Client neglect: Symptom of outdated operating model?

The high incidence of client neglect in the financial services sector is alarming, considering that the client is the lifeblood of the industry.

Client neglect occurs when a financial adviser fails to adequately update a client's long-term financial planning needs through regular visits, analysis and recommendations. The consequences are potentially dire, since as people's circumstances and life-stages change, their financial needs require review and updating.

Who is accountable?

It is the individual clients who ultimately carry the burden of a financial planning failure, and ultimately it is each individual's responsibility to ensure that his or her own financial affairs are in order.

However, downstream impacts can and continue to severely impact the reputation of financial planners and advisers, as well as the financial institutions, regulators and other industry participants.

Client neglect, even if it is self-neglect, therefore is an industry wide problem.

Who's to blame?

The knee-jerk conclusion is that the financial planner is "obviously" to blame, but it is a simplistic conclusion that fails to pay heed to the real causes of client neglect. Client neglect is a symptom or an outcome caused by the traditional life industry operating model.

The first and perhaps most significant cause is up-front commission, the traditional remuneration model which rewards the sale and not the ongoing service. This issue is exacerbated for new financial advisers, who have yet to build substantial client bases and rely on up-fronting of commission to survive financially. Statistics clearly demonstrate a far higher proportion of up-front commission business written by industry rookies, with commensurately higher levels of client neglect in advisers' early development years.

But the problem is prevalent among senior and often very professional financial advisers too - though for different reasons. Legislation such as FAIS and FICA has dramatically increased the administrative burden on financial advisers, requiring strict time allocation and, consequently, necessitating the prioritisation of key client relationships over their broad customer base, which for around half of active financial advisers, numbers between 700 and 1000 clients on average.

Even with the greatest expertise and efficiency, the best will in the world, and assuming no compliance overhead, it is physically impossible for a financial adviser to competently conduct (say) 1000 annual FNA updates, while also trying to add new clients to his or her business. The industry remuneration model rewards selling to new clients over servicing existing ones.

Feasible solution

Unfortunately, there is no quick fix or silver bullet, but a good start would be the introduction of a service-based remuneration model, where financial advisors are paid on an ongoing basis for the advice and service they deliver to customers.

It is possible and feasible to re-configure operating models that focus on the value of customer relationships, rather than on the value of new business. Unfortunately, "possible" and "feasible" do not mean "easy" - achieving it would require fundamental reconfiguration of a number of long-established industry conventions and practices.

An industry re-invented

For the adviser, a move from sales-centric to service-centric activity embraces the very basic and essential concepts of professional practice building.

A practice building approach represents the future of dispensing advice in our industry. If, as an industry, we have the will to actively encourage and build a practice mentality - and if we are big enough and brave enough as institutions to give effect to it - then we will indeed be "an industry re-invented".