Fee Disclosure Statements – Needed for product providers or advice providers?

by Jim

SecrecyI’ve been copping a bit of flack recently suggesting that fee disclosure statements (FDS) aren’t really necessary for your financial advice clients. Yes, I can understand that response considering the frenzy some firms have experienced making themselves ‘compliant’ with their FDS implementation.

The Future of Financial Advice (FoFA) legislation is clear that an FDS is required when an adviser charges a fee that  continues for longer than 12 months.

My thinking is this: How can an adviser possibly advise their clients without at least one face-to-face (or Webex/GoToMeeting) contact per annum? For those advisers who say their clients don’t always want one, doesn’t that tell you something about the value you’re providing to them?

How can an adviser advise without contact?

How does an adviser know what advice is required, how does an adviser know what behaviours, mindsets, goals may have altered in their client’s life? How does an adviser enforce accountability and ensure commitments to an agreed plan with their clients unless the firm re-connects deeply with advice clients at least annually?

My doctor insists I come in each year if I’m going to be a patient of hers. She doesn’t send me a newsletter about health, she doesn’t just procses and file the latest blood results, she wants to eyeball me each year and really know how I’m progressing with my health and understand all aspects that might be affecting it.

I can understand the need for an FDS position where client may believe the advice was only provided for a one-off transaction or event. Once that advice was acted upon and that complexity was overcome, these ‘transaction-based’ clients have a right and need to understand the value they receive for any on-going fee that the advisers is going to receive off the back of a transaction or event in years past.

Hopefully the FDS can play a vital role for these ‘transaction-clients’ to help them determine their value for money.

FDSs are for ‘transactional-clients’?

THAT is a significant game-changer, isn’t it?

Where is the on-going value for the on-going fees being charged to clients for a transaction or event handled in their past?

Time will tell.

One thing is certain. Clients are understanding what value means to them. Witness the revolution occurring in retail with a shift to online as just one example. The reasons why clients engage their financial planner, their accountant, their stock-broker are fast changing as financial services becomes more of a commodity and they change their buying preferences, habits and what they perceive as value.

I find it hard to understand how a relationship-based adviser can earn the on-going ‘faith’ from their clients that they are on the best possible path to achieve their desired financial ambitions without at least one ‘rich’ conversation every year as to why they are paying the advisory fee.  Once done and agreed, a new (or similar) relationship is agreed upon for the coming 12 months using an annual terms of engagement letter.

To me, that doesn’t require an FDS.

If your firm’s role is the provision of financial products, policies and structures, then I can see the need of an FDS for ‘on-going’ maintenance of the products you provided.

But if your firm’s primary role is the removal of financial doubt from the lives of your clients, I reckon you’re going to have to have a deep client engagement or conversation at least annually to understand the value you need to provide and a terms of engagement letter that supports that.

Am I off track?

What do you think?

{ 2 comments… read them below or add one }

Justin Brand December 5, 2013 at 3:42 am

Hi Jim, great post – I couldn’t agree more with many of your points. I recently had a couple of advisers tell me they no longer see particular clients for their regular reviews (which they pay for) as the clients no longer want to come in for them. To me, that represents a fundamental contradiction between the main reason put forward for the ongoing fee and the service that is achieved. These advisers didn’t seem to consider for a second that there might be a need to change the ongoing service agreement. And, I bet the clients don’t understand they are paying for something they have decided not to use. But I think that will generally change.

You also picked up on a great point – how can we tell a client what ongoing service is needed beyond 12 months and at the same time tell them they need regular reviews because things change constantly. Many advisers would argue that a review is a constant service/cost but I think its better to review the year ahead and determine a fee for that year based on whats going in in that clients life. And you can’t do that on a meaningful level by simply posting a portfolio valuation.

I wrote this post about the FDS in July ( http://justinbrand.com.au/blog/7-signs-your-financial-planner-is-overcharging/ ) and copped some flack for suggesting that commissions be included – and that advisers should review their fees if they fail to get their reviews done on time (under the contract/agreement). Yet, I still meet advisers who tell me that its not their fault the client was not available when they called to get them in for their yearly review. My dentist books my check-up 6 months ahead and doesn’t charge me until I’m in his office.

I gained a client this year who used the email text in the post above (asking their adviser for a run down of the commissions and fees paid over the year) and their adviser responded telling them they didnt have to do that based on the FDS rules. I think that adviser missed the point. That client was googling for information on fees and happened across my post. They were unhappy with their retirement savings levels and started to scrutinise and research the fees they had been paying via their SMSF, loans, insurance, etc. They saw little value under their current arrangement and the lack of clarity and proper engagement caused them to doubt and mistrust their adviser.


Jim December 15, 2013 at 11:38 am

Totally agree Justin. Your blog has some great advice – well done.


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