Being able to demonstrate value for money to clients has always been an essential requirement for business longevity.
Both the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and FASEA’s Code of Ethics clearly identify value for money as a key area of focus for the industry moving forward.
The importance of being able to demonstrate that you deliver value for money is underscored by the changes recommended by Commissioner Hayne (Recommendation 2.1 – Annual renewal and payment) where he recommends:
“The law should be amended to provide that ongoing fee arrangements (whenever made):
- must be renewed annually by the client;
- must record in writing each year the services that the client will be entitled to receive and the total of the fees that are to be charged; and
- may neither permit nor require payment of fees from any account held for or on behalf of the client except on the client’s express written authority to the entity that conducts that account given at, or immediately after, the latest renewal of the ongoing fee arrangement.”
This recommendation may seem innocuous, but it goes to the very heart of every adviser-client relationship involving an ongoing fee arrangement. What services (promises) are you going to make to each of your clients and how much are you going to charge to deliver them?
Furthermore, Standard 7 of the Code of Ethics (which comes into effect from 1 January 2020) states that “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.” How will you demonstrate that you have satisfied this Standard?
The removal of passive income from ongoing client relationships is fast approaching. Every dollar you earn will need to be attached to the delivery of an agreed service in return, and that service will need to deliver value for money in the eyes of each client. Failure to grasp this fundamental change will likely lead to a drying up of your recurring revenue, putting greater pressure on efforts to replace the revenue and threatening the sustainability of your business. You’ll have, at most, twelve months-worth of revenue from each client if your ongoing services aren’t good enough.
That’s why you should be prepared for some awkward conversations as soon as legislation gives effect to the annual opt-in. Your clients will start to think about their ongoing fee arrangements in a whole new way and be asking tough questions about the value you deliver.
And just to underline why you should be thinking about this issue now, the data we’ve collected from >1,500 clients in recent months about how they perceive the delivery of value for money, indicates this is consistently one of the worst areas of performance amongst the relationship drivers we measure when assessing the client experience. The mean score is 83.3%, which isn’t disastrous, but when compared to the other drivers, there is considerable room for improvement. And improve it must if the values and standards embedded in the Code of Ethics are to be achieved (and you can demonstrate that).
A critical point to remember is that value for money is in the eye of the buyer not the seller, but the seller nonetheless has to be able to clearly articulate and influence the buyer’s perception of the value being delivered. In order to help you do this, let’s first look at some basics.
The real story of how you create and deliver value for your clients is intrinsically embedded in your business model. A business model is “… a story about how an organization creates, delivers, and captures value.” (Saul Kaplan, The Business Model Innovation Factory).
You create value for your clients through your unique value proposition, which represents the intersection point of your clients’ problems and your solutions. The cost of delivering this value is described by your cost structure and some of this value is then captured back through your revenue streams (fees). So, a key point to realise is that value in your business model is always defined with respect to your clients and their perception of value.
Every business needs to create client value and leave clients better off than where they started.
It follows that, if you truly understand your unique value proposition, you will also understand how you are creating value for your clients, so ‘selling’ them on this value is down to how you communicate the value.
Core values that demonstrate value for money
Here are six core values (first identified here) that you may be providing your clients, together with some suggestions about how you can communicate the value delivered.
Where you help bring order to your clients’ financial life, by assisting them get their financial house in order (at both the “macro” level of superannuation, investments, insurance, estate, taxes, etc., and also the “micro” level of personal or household cash flow). Communicating value may entail preparing a checklist of all the things you have reviewed with each client in order to get them better organised and then reviewing that checklist with them. It could also entail the preparation of a cash flow budget where you are able to compare the tangible financial outcome of the status quo versus the planned outcome e.g. the quantum of anticipated cash surplus under the current situation versus the plan.
Where you help your clients follow through on financial commitments, by working with them to prioritise their goals, showing them the steps they need to take, and regularly reviewing their progress towards achieving them. Communicating value can entail documenting the review meetings and comparing the actual results achieved to the goals that had been mutually agreed in the first place.
Where you bring insight from the outside to help your clients avoid emotionally driven decisions concerning important money matters, by being available to consult with them at key moments of decision-making, doing the research necessary to ensure they have all the information, and managing and disclosing any of their own potential conflicts of interest. While there are clear ethical and legal obligations to always act in your client’s best interest, communicating how you bring objectivity to the table is a valid way to prove value for money. This may be done by describing the research process you have been through (including how long it has taken) and reminding them of the number of times you made yourself available for consultation.
Where you work with your clients to anticipate their key life events and to be financially prepared for them, by regularly assessing any potential life transitions that might be coming, and creating the action plan necessary to address and manage them ahead of time. Communicating value for money may be as simple as reminding your clients of the comprehensive fact-find you completed upfront and that was subsequently updated during the review process.
Where you explore what specific knowledge your clients will need to succeed in their situation, by first thoroughly understanding their circumstances and then providing the necessary resources to facilitate their decisions and explaining the options and risks associated with each choice. Communicating value may be something like preparing a reading list or details of online training and resources you believe will help educate each client and providing this to the client to action and later validating that each client has accessed the resources. It may also consist of providing access to online educational resources owned by the practice and regularly reminding clients how they can access them.
Where you attempt to help your clients achieve the best life possible by working in concert with them to make this possible, by taking the time to clearly understand each client’s background, philosophy, needs and objectives, and then working collaboratively with them, offering full transparency along the way about costs and compensation.
While much of this is already embedded in legal obligations and documentary requirements (and will become even more stringent moving forward), it doesn’t hurt to remind your clients of the processes involved to get to partnership ready status and to document known financial outcomes such as taxes saved, additional returns generated, increased retirement savings realised, etc.
Value for money is set to become a key area of focus for the industry (and a competitive advantage for those who get it right) because the data indicates it hasn’t always been managed as well as it should have been.
Your clients will soon be in a much stronger position to decide if you have delivered on the promises made and whether they should continue to pay you an ongoing advice fee.