“Have you never heard of the cradle-to-grave approach to client service?” a cheeky millennial asked me about two years ago. I tried to sound as diplomatic as possible in my response but in actual fact I wanted to say, “if you expect me and my company to service you at a loss for years on end in the hope that you will stay loyal and eventually becoming profitable for the firm and that paying customers should subsidize you until that point, then no, no I have never heard of such an absurd idea.”
There is a growing problem in the arena of financial planning that those who can benefit most from proper financial planning are not getting it because they either can not or will not pay for it. The reason for this is that the new generation of professional advisers simply can not afford to accept these clients unless it is on different terms, and herein lies the problem.
For years now the public and the Institute for Financial Planners (FPI) have called for and worked towards transforming the industry into a profession in an attempt to raise standards of service and advice but at the same time very few people have changed the way they think about these same professionals’ value proposition and business models.
Allow me to explain how things have changed to shed some light on the problem. I will refer to the policy salesman era as the “old days” and to how a large percentage of financial planners work today as “now.”
In the old days a savings investment of R 1,000 per month via an insurer paid commission of R 9,300 to the “broker” in the first year – all paid at once at the end of the first month of the policy. If the patient (I am not sure we can call them clients) still paid the premium at the end of the first year a further R 3,100 was paid as commission and every following year commission would be paid on the increase of premium as long as the policy stayed active.
If the “patient” decided to cancel the policy after 2 years or to lower the premium for whatever reason – often as a result of something not under their control – it was not the broker or the insurer who took the loss but the client in terms of cancellation or reduction penalties. Now let us be honest, for that kind of money (and no need for after sales assistance) a broker would be more than happy to see you after hours, at your home, competing with 7de Laan in the background with the mother of the house constantly excusing herself to attend to a child, a barking dog or die burning food on the stove.
So, what does the reality look like for the professional financial planner who invests your money with an asset manager and takes no upfront fees or commissions but an ongoing advice fee of 0.75% per year? On the same investment of R 1,000 per month, invested in the exact same funds, the professional adviser will be paid R 51 in total throughout the 1st
year (if the investment grows at 10%) and after 3 full years he would have earned a total of R 464.
Let’s assume this person has a degree and a CFP certification and is thus a qualified Certified Financial Planner with more than 10 years of experience. In any other profession (lawyer, doctor, psychologist etc.) you are going to struggle to find someone willing to work for less than R 1,000 per hour. To worsen the matter, our experience is that 50% of the income generated by advisers go to infrastructure, auditing costs, IT-costs, personnel costs and licensing.
Back to the question from the millennial. Yes, I have heard of the cradle to grave approach to client service but I would not advise her to start a business where she would have to work for people at a loss for 5 years in the hope that those clients would be loyal and stay for 5 or 10 more years after eventually becoming profitable. This is what she was expecting of our firm if we were to give her free or near free financial advice like she expected. Your business would go straight from cradle to grave if you took this approach.
Professional financial planning practices look completely different to the traditional broker set-up. You will do yourself a big favor to make sure which one you are currently dealing with. The old generation broker will tell you with gusto how he has 500 to 1,000 clients on his book while the professional adviser can handle 150 client relationships at best. This has implications to consider if you want to work with the latter:
- Be willing to pay an hourly rate if you do not have sizable investments to place under their management.
- Be willing to work with someone more junior in the company if you are not profitable for a more senior adviser. Their hourly cost to the company is much lower. Professional companies have standardized processes so the advice you receive should still be of a an equally high standard.
- Accept that you will most probably have to see these people in normal working hours like any other profession.
- Be willing to look at a differentiated service model where the fees you pay are correlated with the level of service you can expect.
Let me end off by saying that if your expectation of an advisers’ value proposition is that they must only help you once at the initial investment to choose which funds to invest in a do-it-yourself approach is probably just as good.
Although all possible care was taken in the drafting of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone planning on taking any financial action based on this
document, is strongly advised to first consult with their personal financial advisor. ProVérte Wealth & Risk Management is an authorised financial service provider with FSP