Future of advice could shift to ‘naked pricing’ model

According to WealthO2 managing director Shannon Bernasconi, the concept of naked pricing strips out fees exchanged between third parties in the value chain of advice and discloses only those fees payable to a client on a clean basis, void of revenue bias or conflict.

Examples of fees that are exchanged between third parties in the value chain include grandfathered product trail commissions, volume-based bonuses, badged platforms, shelf platform administration/SMA fees, cash platform fees, and platform in-house product costs.

She said the increasing prevalence of naked pricing will shift the margin from product – and commissions – to the adviser and shared equity licensees, which would be a reorganisation of the value chain.

“It’s on the basis of transparency and the fee for service model that the naked pricing model delivers client benefits as well as a shift of margin away from products and commissions to the adviser,” Ms Bernasconi said.

“A key issue with the old pricing model is that it’s not clear to a client who is taking what in the value chain. This results in conflicts of interest and ultimately the client paying too much for the service being afforded.”

To illustrate naked pricing, Ms Bernasconi cites a client who was on a (non-badged) platform, with investments in products and paid a total of 2.7 per cent. The client was paying 100 basis points of adviser fees, 120 basis points in product, investment management and separately managed account (SMA) fees, and 48 basis points in platform administration plus 2.75 basis points on cash fees on basis of 5  per cent holding.

Under a naked pricing fee model, the total costs for active investment management were reduced by almost 60 per cent to only 71 basis points, and the cash fee was removed by having the interest earned in the cash management account paid in full.

Further, the net savings of 99.25 basis points can be shared with the adviser or passed on in full to the client. In addition, for a share equity-based or licensee model, those savings can increase the profitability of both the practice and the licensee.

However, Ms Bernasconi said adoption of a naked pricing framework would present different issues and/or benefits depending on their respective part of the value chain.

For model managers, she said that the removal of the SMA fee and the ability to negotiate fees per AFSL for specific mandates provides greater flexibility, while for fund managers, the removal of shelf fees shifts to a choice for costs to them in the form of rebates processed to the end clients.

“Naked pricing is about charging a fair price for the service being offered, with no conflicts of interest or revenue sources,” Ms Bernasconi said.

“With the potential of increased licensee fees in lieu of removal of trail commissions and volume based/badged platform kickbacks, the emergence of a co-operative licensee services model is putting pressure on the traditional dealer group value proposition, in addition to the increase in self-licensed advisers.”

Adrian Flores

Adrian Flores is a deputy editor at Momentum Media, focusing mainly on banking, wealth management and financial services. He has also written for Public Accountant, Accountants Daily and The CEO Magazine.

You can contact him on [email protected].