2 years ago

Blue Chip Issue 81

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Blue Chip is a quarterly journal for the financial planning industry and is the official publication of the Financial Planning Institute of Southern Africa NPC (FPI), effective from the January 2020 edition. Blue Chip publishes contributions from FPI and other leading industry figures, covering all aspects of the financial planning industry. Blue Chip takes this opportunity to wish the FPI a happy 40th anniversary. Congratulations!


FEE MODELS IN CHOOSING BETWEEN FLAT FEES OR AUM, CLIENT CARE HAS CHOSEN HEART In six months’ time, I will have been in the financial services industry for 30 years. I have lived through all the change that has happened over that time. I started my career selling commission-based products as a 23-year-old (with the best intentions). I did not know better but as I grew in experience, I started to question what I was doing and how I was or was not adding value to my clients. Fortunately, I discovered lifestyle financial planning 20 years ago, moved to the assets under management (AUM) fee model and have continued to learn and question aspects of what we do, to get better and add more real value to our clients. For the past year, I have been thinking about the way we charge our clients and have been exploring various remuneration models used by planners around the world. This has occupied my mind almost daily and consumed a lot of my headspace – as well as my sleep. When the model stops making sense The challenge I see in using the AUM model is that for different clients, what we earn in relation to the value we add can vary a lot and, in many ways, does not make sense. Advising a client with R1-million of investable assets is not necessarily different to doing the same for a client with R20-million of the same. At Client Care we have started adopting a sliding scale to the annual AUM fees we earn. Portfolio Value Fee 0- R5 000 000 1% R5 000 000 - R8 000 000 0.75% R8 000 000 - R11 000 000 0.50% R11 000 000+ 0.25% 94

FEE MODELS We generally work with people and families who need to plan properly to ensure they are financially secure. We do not have many clients who have excess funds (more than they need) so overcharging has not really been a concern until recently. The few clients we have who have excess assets are all paying a lot less than they were with their previous advisors where in most cases they were getting no value at all, so they are happy on all fronts. Charging a flat fee for a particular offering or service agreement regardless of investable assets really sounds like the fairest way to operate. So, I have been exploring many models to find what can work for our business. The transparency this model provides is clear and it seems simple both for planner and the client. Working out how much to charge can be difficult and then how we collect this fee can also be a challenge. Yet, there are many planners out there doing exactly that. So, it can and is being done successfully. How to find the balance? I analysed our existing client base to see who pays us how much in relation to the amount of work and complexity those clients require. This exercise was very interesting, and the simple result was that we have very few clients who potentially overpay us (in my opinion) and many who probably do not pay us enough for what we do for them – this was not making my job any easier. In fact, it raised alarm bells around many clients who we have done and do plenty for, yet on our existing AUM fee model do not and probably never will earn equal to the value I believe we provide them with. So, the question then arose: what do we do with these clients? I started putting faces to the numbers and reliving our journey with these people and families – many of whom we have worked with for years. Some of our most (financially) successful clients had nothing when they started their journey with Client Care and have grown their wealth substantially. Others have had real challenges, personal tragedies and uncontrollable disaster (like Covid) that has set them back massively and even caused them to lose everything. Do we fire these people and families because they cannot pay us enough any more? At Client Care, we have always battled with the concept of segmenting our clients and even when we have tried to do so, have placed the largest weighting on the relationship we share and how well and easily we work together with them. The challenge that a flat-fee model would bring is that many of these clients would not be able to afford our services. This is the simple truth and something that really, really conflicts with how I have worked all these years. I have always said, if a potential client will go through our process, implement the advice we give them and participate in the relationship we want to have with them, then we have an obligation to help them. This is a terrible business model, I know, but it has never been only about the money at Client Care (as our name indicates). Heart has always been a big part of the Client Care offering. We really do care for our clients and all who work with me share this “care” gene. Moving to a flat-fee model would right now be at conflict with who we are as people, as a business and how we work. Yes, Client Care is a business, but it is also so much more than that. We owe it to the industry do more So many people have built extraordinary wealth through this industry, but how many of us give anything back? I have a personal passion to make a difference in South Africa through the promotion of proper lifestyle financial planning, both to the public and to other financial planners. The reality is that right now there are people and families we can help, who cannot afford the flat fee we would charge. But I believe that over time, with our help, they can become clients who are profitable for our business while living their best lives. I believe in the “lifetime value of a relationship” which means that we will, at times, not earn much for great work but at other times earn well for what may seem a little work. The real value is in the ongoing relationship, for us and for our clients. I believe the world operates on the circle of life. Others have helped me to get to where I am in life, it is only natural and essential that I must do the same for others. Our clients who work with us, I believe, understand this concept so the cross-subsidisation that our current model creates is good in that it helps us serves more families. If we are going to make South Africa a better place for all, something we all need is access to great and fair financial advice. At Client Care, we will continue to find ways of helping more people and families be financially secure and we will continue to find new and better ways of adding real value. I believe we can do this while earning a good honest living. Dirk Groeneveld, Certified Financial Planner®, Client Care 95

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