James Sim of the Financial Planning Association of Singapore explains the basics, as well as some pros and cons, of different fee models within wealth management.

Date: Nov 2010

Tags: Advisory process, Fees, Commission

• Fee-for-service has a become prominent issue since the UK financial regulator announced that it will ban commissions in favour of a fee-only model by 2012
• People need to think about fees and commissions differently
• Consumers are wary as they don’t know how much they will be charged, plus they don’t see the need to pay, given that product providers and distributors provide advice for free at the moment
• Until and unless there is greater awareness of and consumers see the value in advice, there will be a question mark over this model

While fee-for-service is not a new issue, James Sim said in an interview that it has become prominent as a talking point within the wealth management industry globally following the announcement by the UK financial regulator that it will ban commissions in favour of a fee-only model by 2012.

This has led to the global community becoming more alert to this issue, he explained.

However, Sim said that other countries might not yet be ready for an approach like that in the UK.

Understanding fee models

According to Sim, fee-for-service exists in wealth management where an adviser talks to a client and after establishing a clear understanding about their needs, goals, objectives, risk tolerance and time horizon, then creates a financial plan and charges a fee for that service.

Then, when the adviser starts to implement the plan, they will earn a transaction-based fee.

However, people need to think about fees and commissions differently, said Sim.

For example, he explained, when engaging an architect to produce an initial drawing, by paying for this it is akin to a fee for advice.

The client might then not use that architect any more, and can take the drawing to someone else to develop. That would be a fee for product, said Sim.

Challenges to a fee-for-advice model

In order for consumers to see the benefit of paying fees for advice, however, Sim said more education and awareness is needed.

Consumers don’t know how much they will be charged, he explained, plus they don’t see the need to pay, given that product providers and distributors provide advice for free at the moment.

So until and unless there is greater awareness of and consumers see the value in advice, there will be a question mark over this model, said Sim.

At the same time, consumers should be demanding a certain type of advice before fees for advice are introduced, he added.

In general, Sim said it will take time to be able to introduce this fee structure to the wider population.