“The client must give free, prior and informed consent to all benefits you and your principal will receive in connection with acting for the client, including any fees for services that may be charged. If required in the case of an existing client, the consent should be obtained as soon as practicable after this code commences. Except where expressly permitted by the Corporations Act 2001, you may not receive any benefits, in connection with acting for a client, that derive from a third party other than your principal. You must satisfy yourself that any fees and charges that the client must pay to you or your principal, and any benefits that you or your principal receive, in connection with acting for the client are fair and reasonable and represent value for money for the client.”
— Code of Ethics Standard 7: Consent to benefits and reasonableness of fees
Consent and the reasonableness of fees
Standard 7 requires you to obtain the client’s free, prior and informed consent for any fees and benefits you will receive, and that all fees charged by you are reasonable, and provide value.
In addition, you must be satisfied that your client understands and agrees to these arrangements.
Practically, Standard 7 is closely linked to Standard 3 (conflicts) and Standard 4 (informed consent).
Essentially, fees derived from any other source other than your principal must not be accepted, but to be clear, this does not include fees derived from other entities within your corporate group, because the Code does not extend or apply to these structures. We’ll cover this in another article.
The fundamental principle underpinning Standard 7 (and related Standards) is that when your client understands exactly what they’re paying (and why) it makes it easier for them to make an informed decision about whether to act on your recommendations.
As you are aware, disclosure by itself is not sufficient and must be supported by your discussions with you client(s).
We are also assuming that any relationships you have, and benefits you receive, have been reviewed by you and your Licensee (and compliance professional) and those that are in breach of the Code have been terminated.
Enhancing understanding: More than disclosure
“Ah, you think disclosure is your ally?
You merely rely on disclosure. I supplement it, enhance it.”
— Bane, Financial Adviser of the year, 2021
Long gone are the days when the advice fees and additional benefits are the last things the client sees in their Statement of Advice – especially when it’s accompanied by “You agree to pay this fee whether you accept the advice or not.”
The Statement of Advice must contain information regarding remuneration, benefits, interest, associations and relationships that might influence the advice, or have the capability to do so 947B(d)(e), but the Code requires more than this.
The expectation is that relationships and fees are discussed prior to any advice being provided. This way, the client can (hopefully) understand these, and make an informed decision as to whether they consent to you acting for them, whether they want to pay $X for the advice in question, or whether (in some circumstances) they’re comfortable with other benefits being received.
From what I’ve seen, most advisers are completely transparent in this regard, and have also taken steps to remove any potential conflicts from their advice, making it easier and simple for the client(s) to understand.
Firstly, we’d suggest that all relationships and benefits are included in your FSG and advice documents (where relevant) and that these are clear and in their respective dollar values (where possible).
Secondly, we’d suggest that you have a conversation with your client(s) and clearly explain the information in simple language. This will need to be recorded in the file somewhere.
Value and reasonableness: One size may not fit all
We’re no strangers to advice fees and the myriad of ways these can be charged. The majority of the time, advisers are either charging a fixed fee, a percentage-based fee, or a combination of the two. There is no wrong way to approach this, but you might want to consider the approach a little further if the impact is greater than the benefit – and this works both ways.
Value is measured on both sides (differently) and it is very subjective. In an advice scenario, this is driven primarily by the client and the consideration of what you bring to the table.
Reasonableness is a straight up and down assessment of whether the fees are justified and fair. This may include a number of factors, such as:
- The cost of comparable services in the industry.
- Impact of the fees on the client’s assets/investments.
- Perceived vs. actual benefit received.
- Complexity of the circumstances and services.
- Time and effort.
- Disclosure.
The value of advice is easy to measure from your perspective as the adviser, because you know exactly what you are bringing to the table. Expertise, knowledge, guidance, personalised service and holistic support (amongst other things).
The value of the fees charged is not as easy to measure in some cases for the client, especially if they haven’t received financial advice before. They may not fully understand what you can do for them, or understand that some things can’t always be measured until after the fact.
At each end of the spectrum, there are basically two opposing forces:
Expensive clients
As an adviser, you are well within your rights to make a profit from providing advice to your clients. The reality is that this is not always occurring. Some clients cost money to service, and others may cross this threshold in the near future.
There is a risk that percentage-based fees aren’t going to be sufficient to cover the costs of servicing some clients. There is also a risk that flat fees may too great of an impact to justify the amount.
Expensive advice
As a client, there is an expectation that the fees will be reasonable for the services they need and provide value (this is also a requirement of Standard 7). Some clients are paying huge fees, but they may be receiving the same level of service as someone paying half as much.
There is a risk that percentage-based fees are going to create a large disparity between clients receiving the same level of service. There is also a risk that flat fees may not be sufficient to cover the costs of servicing some clients.
How do I charge thee? Let me count the ways.
Firstly, we’d suggest reviewing the way in which fees are calculated. There is no wrong way to do this, and this would be relevant when considering the upfront and ongoing fees.
Secondly, we’d suggest considering whether you may need to offer more than one level of service. A client with relatively simple needs may not need to receive the same level of service as a client with multiple entities being advised upon.
When we speak to advisers, we gain a better understanding of the methodology applied and there are endless combinations and considerations. If this is clearly outlined, hopefully a number of things occur.
Your client better understands that you’re basing your fees on their circumstances alone and the value may be easier to understand; and the Regulator may not be concerned whether your fees are unreasonable.
The trouble is when this aspect isn’t explained it’s natural to have some doubt and ask more questions.
We mainly see a consideration of the following when advisers are calculating fees:
- Funds under management.
- Time spent on the client(s) each year.
- Complexity of circumstances.
- Number of structures and capacities in place for the client(s).
- Level of service.
- Number of services provided.
From an ongoing service perspective, the above considerations are applied, but the outcome can be based on the level of service provided, or the amount of fees being received.
For example, an adviser charging flat fees may offer a number of previously determined levels of service. For each client they may select the offering, which is most appropriate, and then charge a fee which corresponds to the level of service required; or
Determine the level of service a particular client needs and charge a fee that corresponds to this.
Alternatively, an adviser charging a percentage-based fee (or part of in conjunction with a flat fee) may consider the amount of fees being received, and then select the service offering which corresponds to the level of fees being received.
One more thing
Lastly, I frequently see the real value that advisers provide to their clients but that value isn’t always demonstrated in either the file or the advice documents provided to the client. This can have a negative impact on the assessment of whether the fees are reasonable (and provide value for money).
Sometimes it is only after discussions with the adviser that we can understand exactly what is being provided to the client and we can see how the fees were calculated and what was factored in.
Let’s face it, you are probably wearing several hats when you’re dealing with your clients, but this is not always evident, nor can it be properly articulated when constructing your service offering. It’s not always about investments and insurances.
Advisers are helping clients achieve their objectives by constructing a path, making adjustments along the way and helping to avoid decisions which can derail the plan itself. This is something that can be seen as time goes on, but may be hard to envision in the early stages.
As Compliancers® we only see the black and white information on file, so we think you should focus on explaining to your clients what you do, and what you can do for them. Shout it to the hills. Personalise your offering after you have understood your client’s needs and be brave – ask them for feedback.
That way, if there is something amiss, it can be rectified before it becomes a problem.
