The implications of financial planning industry consolidation

Large institutions view the global financial crisis-inspired period of regulatory review and change as a chance to buy distribution and platforms cheaply and to position for future growth. But what implications does this concentration of advice and product have for the Australian financial planning market, asks Paul Kelly.

As a small financial planning group with about 88 planners and 50 offices, Futuro views the latest round of merger activity between large financial institutions in the financial planning space with interest.

These large institutions view the global financial crisis-inspired period of regulatory review and change as a chance to buy distribution and platforms cheaply and to position for future growth.

The question is, what implications does this concentration of advice and product have for the Australian financial planning market?

Statistics released by Roy Morgan Research in 2009 provide some clues, revealing the six largest institutionally owned dealer groups placed more than 70 per cent of client monies (inflows) into their parent company’s products.

The top three placed more than 80 per cent.

In addition to the inflows trend, we believe there will be an acceleration of unrealistically (low) pricing of services offered by these institutionally-owned licensees due to the significant subsidies provided by the licensee’s parent.

This will squeeze out smaller, independent financial planning licensees, and ultimately reduce choice and competition.

As one of the larger independent licensees in Australia, we have the resources to meet pricing competition, but it has the potential to be detrimental to new licensees entering the market and to smaller, existing licensees, and will further consolidate the industry into the hands of the institutions.

Some examples of recent industry moves include NAB/MLC’s acquisition of Aviva, including the Navigator platform and four financial planning groups, Meritum Financial Group, Infocus Wealth Management, Financial Technology Securities and AG Private Advisory, and NAB/MLC’s offer for AXA’s Australian and New Zealand operations, including financial planning brands like ipac, Genesys, AXA Financial Planning and Charter Financial Planning.

Then there’s ANZ, which recently acquired ING Group’s 51 per cent shareholding of the ANZ/ING wealth management joint venture, which owns Millenium 3 and interests in other financial planning groups like Sentry in WA.

As a result of this, the platform market is now dominated by a few large institutions. Our experience with some of these institutions is that they have failed to spend what is required to ensure the platforms keep pace with technological developments, and the needs of advisers and clients.

This can be a headache for financial planning groups like us, where planners use several platforms.

Advisers may find themselves facing unhappy clients who have been left in old, cumbersome legacy platforms that fail to provide access to appropriate technology.

In such cases, clients are disadvantaged, thus adding unnecessary costs (and stress) to the advisory process.

Based on current trends, the emergence of a ‘super platform’ is likely. It is simply not sustainable for a large financial institution to be running three or four different platforms.

It is interesting to speculate on what the emergence of a ‘super platform’ will mean for advisers.

If the only solution is to transfer the clients to the new ‘super platform’, the adviser will ultimately bear the cost of shifting affected clients in a very strict regulatory environment. If this scenario does eventuate, proactive action is required by regulators to ensure clients don’t

suffer as a result of the forced transitioning to the new platform, particularly where the ultimate owner of the licence and the platform is the same.

In this fast moving environment, we will continue to seek regular feedback from our network and will be very proactive in our dealings with product providers on our advisers’ behalf to ensure no one is disadvantaged.

We will also be interested to see how licensees of these ‘super distribution networks’ oversee the provision of compliant strategic advice, as opposed to product advice.

Will they raise the bar for their distributors or will it be a case of ‘dumbing down’ strategic advice on offer?

Will it be a case of limiting strategies and services the adviser can use to minimise business risk, rather than embarking on a training regime to improve advisers’ understanding of strategies that should be on offer to clients?

As a licensee owned by advisers and management, our adviser pricing model distinguishes itself through its transparency and does not rely on financial support from a parent to fund the licence activities.

In the short term, we anticipate very little change within these super distribution and platform businesses as institutions devise the best way to integrate their purchases into their established businesses.

However, advisers in these businesses will need to stay alert to subtle changes occurring during integration.

Advisers will ultimately have to decide whether being part of one of these monoliths suits their needs and their clients’ needs and if they see themselves as providers of ‘independent strategic’ advice or merely product promoters.

Paul Kelly is director of network services for Futuro Financial Services.