The main reason for advisers transferring from a commission-based to a fee-based service is to reinforce their independent status
The main reason for advisers to make the transition from commission to fees is not simply to add value to their business but to make them more independent, according to director of Baxter Fensham, John Baxter.
According to Baxter, the argument is not about commission versus fees but the service the adviser is providing. If the service is financial planning rather than simple product advice, then the change to fees is a natural progression, he says.
'Providing advice is like a shopping trip. It is like putting goods/products in a trolley until you've forgotten what you intended to buy,' he adds. 'There is a lack of measurement and planning and financial planning provides this. It is an holistic approach that involves setting down what the client wants to achieve and working out the needs and wants of the client.'
Financial planning is a time-consuming approach that requires a system, he says, and advisers moving from an advising to a financial planning role would therefore have to re-engineer their firm's whole structure and adopt a different kind of discipline.
He says: 'From a technological point of view, what a business needs is a robust back office system providing a foundation to the whole infrastructure. A lot of advisers use a database system that is limited to recording data. A back office system has to enable advisers to record all activities that any staff, whether adviser or administrator, carries out on a client's affairs.'
He adds that advisers should record all the time spent on clients, as this will show how long it takes to build up every relationship and how profitable the business.
Baxter thinks that to implement a system for financial planning, an adviser should work towards substitution. The substitution process is basically the division of labour into simple tasks, in which staff can subsequently specialise. This creates an organised chain of jobs that ensures the whole operation of giving advice and recording it works as efficiently as possible.
Consequently, it is hard to make any mistakes or omissions and every staff member develops a specialty in administering, giving advice or compliance. This leads to substitution, where a member of staff's competence can be easily measured and, in the case of people leaving, someone new can easily be trained.
'When we were first implementing our back office system, for example, we designed a process comprising of 10 stages,' says Baxter. 'However we found that the system worked on the advice front, as we had a team of competent advisers, but not on the information-gathering front.
'Gathering information in order to plan a client's priorities requires going into their financial history and getting the data from different sources, which is a cumbersome process.
'We therefore broke the initial 10 stages down into 150 simple tasks, which we called the de-skilling process. Advisers hate administrative tasks and do them badly, and by de-skilling we can assign the right people to the right tasks ' that instantly made us profitable.
'Over the years, we have continued to de-skill and can now substitute the adviser. What this means is that clients start to have faith in the process ' they do not feel that they have to deal with a particular person anymore but rather with a team of advisers.'
Having a system that is able to substitute the adviser is daunting to a lot of intermediaries and might put some off adopting such a system.
According to Baxter, however, the transition is worth it. He says a lot of commission-based businesses are one-man bands and, without the adviser, the business will collapse. Consequently, their organisation is not worth much to a third party and the transition to such a system will add value to the business.
An adviser will also have to invest in a cashflow modelling system that plots clients' financial progress across their life. This enables clients to see what the adviser is doing and the intermediary is able to reassess and monitor the client's financial position to find out whether the objectives are being met.
'A lot of advisers want to make the transition because they see the benefits, and regulators are pushing things that way,' Baxter says. 'Some have issues about costs, however. If advisers try to implement this system themselves, it will cost them a lot of money but if they seek the help of an organisation, it will reduce the cost.
'One thing I would warn against is that while a lot of organisations have put forward money to help advisers make the transition, it is only possible if the adviser has taken steps to plan and understand the changes that need implementing. Unless the adviser business has been in the process of adopting a different approach and moving towards financial planning, then the transition remains only really theoretical.'
Advisers should therefore talk to as many fee-based planners as possible to find out what is the best system for them, he says. There are different ways of charging fees ' it could be on a time basis while some advisers charge fixed fees or use a retainer.
Finally, in support of the transition to fees, Baxter says advisers need to be more professional.
He says: 'They need better qualifications and they also need to demonstrate that their service is impartial. If they get paid according to what they sell, it is not professionalism.'
While most advisers use technology, Baxter adds they need to use technology properly.
He encourages advisers not to buy training from software providers because it is very expensive but rather to get in contact with a user group of the software provider and set up monthly self-help exercises.
He also believes advisers should take advantage of free web-based training offered by providers.
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