and
  7. relatives facing bankruptcy or divorce proceedings.

The acquisition of the required level of knowledge to advise on wills and estate planning generally, and to know when more expert knowledge is needed, is well within the technical skills of most financial planners.

How does Dover help you?

Dover helps its representatives by providing expert advice and assistance in each of the nine essential competencies.

Dover representatives can access this support without compromising their position as primary adviser to their client and Dover works through the representative and does not have direct contact with the client.

The ten thousand hours rule

Keep practising and within a few years you will become very good at what you do.

This sentence may strike a chord with anyone familiar with the work of Malcolm Gladwell and particularly ―Outliers, the Story of Success published by Penguin Books in 2008. Throughout this book Gladwell repeatedly refers to the ten thousand hour rule and posits that (almost) anyone who practises a complex skill for ten thousand hours will become good at it. He then takes on examples ranging from air traffic disasters to baseball to Bills Gates writing MSDOS to prove his case. Outliers is an instructive read, and one we highly recommend to anyone interested in understanding success.

In the context of creating a fee for service financial planning practice the ten thousand hours rule should be seen as a metaphor connecting time and effort with results. You do not need to practice for 40 hours a week for five years to acquire the knowledge needed to run a good fee for service financial planning practice. It takes much less time than this. But it does take time, and effort. How much time and effort depends on your state of knowledge now, and our guess is virtually all financial planners should make the jump on all nine areas of practice.

Technical competency self-audit

A good place to start is to devise your own technical competency self-audit to help identify what you need to do to develop or otherwise access the skills needed to run a comprehensive fee for service based financial planning practice.

An example format is shown below.

Technical competency self-audit process: one suggested approach

Area of competency Self-education Action required Business plan strategy Mandatory referral arrangements with third parties How can Dover help
General business advice Maintain general reading and develop business plan preparation skills.Complete readings from major financial planning text books Develop a pro-forma business plan to be offered to all clients running businesses or contemplating starting a business.Develop a pro-forma marketing plan IT IM consultants. Business lawyers to advise on structure and asset protection issues. Accountants to complete taxation, workcover and related applications and registrations Dover provides business planning guidance and templates for business plans
Basic taxation planning Commence diploma of taxation at Curtain University through Open Learning Australia. Understand tax implications of different business structures. Understand and implement negative gearing and advanced gearing strategies. Accountant/tax agent to ensure strategies are implemented correctly in client tax returns Dover‘s accountants advise on specific tax issues and to provide tax advice for inclusion in your statements of advice
Finance and negotiations with financiers Complete certificate IV in Financial Services (Finance/Mortgage broking) Advise clients on choice of lending products and interest rate management including strategies to pay off non- deductible debt Not required. Dover provides debt management strategies
Self-Managed Super Funds Complete Kaplan SMSF courseComplete readings from major financial planning text books Advise on set up and related issues Advise on planning strategies Advise investments & insurance Engage SMSF manager/auditor/tax agent to provide SMSF back office. Dover can provide a complete SMSF back office service including audit and tax agent certification for a fixed fee
Accounting and tax compliance Complete Certificate IV in bookkeeping and MYOB, or Xero short courses (unless hold relevant undergraduate degree) Advise clients on basic concepts Accountant tax/agent needed to complete and lodge Dover can provide a complete accounting and tax compliance support service for a fee
Risk insurances Complete ASIC accredited course Advise on life insurance, income insurance and trauma insurance Not required. Dover provides a complete risk insurance service for a fixed fee per policy and the representative keeps all commissions
Estate planning Attend FPA seminars on estate planning for financial planners. Assemble a readings collection to provide to clients at meetings Advise clients on an on-going basis on estate planning and related issues, including regular will reviews Estate planning lawyers to complete wills and related documents on your instructions and to handle complex cases directly with your clients. Dover has expert solicitors on staff to help representatives advise on estate planning issues
Property consulting Complete REIV or equivalent Agents’ representative course. Advise clients on up-grades and down- sizes to the home, and on residential and commercial property Consider engaging buyers advocates or similar consultants Dover can assist with providing general property investment strategies
Shares and other securities Kaplan ASX Accredited Listed Product Adviser course. Advise clients on shares and similar securities Not required Dover can assist with sample portfolios and research reports
Managed funds Complete readings from major financial planning text books Advise clients on managed funds Not required Dover can assist with sample portfolios and research reports

Who is your competition?

Your competition is all other financial planners, as well as most accountants, some business lawyers, and other financial advisers such as mortgage brokers. It‘s not just other financial planners any more. And if they are not with you they are against you, and competing for the same client adviser dollar.

Your competition will all be after the same space as you: the role of primary adviser.

Your competition will want to be financial GP who controls the client and who represents the client in all dealings with other professional persons.

Your clients have a choice of paying your competition or paying you. You must create a value adding proposition that supports and justifies your fees if you want your clients to choose you rather than your competition.

It‘s a Darwinian model and if you are not fit you will not survive. And if you are not fitter you will not prosper. You have to be proficient in all nine technical competencies if you want to run a profitable and successful practice.

If you do not evolve you will lose your income and the capital value in your practice.

financial-planners-competitors

A practical tip: create a homogenous client base

Practices that have homogenous clients, with similar features amongst most clients, are more profitable than other practices. There are many reasons for this.

First, homogenous clients are more suitable to standardisation and systemisation. What worked for yesterday’s client will probably work for today’s client, and tomorrow’s client too. You can get better results for better prices, and this in turn leads to even more clients. Growth compounds and client numbers build until you have a significant and self-perpetuating practice.

Second, it‘s easier to get better. If you are dealing with similar problems all day every day it‘s logical that you will get better at solving those problems. Client presentations start to repeat, and you can see the patterns, and you can develop precedents, templates and systems that allow you to handle larger volumes of clients more efficiently than your competitors.

Third, marketing is easier. Word of mouth referrals are stronger within a smaller group and advertising can be more specific and focussed. It‘s more cost efficient to sponsor say, a newsletter dedicated to schoolteachers than it is to advertise to everybody in the Sydney Morning Herald.

Finally, the power of the precedent means you can create better statements of advice for your clients at a lower price and with a better profit margin. It pays to invest in your precedents and to make sure you are doing more for your clients at a lower price.

Fee for service practices work better if you have a homogenous client base.

Introducing our case study: Black Rock Advisers

Let us introduce two of our Dover representatives, Bez and Sean.

Bez and Sean decided five years ago to specialise in a particular professional group – teachers. They had some experience with teachers, and they felt it was a nice group to work with, had realistic expectations and appreciated an educative approach to all advice work.

They implemented a simple business plan featuring:

  1. selling their old practice, except for the teacher clients, thereby realizing a nice tax free capital gain;
  2. re-investing the capital gain in new owned premises in Black Rock, Victoria, with the right look for their new venture;
  3. creating a portfolio of low cost standardised statements of advice for common teacher presentations, including younger teachers, middle age teachers in their peak cost years and older teachers at or approaching retirement age. These statements of advice can be produced in more detail, more comprehensively, faster and more efficiently than their competitors can;
  4. developing products for teachers which fit within the average teacher‘s budget, including SMSF strategies, will and estate planning packages, negative gearing strategies and tax planning strategies. These products create a client value proposition by reducing tax liabilities and improving super performance which meant clients were making money by seeing them before they even discussed investments;
  5. they also create an on-going connection with the client, in that they see the client for tax and SMSF reasons at least once a year, which creates, as they say, a thirty year relationship rather than just a thirty day relationship, and a practice with permanent value;
  6. they developed key alliances with a tax agent whereby the tax agent created the teacher‘s package to make sure their clients got the best possible tax results including all possible deductions. The alliance contract stipulated that the tax agent could not advise the teacher directly and had to channel advice and the tax returns through Bez and Sean, and created a restrictive covenant for three years if the relationship terminated for any reason;
  7. they developed a similar controlling alliance with an SMSF administrator/back office service, negotiating wholesale rates but remaining the SMSF front office and charging clients retail rates;
  8. they developed a similar alliance with a wills solicitor to provide an estate planning service; and;
  9. they created a commission rebate scheme on life insurance and income continuance insurance to help attract in new clients and retain existing clients and to make this service more cost efficient for their clients.

Bez and Sean’s strategy is a great case study in how to move from a traditional commission-based financial planning practice to a more professional and comprehensive fee for service model.

We come back to Bez and Sean later on in this chapter, and look more closely at how they created a profitable and valuable fee for service practice, and the business plan that helped them do it.

The key is developing a homogenous client base

The key to Bez and Sean‘s success is their homogenous client base.

Teachers know Bez and Sean are good at what they do and have created tax effective strategies that work for teachers, at each stage of their career and retirement. Bez and Sean advise teachers better than anyone else, and that‘s why their practice is so good.

They charge their teachers set annual fees for completing agreed services including property and tax work, and this means their fees are tax deductible and represent much better value for money than their competitors.

What’s the message here?

We would all like to be the best financial planner in Australia. But that‘s unrealistic and probably not going to happen. But if you focus on a particular segment of the market, in terms of occupational group, retirement status, wealth and income level and even geographic location, you have some chance of being the best financial planner in that segment.

This is what Bez and Sean have done, and they now enjoy a happy client base, made up of intelligent clients who respect them and regard them as trusted advisers, and who want to use them on a continuing basis for the rest of their lives.

And if you do this it means you will have a much better practice, and achieve much better client outcomes, than otherwise would have been the case.

What about your team? How do you get them to change with you?

What about your co-owners? What about your staff? What about your other stakeholders? Getting your team on board with the transition to a fee for service model is an essential pre-requisite for success. They have to own the idea and be 100% committed to making it work.

The best way to get your team on board is to ask them to read this chapter and other materials dealing with the transition to a fee for service model. Read the newspaper and journal articles, and go to the conferences.

Brain storm at team meetings

Call a team meeting to discuss the changes, the problems it creates and the opportunities it presents. Get your team to brainstorm the problems for you, with no idea too ‘out there’ or different. Listen carefully to what they have to say.

Ask your clients what they think. At one level you can conduct a full scale detailed analysis of what your clients want, formally asking your clients to respond to a set of questions and inviting them to comment further as needed. Or, perhaps more professionally, you can ask certain key clients what they are looking for and what it is you can do to improve your service to them.

Some ideas for change

Think about:

  1. the need for a dedicated time management/practice management system and billing system. These have been around for years in the accounting and legal professions and will be picked up quickly by financial planners;
  2. the need to change Financial Services Guides, client service contracts and similar documents;
  3. the need to change marketing strategies including website design and presentation;
  4. the need to re-educate clients about remuneration options, including: client letters, e-mails, meetings and telephone calls. Use all forms of client communications to repeatedly and systematically get the message across so clients are not surprised and client retention rates are maximized;
  5. an options menu, if you have one;
  6. a demonstration that the new model will create more value for the client through lower after tax costs and better and more services;
  7. general client marketing materials;
  8. the need to maintain client relations during the transition period;
  9. the need to change to a dealer like Dover so you get the support you need with the nine essential competencies to run a successful financial planning practice;
  10. the need to acquire a base level skill level in each of the nine essential competencies and to establish connections with a dealer like Dover to access the expert third party technical support needed in each of these competencies; and
  11. the need to recruit new staff to take full advantage of the new business opportunities presented by the fee for service model.

When should the change management process start?

Do not leave the change management process until the last moment. It‘s better to change sooner than later, and you should not underestimate the effort or time needed to complete the change. Most staff resist change, some more than others. And you need to demonstrate the negative reasons for changing (ie not becoming redundant) as well as the positive reasons for change including, ultimately, a higher salary/profit share, a higher skill level and greater career satisfaction.

Managing the change to a fee for service financial planning model will be a very significant process for most firms. But managing change in a professional practice is an on-going process and this will not be the last time your firm has to adapt to a significantly different operating environment. 

How big should your practice be?

Generally speaking, bigger is better. A properly constructed team is worth more than the sum of its parts. Choose colleagues who are compatible but not cloned, and who have distinctly different but complementary skills. Two peas in a pod is not a great business strategy. An older male financial planner, with traditional skills in managed funds and insurances, might team up with a younger female financial planner, with knowledge of tax and share selection, so they can complement each other.

The skill leverage is exponential. Two times one is only two. But two times two is four, and three times three is nine. And it just gets better from there. The more people you have, with distinctly different but complementary skills, the better your firm will be and the more appealing it will be to existing and potential clients.

Generalisations are dangerous, and will always be wrong, but we expect an optimum number of financial planners in the same office serving the same client base is between four and five. There will be some overlap of skills, but some will be stronger in some areas than others, and each will have their technical strengths and weaknesses and client preferences. Some financial planners may be better at estate planning, and some financial planners may be better at share selections and business plans.

Female financial planners may be better with female clients. Older financial planners may be better with older clients. Younger financial planners may be better with younger clients.

In summary, four or five financial planners, of varying ages and mixed gender, with different social backgrounds and areas of expertise, should be able to combine together to provide a complete service to all clients in the relevant segment. The combination will increase revenue, lower costs per planner and decrease overall risk due to succession planning and emergency planning processes. Overall this means less risk, more diversification, more profit, more cash flow and more CGT free value in your practice.

What if you do not have or want any colleagues?

The good news is Dover helps you get big without having to take on staff or partners.

Dover allows you to access the Dover Experience to provide a full service financial planning practice covering all nine areas to your clients without giving up control of your practice in any way. The following chapter explains how Dover can help you with each of the nine essential competencies.

The Dover Group