As an important element of the research completed for Brokers Ireland on “The Evolution of the Broker Market 2030”, we identified 12 areas to be considered by Financial Brokers to help prepare your business for the changing market environment.
We have considered previously the importance of developing the best proposition and services for different groups of clients and prospects. We now consider the next action identified in the research, which focuses on developing a cost model that makes sense for both the client and also for your Financial Broker business.
This starts with recognising that being a Financial Broker is a very worthy profession that delivers a lot of value to clients. Good Financial Brokers deserve to be well rewarded for the value that they add, helping clients to achieve their financial objectives and transforming their lives.
To achieve this, a well-thought-out remuneration model that is linked closely to the value added must be developed and articulated clearly to clients. This may appear difficult to some, who have simply been ‘price takers’ in the past.
While there is a sense that fixed fees may be charged for project-type work such as some complex planning services, there is a strong and unanimous belief among all Irish participants in this research project that the current commission model, particularly in relation to ongoing charging on an assets under management (AUM) basis, works efficiently and will continue.
With regard to explaining the level of charging, Brokers will need to be able to clearly demonstrate and confidently articulate the value delivered. In the future, it would be prudent to anticipate that trail commission won’t continue without value actually being delivered.
There is an expectation in some quarters that enterprise level charging structures (irrespective of where business is placed) will emerge. In this case, Financial Brokers will need to set their own pricing for different products, and not vary this based on terms given by different providers. Additional benefits supplied by a provider would then go to the client.
Charging for younger clients and those of limited asset amounts is recognised as a real challenge for the industry. They are not attractive to either providers or Brokers today, but they are the valuable customers of the future. The belief is that many Financial Brokers will take a long-term view that as these people’s careers progress and their assets build, in time they will become attractive clients. For clients with low assets, Brokers will need to continue to receive initial remuneration to make this business worthwhile, either by commission or through the levying of some form of an administration fee. As discussed earlier, the service level provided to these clients will need to be relatively light, in line with the income generated for the Financial Broker.
So, what are the steps for you to take to develop a cost model that will serve you well into the future?
The starting point is to review your current remuneration levels across your different client segments, ensuring that they are fair and equitable to your different groups of clients, and to you. Your next action is to take a step back and identify all the areas of value that you deliver, and then place a cost on these based on your time, expertise and the value experienced. This may require you to adjust your remuneration amounts accordingly.
Running in parallel with these actions, we also think it prudent to actively consider an alternative remuneration approach for younger / lower value clients, to ensure that they are not loss-making for you, while also delivering positive outcomes for the clients. Your cost model needs to be proportionate and attractive enough for these clients, while also making sense for your business.
Finally as you look forward out over the 8-10 years and should enterprise level charging begin to emerge in the future, it might be worth considering the levels of charge that you would apply to remove any suggestion of provider bias in your recommendations.
Fees and charges are always a tricky area to get right. The solutions you develop must be transparent and fair to your clients, while also providing the level of income required by your business to ensure you can afford to continue to deliver a world class service to your clients.