Advisor commissions under fire worldwide: Protective steps you should be taking before it's too late
By Ed Morrow
Intl. Assoc. of Registered Financial Consultants
The insurance industry is changing abroad, and we should look to trends in other countries as indicators of what's to come.
Royal Bank of Scotland Group (RBS), the U.K.’s biggest taxpayer-controlled lender, is eliminating 618 branch-based financial advisers this summer as regulators force all the lenders to charge clients for the service. RBS is also creating 351 financial planning jobs as a result of the rule changes, the Edinburgh-based bank said in a statement last week. Question: Why would a company eliminate jobs and hire some of them back?
At the end of 2012, the Financial Services Authority’s Retail Distribution Review will prevent the payment of commissions to advisers, and lenders are now preparing to charge for the service. But it is not clear who will get the fees — RBS or the financial advisors, or some split?
What’s the difference between receiving a commission and receiving only part of a fee? Disclosure to the customer and other advisors. The total remuneration to the advisor. The amount of commissions and overrides were not previously disclosed. When fees become the mandatory form of compensation, the total amount paid by the consumer may go down. But most assuredly, the total sales will go down. This means that consumers will not be saving and insuring at the prior rates.
Institutions may still receive fees for distribution, but no commissions will be paid to agents. Furthermore, the institutions are likely to take the lion’s share of the fees, paying the advisors only a modest salary.
Other major institutions
HSBC said in June last year it was cutting 700 employees offering face-to-face advice in branches. Barclays, Britain’s second-largest bank, said in January 2011 it would cut more than 1,000 employees as a result of the new “anti-commission” regulations.
“These latest RBS job losses are brutal,” said David Fleming, a Unite labor union national officer. “Unite, for some time, has had major concerns about the appalling manner in which these workers at the bank have been treated.”
RBS Chief Executive Officer Stephen Hester has shrunk assets by more than 700 billion pounds ($1.1 trillion) and cut about 36,000 jobs at the bank since he took over from Fred Goodwin in 2008 during the financial crisis. RBS announced in January 2012 that it would cut about 3,500 jobs at its investment bank, citing volatile markets and the cost of new U.K. regulations.
Will this anti-commission trend be reflected in the U.S. and other countries? Certainly there will be an attempt on the part of some public interest groups, “friendly” members of Congress and a few dedicated regulators. Will the trend that has already affected Australia, Canada and Britain grab hold in the U.S.? If so, this will have a devastating effect on hundreds of thousands of financial advisors, including securities brokers, agents selling life and health products and planners who primarily depend upon commissions. What can you do?
Do not wait for the train to reach you, hoping that it will be switched somewhere down the line and roar aside. That would be the proverbial ostrich approach to problem solving.
Here are protective steps that every person and every agency in financial services should be taking:
Start charging fees for written plans.These do not have to contain investment advice – they can focus on debt reduction, retirement plan alignment, education funding, insurance needs analysis and other issues.
Move toward the business owner market.This group of prospects is dramatically underserved, and is already accustomed to paying fees for advice and service. Business succession, loan cancellation, incentive and retention plans and owner estate planning are big ticket items. They all justify a fee, plus they require ongoing service. If you are not in this market, you are ignoring the need for you to diversify professionally.
Add a retainer fee for all clients. This can start out small and be increased later. This modification will require you to install and collect ongoing fees and ramp up the level of your customer services. The experience of advisors who have added retainer fees is that quality referrals actually increase.
Enhance your memberships. Join professional association that offer tools and training. Recommend to your professional friends and associates that they also join the associations you value. With greater numbers will come greater strength.
Polish your image. What is your brand? Are you perceived as a commission-hungry sales rep or as a fee-based financial advisor? Do you have a business name, motto, logo, literature, business cards and independent materials that distinguish you from the herd of tellers, clerks and product pushers?
Who will help you?
Do not expect product vendors to help you. They will continue to push you toward commission only sales — right up until the train runs over you. Their institution may suffer when commissions are outlawed, but you can count on it — the executives will retire in comfort.
Branding becomes critical
If you do not brand yourself and your services effectively, then the media and major institutions will brand you as an insignificant player in the financial services marketplace.
The obstacle to your survival in the future is that you gradually leave your past behind. Only the fittest will survive and thrive.
What do you need?
- Infrastructure to charge and collect fees for consulting advice, planning and service.
- Practice management tools such as procedures, forms, software and client presentations.
- Marketing systems that focus on your advice strengths and not just on product features.
- Approach techniques that introduce you effectively to a wider clientele with greater purchasing power.
- Process charts that communicate to prospects, clients and your staff that you offer a higher level of service.
- Professional image to ensure you're viewed as a necessary intermediary to help clients perceive and achieve their financial goals.
Every agent, broker or consultant knows other financial services persons who should become active in professional organizations. A short message from you will move them quickly to join. All you need is to tell them, “This organization really believes in the growth of our profession. The XXX association is not an advocate for any product line or any method of compensation. Its programs all have strong marketing and practice management components. You should become a member!”
Use your time
Soon there will be pressure to reduce the compensation of financial professionals. You can prepare for the future by registering for workshops on business, owner planning, debt cancellation, advisor branding and fee-based businesses.
Use what worked for others
The mission of the well-established associations is to help consumers by creating knowledgeable, ethical and wise financial consultants. The country needs you to serve more customers, help them more effectively and make more money – for them and for you. So give some thought to registering for workshops that fit your style and the market you want to enter.
Prepare now for the future
Once you realize what has been happening to commissions and results-based compensation in other countries, you would not be exercising prudent judgment if you simply ignored it all. If you move into other markets such a business owners, professionals, highly-paid civil servants or senior military officers, you are diversifying and building greater value within your practice. And like those you advise, you, too, may someday wish to retire and maximize the transferable value of your practice.