It used to be a pretty good racket. You’d hold a corporate super book for a couple of big organisations, and for the annual price of a PowerPoint presso and a bottle of Grange to the MD you’d receive a juicy 0.66% of each employee’s Super balance.
Every now and again your accountant mates would send across someone looking for a bit of help getting across the line to retirement and you’d whack them into a TTR and make sure they got a Christmas card come December.
Markets were always heading North, your BDM always ready to whip out the corporate card for a long lunch, and you even knocked a couple of swings off your handicap. Life was good.
Then 2007 hit. Suddenly the unimaginable was happening. Clients were losing money. Worse, they were calling you to ask what the hell was happening! Suddenly your BDM was more interested in talking risk-mitigation strategies than beef cheek and a bottle of Shiraz at Aria.
Those under bank aligned dealership groups weathered the storm a little better. They continued to receive a base salary even if the bonuses did start to dry up. Those aligned to the Storm model didn’t fare as well.
Following down-turning markets and collapses at Storm and Westpoint, planner reputation was relegated closer to that of the used car salesman than the professional accountant image the FPA had been so desperately coveting.
Regulators had to be seen to act. Ripoll recommended amendments to the corporations act and backed by the government, the continued push towards separation of commission from advice was esclated.
Industry funds upped attack on the value of financial advice, and in the face of falling markets were able to display value through better returns (on during this period, smaller losses) for their clients.
Licensing regimes became tougher. Post-graduate degrees became a minimum requirement for young advisers. SOA’s became a saving grace for advisers previously unconcerned about compliance requirements. Dealership groups started talking about the need for fee for service.
So the industry will never be the same…
…well maybe not, but during a pretty short period of time, it suddenly required a lot more work for financial planners to turn a buck.
But far from this being negative, this represents the right transition away from what had for a long time been a cowboy sales operation, towards acceptance of financial planners as committed, ethical professionals removed from conflict of interest.
For years the fee-for-service debate has raged between advisers who feel that embedded trail commission under investment products represents that fairest way to charge for their time. They argued that charging an asset based amount from total investment balance provided clients a flexible option around payment, without the need of big upfront fees to implement advice.
On the other side of the fence sat the bank-aligned fund managers – with the charge led by MLC’s Steve Tucker, and more recently the FPA – throwing weight behind a fee-for-service model. Under this worldview, the customer pays a single amount for advice and implementation, with details and costs out-in-the-open and independent from product pushing.
But even under these self-proclaimed “transparent” fee-for-service models, advice costs are often linked to percentage-based fees of total funds under management, charged on an annual basis. Is it fair to change someone with a $1mil balance the same 1.10% advice fee you leverage against $250k accumulator clients, where the core advice strategy and work around implementation remains the same?
As a potential client you must consider what value you’re actually looking to gain from seeing a financial planner. Contrary to customers perception (not to mention image cultivated by less ethical members of the profession), visiting a planner is no guarantee of financial success into the future.
Any planner who tells you they will make you richer is a liar. No, a good planner is not there to make you money. Instead they should be performing a role closer to that of a personal trainer rather than a hedge fund manager; they’re here to create a plan and keep you on target.
At the absolute centre of a planner’s service offering is the application of Modern Portfolio Theory (MPT). MPT is an investment methodology that suggests gains can only be made through risk management and diversification. Problem with this is when a GFC hits the modern planner has nothing in the toolbox to protect client investment.
“Stay the course” is fantastic unless you’re 12 month out from retirement and 40% of your super has just disappeared.
Further to this, if the key service your planner offers revolves around picking a couple of managed funds and ensuring you don’t touch them, why can’t you look up a risk profile tool and simply implement this yourself?
Well actually there are a couple of reasons here, Australian fund managers make it very difficult for a ‘direct’ client to access the same level of service offering provided to planners.
Sure, one of the banks could come out with a rock solid investment platform tailored especially for clients, but this would be a case of cutting off the nose to spite the face. Distribution is key to the funds management businesses. Instead, through the imposition of a fairly average user experience, and by withholding access to the more technical adviser capabilities, the end investor is left with limited choices in the DIY space.
Not exactly, the recent additional layers of regulation and complexity are forcing independent (non-salaried) advisers to reconsider their customer base. For a lot of these planners it’s no longer worth canvassing ‘accumulator’ or lower net-worth clients. Now it’s high net-worth or nothing.
This means the smaller fish are now up for grabs, and the banks know it. This is going to result in a shakeup of who services who, and leads me to suggest the endgame looks a bit like the following:
In this world, a clear definition would exist for which clients would be approached at different stages in their lives.
Loosening of advice limitations will empower industry and retail funds to open up distribution channels, initially over the phone, and then through the branch network.
In bank land, advice provided to complex clients would move across from the financial planning bank silo to under the private bank umbrella, providing skilled and licensed bankers a holistic overview of client investment while allow the bank to grab a bigger share of wallet.
Notice the point of cross over for all three providers will be the insurance business. As investment advice ceases to be the golden goose, insurance will be the profit center for businesses ready to change and take advantage.
This won’t necessarily be your traditional life & TPD either; general lines will start to be offered across all providers, and structured/guarantee investment products will sooth client concern over volatility… for a fee.
Differentiation based on price, product and platform will cease to be enough to keep customers loyal. The pace of technology improvement and customer demand for great control over their investments will force providers to quickly innovate with better online functionality.
Segmentation and customer analytics will empower platforms to provide advisers deep customer understanding and the ability to target improved product offering. Customer-centred design will be the touchstone through which all improvements to the offering will be measured.
Products will change too. Platforms will generate single product shells with limitless flexibility around pricing, features, access, branding. Product manufacturing will stop in-house, and instead become the task of the adviser. This will increase product offerings across a single platform from a handful of options with different tax structures, to almost unlimited choice based on client need.
This new flexibility will make it possible to hold a single account with a single provider for your entire lifetime, adding on additional feature and benefits as your needs and balance grow.
It’s not just the baby boomer clients that are soon to move into retirement. While financial planning as an industry may be fairly juvenile, the average age of someone working in the industry is a shade under 50. Soon we’re going to see any entirely new generation of clients and advisers coming through, both with radically different needs.
Planner, dealerships and platforms all need to take a good hard look at their current direction and ask themselves “who are my clients going to be in 15 years, what’s the regulatory landscape look like, and am I really prepared for the change coming”.
If you’re not currently thinking about dis-intermediated product, mobile development, self-service, flexible tailored solutions, and advice as a service (not a product), the future may not be all that kind.
The good news is the opportunity for those committed to innovation and growth is limitless, and with trillions at stake, it’s an exciting time to thinking about all that is possible.