Constructing the Right Advice Fee Model to match the Emerging Affluent by netwealth

Constructing the right advice fee model to match the Emerging Affluent

Presented by Rob Jones Co-Founder and Principal Consultant of Peloton 26 March 2021

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Rob Jones Co-Founder and Principal Consultant Peloton Partners

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Pricing the Emerging Affluent Client Prepared by Peloton Partners Pty Ltd March 2021

Introduction – The Importance of Data This presentation is based on Actual Data, compiled by Peloton Partners on the firms it has advised – all data is verifiable. We have analysed the data of over 110 Financial Advisory firms Australia-wide. This presentation is based on:  An Audit of Actual Fee Data extracted from over 12,000 clients across 41 firms Australia-wide.  An Audit of Actual Services Delivered to over 1600 clients across 12 firms Australia-wide.  There is a clear distinction in services acquired by the “emerging affluent” client and the price paid for those services in the data set you will see.  There is also an emerging pricing strategy for the “emerging affluent” client who expects that the fees they pay are logical, accurate, relatable and transparent.  The goal for any advice business is to build a pricing strategy that can flex to the needs of all clients as well as the needs of the advice business.  Advice businesses must uncover and maintain the “right fee” for both individual clients and the business no matter what changes occur for either party.

Fee Levels: The Australian Financial Advice Industry Density Plot of Fee Levels in Australian Financial Advice Industry This graph is a density plot of the >12,000 actual clients being actively advised by financial planning firms. It shows the actual fees paid by clients to the firms that advise them. These >12,000 clients represent a large sample of the Australian Financial Advice industry across a diverse range of firms and client profiles. Most clients are priced in the $500 - $10,000p.a. ongoing fee range, with fees in the $2,500 - $5,000p.a. the most prevalent.

Australian Financial Advice Industry

Average Fee (p.a.)

Median Fee (p.a.)

$3,400

$2,200

Fee Levels: Affluence Segments Density Plots of Fee Levels in Australian Financial Planning Advice Industry by Segment

Now let’s explore Fee Pricing in the Australian Financial Planning Advice industry by examining three differed affluence-based segments.

Average Fee (p.a.)

Median Fee (p.a.)

Mass Market (<$250K FUM)

$1,200

$1,000

Emerging Affluent ($250K - $1mil FUM)

$3,900

$3,600

Established Affluent (>$1mil FUM)

$10,600

$8,800

Financial Advice Services The Financial Advice Industry is a Service Industry. We have identified that financial advice businesses are qualified and capable of providing between 12-22 individual services. It is stating the obvious to say that “Clients should be charged fees based on the individual services and value they receive”. But too often we see Pricing Arrangements in place that don’t price service and value, instead they price either the wealth clients have accumulated, or service clients based on the level of ongoing fees they currently pay. Both are problematic because they fail to unearth the true cost of delivering advice and this means clients are often paying too much or too little for advice they receive, and individual client profit is often an after-thought of many firms.

Number of Services : The Australian Financial Advice Industry Density Plot of the Number of Services provided to clients Actively Serviced clients typically receive between 4 and 16 individual services from the Financial Advice firm advising them. On average, clients receive 7-8 individual services (marked by the dotted line in the graph to the left), but there is much variance from client-to-client. Yet many Pricing Models do not specifically price each individual Service. How can we expect to arrive at the ‘right fee’ if the Services are not even specified and priced?

Australian Financial Advice Industry

Average Number of Services

Median Number of Services

7.6

7.0

Number of Services: Affluence Segments Density Plots of the Number of Services provided to clients (by Segment)

Established Affluent clients are less homogenous, usually falling somewhere in the 6 – 15 services range. Emerging Affluent clients most often require 6-9 services, with many needing up to 15. Mass Market clients still typically require 4 – 6 services, with 10 or more services not uncommon.

Number of Services: Affluence Segments (cont’d) There is evidence of some relationship between FUM and Level of Service although it is not strong.

Number of Services provided to clients (by Segment) Min.

Median

Average

Max.

Mass Market (<$250K FUM)

6.4

A Mass Market client is on average receiving 6.4 Services, whilst an Established Affluent client is on average receiving 9.2 Services – 2.8 more.

Emerging Affluent ($250K - $1mil FUM)

7.9

To put it another way, when FUM goes up by a multiple of 4x, Services provided go up by only 1.5x.

Established Affluent (>$1mil FUM)

9.2

This is pretty strong evidence that we should be Pricing Services rather than Pricing FUM.

Fees vs. FUM Fees vs. FUM

The industry is still addicted to FUM based pricing (or service segments based on FUM) as is evident in this slide. As FUM rises, so do Fees. How would this graph look, if instead of comparing Fees to FUM, we compared Fees to Number of Services provided/needed? Let’s see….

Fees vs. Services Provided (needed) Fees vs. Services Comparing Fees to Services tells a different story. Overall, this graph is a lot ‘messier’ – there are dots ‘everywhere’, not in a tight band like the previous graph. This tells us that the relationship is weak. Despite this, there is a reasonable relationship at the lower end. However, we can see a section in the middle, where Service demand is increasing but the AVERAGE Fee charged is not. This is because fees are either FUM based, or segment based, and both are not in-step with client needs. This is a big problem.

Services Needed vs. FUM This is an EXTREMELY IMPORTANT SLIDE.

Services vs. FUM Likewise, the AVERAGE Number of Services for the Established Affluent clients (light blue dots) appear to be levelling off.

The AVERAGE number of required services are not increasing for the Mass Market (dark blue dots) segment.

But notice the rise in services required for the Emerging Affluent clients (green dots). It appears that the crucial time for a Financial Advice client is when they transition towards affluence. During this time, they need additional services, but do not (yet) have sufficient FUM to support them if priced on a “% of FUM” basis or a rigid fixed fee for the service segment they are in.

Services Provided: Estimates We ask firms we are working with to estimate the percentage of their clients that receive each aspect of the service they deliver. Here are the SURVEY results:

99%

100%

% of Clients Estimated to be Receiving Services 98%

92% 82% 61%

60% 42% 25% 12%

28%

35%

39% 19% 9%

Services Provided: Actual After analysing the service offering of the advice business and building their unique Pricing Model, we then “map” each client individually and determine the ACTUAL Services being provided. Here are the results: 99%

98%

97%

% of Clients Actually Receiving Services

68% 54% 35% 19%

19%

15%

11%

10%

Services Provided: Estimates vs. Actual There are large discrepancies between what a firm estimates it provides and what it actually provides! These discrepancies are only uncovered during the Fee Mapping process, which in turn can only occur once each individual service has been defined and priced. Many firms in the industry have not invested in such a process.

Services: Estimates vs. Actual 99% 99%

100% 98%

98% 98%

92%

Is there any wonder that clients routinely pay the wrong fees and there is regulatory pressure on firms to fix this?

97% 82% 68%

61%

54%

60%

42% 35% 19%

19%

12%

Strategy &

Admin &

Review

Implementation

Meetings

Asset Allocation

Portfolio Management

Superannuation Cash Flows & Estate Planning Group Structure Tax Planning Projections

28%

25% 15%

Other Assets/Direct Shares

39%

35%

19% 11%

Family CFO

10%

Centrelink

6% Insurance

5% Debt Management

9% 0% Aged Care

Services Provided by Affluence Segment Services Provided by Affluence Segment 100% 100% 94%

100% 99% 93%

100% 90%

99%

Mass Market 99%

Emerging Affluent

Established Affluent

As clients move from Mass Market and into the Emerging Affluent category, we can see Service Needs increasing.

99% 94%

89%

Firms needs to be capable of not only PROVIDING these services, but also ACCURATELY PRICING them.

73%

Emerging Affluent clients often have high needs, but low FUM.

58% 51%

37% 31%

If a proper Pricing Model is not in place, then the result is often UNDERPRICING / OVERSERVICING.

47% 35%

31% 29%

30%

16% 5%

18% 14%

28%

13%

8% 2%

6% 6% 5%

9% 3% 4%

0% 0% 0%

Level of Service Level of Service by Affluence Segment

There is another important dimension of Service which we have yet to explore…

MINIMUM

MODERATE

MAXIMUM

…. What level of Service are clients receiving? As an example, for some clients Estate Planning means nothing more than a Basic Will, yet for others an elaborate Plan needs to be strategized, implemented and monitored across entities. Some clients are judged as ‘MINIMUM’ complexity, whilst others are assessed as ‘MAXIMUM’ complexity. We can see as client's transition from MASS MARKET to EMERGING AFFLUENT the Level of Service starts to migrate from MINIMUM towards more MODERATE Levels of complexity. An ESTABLISHED AFFLUENT client is typically receiving MAXIMUM Service on more than a quarter of the Services they are provided with.

Established Affluent

Emerging Affluent

Mass Market

37%

36%

27%

28%

68%

14%

85%

E.g. In the Mass Market Segment, 85% 20% 40% of Services0% are provided at the firm’s MINIMUM Level. Just 1% of Services are provided at the firm’s MAXIMUM Level.

60%

80%

100%

Evolving Fee Models – past, present and future… FLAT % OF FUM (PROXY WAS 1%)

TIERED % OF FUM

(ACCOMMODATE HIGHER FUM BALANCES)

COMBO:

% OF FUM + FIXED $ (HAVING A BET BOTH WAYS)

Our industry becoming a Profession may be viewed through the lens of an evolving pricing model A pricing model that can accurately price value and services including profit is essential

FIXED $ SEGMENTS GOLD, SILVER, BRONZE.. (GET SERVICED THE SAME)

CLIENT NEEDS FEE MODEL SERVICE, VALUE & COMPLEXITY PRICING (CREATES ALIGNMENT)

Pricing models must be able to flex with client circumstances

Pricing is a Layered Multi Factor Approach Intangible Value

Strategy & Investments

Structural Complexity & Additional Value-Add

(the impact of valuable advice)

(services to make it happen)

(too often left out of pricing)

•

Qualified, Trusted Adviser who proactively contacts me (“Peace of Mind”).

•

Recurring Goal and Strategy Meetings

•

Group Structure Advice

•

An ongoing, continuous relationship (“my adviser knows me, my concerns, my challenges and my needs”).

•

Portfolio Management

•

Risk Assessment and Asset Allocation Advice

Ongoing Management (oversight) of Insurances, Estate Planning.

•

Debt Management

On demand availability (“my adviser will be there for me in a personal or financial crisis be it planned or unplanned”).

•

Projections, budgeting, cash flow management

•

Taxation Planning

•

Superannuation and/or Pension Advice

•

CFO Management & Co-Ordination of Client Affairs

•

Active assistance to achieve goals (“My adviser has my short- and long-term goals always in focus”).

•

Responding via Phone Calls, Emails, Letters

•

Aged Care Advice, Centrelink Assistance

•

Empowering the client (“Getting my affairs in order so I live a life of my choosing”).

•

Additional Meetings and/or Reporting (formal and informal).

•

Complex Assets

•

Special Projects or Unique Circumstances where Premiums/Discounts are warranted.

•

Administration and Implementation

Defensible Tailored Advice Fee

Establishing a Fee Model (Example) Service, Value and Complexity Pricing Model

MONTHLY Price (ex GST) MINIMUM

MODERATE

MAXIMUM

$100

$200

$400

$50 $50 $50 $50

$100 $100 $100 $100

$200 $200 $200 $200

$50 $50 $100 $50 $50

$100 $100 $100 $100 $100

$200 $200 $100 $200 $200

$25 $25 $25 $25 $25

$50 $50 $50 $50 $50

$100 $100 $100 $100 $100

$25 $25 $25 $25

$50 $50 $50 $50

$100 $100 $100 $100

INTANGIBLE VALUE – What Really Matters

Base Retainer fee for client engagement (Qualified, Trusted Adviser who gives "Peace of Mind") . STRATEGY & MEETINGS Ongoing Strategy & Advice Review Meetings Ongoing Administration, Implementation Management & Advice Preparation Projections, Budgeting & Cashflow Management Analysis/Advice Superannuation and Pension Advice & Implementation . INVESTMENT Ongoing Risk Assessment & Asset Allocation Advice/Implementation Portfolio Management Recommendations & Implementation Investment Governance Investment Research Other Assets, Direct Shares and External Assets Advice . STRUCTURAL COMPLEXITY Group Structure Management Estate Planning / Succession Planning Personal Insurance Needs Advice & Implementation Debt Management Advice Tax Planning & Review . ADDITIONAL VALUE-ADD CFO Management & Co-ordination of Client affairs Centrelink Advice Aged Care Advice Special Projects/Other

Each Service / Value-add is priced across 3 levels of complexity: MINIMUM, MODERATE or MAXIMUM

Investment services should be “unpacked” and priced according to what you deliver. All clients will be reviewed for their asset allocation position for example.

Pricing Points are established for each Service and Value-add your firm provides. Not all clients need all services, but it showcases the extent of your capability.

Mapping a Client Fee – Emerging Affluent Client Damien (an emerging affluent client – with problems to solve) Banking Rep. 36 An up-and-comer with rising salary and sharebased bonuses but limited other assets. Very busy and time-poor. Has just relocated from London. FUM: $250,000 Income - $200k p.a.

Key Service Needs Portfolio Management Regular Meetings Projections & active Goal Management A Basic Estate Plan

Once you have thoroughly defined your service offering and performed the necessary analysis to arrive at the appropriate pricing points, the actual Fee Mapping process can be quite straightforward.

Pricing an Individual Client – The Calculator Service, Value & Complexity Assessment for Example Client Group Superannuation and Pension Advice & Implementation

Price (ex-GST) PER ANNUM

$600 - $2,400

Service Provided

Service Level Assessment



MODERATE

ANNUAL Client Fee (ex-GST)

$1,200

For each client, the adviser: 1. Determines whether the client is to receive that service. 2. If yes, then considers the key questions that drive the complexity of delivering that service. 3. Then makes a determination of whether the individual service delivery will be MINIMUM, MODERATE or MAXIMUM. 4. The appropriate fee for that service is determined from the pricing model. All service fees are aggregated to determine the total fee package for the client group. 5. This process is Repeated across all Services.

Pricing An Emerging Affluent Client Example – Damien Damien Banking Rep. 36 An up-and-comer with rising salary and share-based bonuses but limited other assets. Very busy and time-poor. Has just relocated from London. FUM: $250,000 Income - $200k p.a.

Key Service Needs Portfolio Management Regular Meetings Projections & active Goal Management A Basic Estate Plan

Price (ex-GST) PER ANNUM

Services Provided

Service Level Assessment

$1,200 - $4,800



MODERATE

$2,400

Ongoing Strategy & Advice Review Meetings

$600 - $2,400



MAXIMUM

$2,400

Ongoing Administration, Implementation Management & Advice Preparation

$600 - $2,400



MINIMUM

$600

Projections, Budgeting & Cashflow Management Analysis/Advice

$600 - $2,400



MINIMUM

$600

Superannuation and Pension Advice & Implementation

$600 - $2,400



MODERATE

Ongoing Risk Assessment & Asset Allocation Advice/Implementation

$600 - $2,400



MINIMUM

$600

Portfolio Management Recommendations & Implementation

$600 - $2,400



MAXIMUM

$2,400

$300 - $1,200



MINIMUM

$300

Service, Value & Complexity Assessment for DAMIEN INTANGIBLE VALUE – What Really Matters Coverage of your wealth management affairs enabling you to live a life you chose while giving you peace of mind everything is being cared for.

ANNUAL Client Fee (ex-GST)

STRATEGY & MEETINGS

$1,200

INVESTMENT

STRUCTURAL COMPLEXITY Estate Planning / Succession Planning

TOTAL FEE Per Annum (excl. GST) GST TOTAL FEE Per Annum (incl. GST)

$10,500 $1,050 $11,550

The Financial Impact of ‘Service & Value’ Based Pricing

When paired with proper Methodology, Templates and Communications Training the implementation of a ‘Service & Value’ Based Pricing Model typically has a large positive financial impact on a firm. Notice the strong ‘right-shift’ in the Fee Distribution after clients are Fee Mapped accurately. Some clients would receive discounts and others would face fee increases, but overall, the latent value inherent in the business is unlocked via a proper pricing methodology.

The Financial Impact of ‘Service & Value’ Based Pricing Average Fee (p.a.)

AVERAGE FEE (p.a.)

ALL AUDITED CLIENTS (>1600)

UNMAPPED

FEE MAPPED

% Fee Change

$4,800

$6,300

31%

$4,800

UNMAPPED

FEE MAPPED

Median Fee (p.a.)

MEDIAN FEE (p.a.)

ALL AUDITED CLIENTS (>1600)

$6,300

UNMAPPED

FEE MAPPED

% Fee Change

$3,800

$5,100

34%

$3,800

UNMAPPED

$5,100

FEE MAPPED

The Financial Impact by Affluence Segment The same strong ‘right-shift’ in the Fee Distribution can be seen in each Affluence Segment. Notice also, the ‘soft-floor’ in the model around the $2,000p.a. most discernible in the Mass Market segment. When executed properly, Service & Value Pricing won’t easily allow you to service a client at clearly unprofitably levels. The actual ‘floor’ differs from firmto-firm depending on their Service Offering, the cost base of the business and the client profiles managed by the business. However, in the current regulatory environment – providing quality advice that is fully compliant is nearly impossible below $2,000 – thus the emergence of the ‘pricing floor’ in our distribution.

The Financial Impact by Affluence Segment Average Fee (p.a.)

AVERAGE FEE (p.a.) Mass Market (<$250K FUM)

UNMAPPED

FEE MAPPED

% Fee Change

$1,600

$2,900

81%

Emerging Affluent ($250K - $1mil FUM)

$4,400

$5,600

27%

Established Affluent (>$1mil FUM)

$10,200

$12,400

22%

$5,600

$4,400

$2,900

$1,600 UNMAPPED

Emerging Affluent ($250K - $1mil FUM)

Emerging Affluent

Established Affluent

(<$250K FUM)

($250K - $1mil FUM)

(>$1mil FUM)

Median Fee (p.a.)

Established Affluent (>$1mil FUM)

UNMAPPED

FEE MAPPED

% Fee Change

$1,400

$2,400

71%

$4,000 $9,300

$5,200 $11,400

FEE MAPPED

Mass Market

MEDIAN FEE (p.a.) Mass Market (<$250K FUM)

$12,400

$10,200

30% 23%

$11,400

$9,300

$1,400

$5,200

$4,000

$2,400

UNMAPPED

FEE MAPPED

Mass Market

Emerging Affluent

Established Affluent

(<$250K FUM)

($250K - $1mil FUM)

(>$1mil FUM)

Emerging Affluent: Historical Results Historical iDELIVER Transition Results Mass Market (<$250K FUM)

Emerging Affluent ($250K - $1mil FUM)

Established Affluent (>$1mil FUM)

Number of Clients across Australia presented with a Peloton iDELIVER Fee Proposal

2965

3099

976

% of Clients across Australia that accepted immediately

61%

81%

86%

Number of Clients across Australia that accepted immediately

1820

2520

844

Average Annual Fee Uplift per Client (where proposal accepted)

$652

$1,013

$2,042

The success rate in applying a Service Priced Model to ‘Emerging Affluent’ Clients is 81% and materially higher than that of ‘Mass Market’ clients (61%). Emerging Affluent clients need services and are willing to pay for them when they know exactly what service and value they will receive, how and why it is being charged!

Conclusion We have explored the problems with many of the Pricing Models currently used within the industry. We have shown how these models result in Pricing which does not reflect the Service and Value delivered. We have highlighted how this applies to the Emerging Affluent segment of the marketplace; a segment with lower FUM, but high service needs. We have explored an alternate pricing model (to the established models) that proves the depth and breadth of services and value that financial advisers are delivering to their clients. We have highlighted the Financial Benefits of properly aligning your Pricing Model to the Service & Value you deliver. We have concluded that the importance and relevance of great financial advice is very valuable to all clients.

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