by Tony Vidler
Most financial advisers acknowledge that things are likely to change when it comes to fees, initial commissions, renewals or AUM fees and so forth in coming years.
Yet they behave like the frog being boiled. The boiling frog story is a common metaphor used to describe the inability or unwillingness of people to react to or be aware of threats that arise gradually. The issue of remuneration for financial advisers is such a story.
There is an undoubted trend internationally for increased cost transparency and delivery of value to consumers. It is accepted that this naturally focusses attention upon the fees or remuneration (in all its forms) that financial advisers receive for the work they do. Or for the work they do not do in some cases. We’ve all known about this for quite some time now, and as time goes by there is increasing discussion and attention and publicity…..the temperature rises gradually.
Which is the cue for the boiling frog parable….The premise of this story is that if a frog is put suddenly into boiling water, it will jump out, but if the frog is put in tepid water which is then brought to a boil slowly, it will not perceive the danger and will be cooked to death. It is of course just a parable…real frogs don’t stay in water being boiled. They do actually jump out….so no actual frogs have been harmed in the writing of this post and no suggestion is made that one should try this experiment at home with your own frogs.
I do however see a lot of slowly-being-boiled-frogs in financial services.
The temperature is being gradually raised in the pot. The heat is on fees and commissions and soft dollars. And it is increasing constantly.
Yet many advisers remain passively immune to the increasing danger to their business models and stick with the known remuneration structures. This is not just my own opinion: Fidelity Investments found recently that only 9% of the advisers they surveyed had “changing fees or pricing structure” as one of their top 5 strategic priorities.
How the advice business gets paid and generates an income doesn’t feature in the top 5 things to think about.
Hence my thinking that there are a lot of frogs being boiled alive right now….
Consumers repeatedly say that they are far more likely to work with financial advisers if fees were lower. Or if they understood the fees. Or if they could see what value they were getting for the fees.
The common barrier cited by most consumers to engaging with advice is usually “fees”.
The point is that there will come a time in the not-so-distant future when the water temperature is deadly if advice businesses do not choose to address the issue themselves. Business models will die simply because they were comfortable with the status quo and mistakenly believed that they could tolerate the incremental changes without making a move.
The world has a habit of continually changing whether we want it to or not, and on the topic of remuneration for financial advice it will definitely keep changing. Advice businesses that want to be in business in 10 years time should be at the very least be putting their fee model somewhere near the top of their strategic priorities to work upon.
At some point you are going to have jump out of the existing pot if you want to survive.