Welcome to part two of a three part series on FEES.
Time to be perfectly frank, implementation fees ARE the commissions slapped onto a particular product, which are meant to entice the planner to SELL, SELL, SELL and in a world where there hasn’t been an upfront financial planning fee charged and a client hasn’t gone through a lifestyle financial plan, that is exactly what they achieve BUT this is not THAT world and I am going to take you through the WHAT, the WHY, and the HOW of implementation fees.
Implementation fees are generally upfront commissions built into the pricing of a particular product, paid to a planner by the product provider and then recouped from the policy over a specific time period.
In the world of lifestyle financial planning, an implementation fee is not used as a mechanism to recoup the initial financial planning fee, it is not a tool used to get paid for the advice rendered, it is not an incentive to place business with a particular product provider, IT IS a commission(at this stage) paid to a planner for implementing the agreed recommendations of the financial plan. Remember I have taken you through your Lifestyle Financial Plan (which you have paid for), I have identified areas of concern, things we need to put in to place (which you have agreed with). In order for you to move from point A to point B (in its simplest terms), and now those recommendations need to be fulfilled from an admin perspective. I guess the message that I’m trying to drive here is that the implementation commission does not drive the product recommendation. The need to cover a shortfall or address a specific concern has already been identified and both parties have agreed, the product used to fulfill this need is then selected based on its ability to do so over another. The commission then covers the cost of fulfilling the implementation order. In the case of fulfilling the risk shortfall, it entails drawing various product provider quotes, completing the application together, along with the medical questions, submitting to the life company, ensuring the required medical tests are booked with the nurse and the client, ensuring the client is correctly underwritten and that the agreed terms are applied. In a more complex case, there is a lot more interaction with the underwriting team of the insurer, putting your case forward and fighting for the best possible rates on your behalf.
As already described in what implementation fees are, how they are charged, paid and recouped is now discussed. In the case of a life company it is generally a fixed percentage of a multiple of the annual premiums charged. This fee is then recouped over a period of years from the premiums received. In other instances it could be a fixed percentage charged on an initial premium invested, and either deducted directly from that investment, or deducted over a certain period. Either way, there is a fee being charged, and you and the product provider are paying for it. It’s not a no strings attached fee for the planner, because it’s generally an upfront fee based on the policy/ investment staying in force for a certain period of time, if that fails, the fees are generally recouped from both the planner and the client, I guess in an effort to ensure the business is placed there for the correct reasons in the first place.
As the industry has evolved so to have the range of products offered to fulfill the identified needs. In 1998 an upfront commission of 5.7% wasn’t unheard of, and was typically charged, whether it was disclosed is another story. However, in 2018 if you are paying an upfront implementation fee of 5.7% you are being robbed.
As an independent financial planner, I have access to a range of different product providers, who are there to fulfill my clients needs which we have identified together. I recommend the provider who can best do this, not on how much they are going to pay me but on merit on their product suiting my clients needs. In doing this, I am building a long-term honest and transparent relationship with my clients. This is truly a fee earned to cover the cost of implementing the agreed upon recommendations. This is evident when selecting and comparing products, below is an example of two providers both offering a retirement annuity to cover a clients shortfall. First the Facts:
Client A needs to earn a return of inflation plus 5 over a 15 year period, in order to provide a lump sum of ‘X’ at his desired retirement age, in order to draw down an income of ‘Y’ until age 99. To do this he needs to be contributing R10 000 per month into a retirement product.
Pays an upfront commission equal to 3.42% of the annual premium over 5 years and then an ongoing commission of 5.7% of each premium received per month after year 5. That is an upfront fee of R 20 520.00 and R570 per month after year 5.
Allows for an upfront fee of up to 3.42% of monthly premium to be charged, and an annual planning fee of up to 1.73%. If the upfront fee is taken and a 1% annual fee is charged, that equates to R342 per month upfront and R100 per month increasing with contributions.
In a world where there is no fee paid for the actual financial planning, you could see how a planner would be incentivised to SELL product A over Product B. In the world of Fee for Advice Lifestyle Financial Planning, I would recommend product B as follows: 0% upfront fee and 1% annual fee. The outcome is that Product B is best suited to you the client, and Product A is best suited to me the Planner.
Which would you rather have your financial planner put in place for you…