Industry forum: defining the real issues

AMP enforceable undertaking

MT: I’ll kick things off by saying that one of the issues of the last couple of months is the AMP enforceable undertaking. I would like to get everyone’s view on how the regulator actually handled that and whether it has taken the appropriate approach to super switching and the whole shadow shopping exercise.

PM: Something that’s been suggested to me is that ASIC [the Australian Securities and Investments Commission] was certainly looking for a scalp and didn’t care who it was.

But I think if you think about the way AMP did it, where they had industry funds on their approved list, it almost made it impossible for anything other than what has happened to happen.

If you can’t recommend it you can only, therefore, recommend an in-house product or some other solution, which is obviously in terms of what they were looking for, the outcome couldn’t be anything but what happened.

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There is a real dilemma because it’s very difficult dealing with information on industry funds.

LW: I had a client the other day who’s got his own self-managed super fund set up and I recommended a salary sacrifice for him. He’s a lecturer at university and they’ve said no you can’t because they don’t have choice under the regulation. Here they are telling him what to put it in and yet at some point in time they’re going to say, ‘Well, you’re the adviser and you don’t have the right to switch him out of it’, yet the client never from day one nor the adviser had any say.

MP: The key issue is still this lack of research on the funds. The industry funds just can’t compete with the platforms and the retail funds with respect to unit pricing features and transparencies of their fees … We face exactly the same issues as everybody — the fact that there is no research. We are criticised sometimes for having a strict recommended process for our APL [approved products list], but that’s because we want to make sure quality products are on there.

We are in a unique position where we have multiple platforms, so another platform is not the issue, but the fact is we can’t get research. We have to relax our rules and where they lack information on insurance — which is fundamental — they lack information on choice of funds and the fees that they pay. It’s the biggest issue that we face at the moment.

These clients come into an adviser and it’s working against what the Government intention is because the advisers are just saying, ‘Look, I can’t help you because I don’t have access to the research to provide a reasonable basis for you to move out of that fund, so leave that there. I can only focus on your other investments.’ That is really unfortunate.

So what’s happened to AMP and its process ... the issue there was [there was] no viable research to actually perfect or make a reasonable basis for those funds.

We’ve looked at the four main providers of research on industry funds, and you either have lack of choice, so there are only a limited number of funds there, or they don’t consider the insurance or the fees.

Retail funds aren’t based on features; it’s fees, performance and people management. The industry funds should change their attitudes and we should really work in unison …

For a young person that doesn’t need insurance, but does need a lot of advice because they’re just starting out, an industry fund is probably ideal, but an adviser is not going to recommend it because we don’t have a reasonable basis to make that recommendation, so it’s very unfortunate.

Shadow shopping worries

MT: Are planners actually avoiding giving advice because they know the regulator could be out there shadow shopping?

PM: It could be that or it’s just not worth it, they just don’t want to do it.

LM: In a small firm, which we are, we don’t have the capacity of larger firms to go out and source lots of research ... if somebody comes in with a less prevalent fund it can cost a great deal to go out and research all the differences and what might be best for the client.

It might be somebody that doesn’t have the capacity to pay for that time because all of a sudden you’re charging them one, two, three extra hours of your time just to try and get the figures and the comparison and it might not be worth it for the amount that’s involved.

MP: The classic example we have is that someone will come in with $2,000 in that fund and there’s no research. So the amount of time for the adviser to get that research for $2,000 is just not worth it.

PM: That’s why there’s this movement to say ‘sorry, not interested’, which is defeating the purpose.

MP: Which is the unfortunate situation the industry is in. The majority of these people actually need advice.

The issue is that there are still people with inadequate funds in retirement, so this policy is not going to help these people get advice and get the right advice.

I think there’s this bias towards treating the fund that they’re in in a certain way that almost discriminates them against seeing an adviser, so it’s really difficult.

PM: Not that I don’t think the industry funds’ plugs on television helps at all — they focus on the wrong issues.

Value of Advice campaign

MT: On the question of seeking advice and the whole media push for industry funds, do you think Dazza has been effective in portraying the value of advice and the value of going to see a financial adviser?

PM: I think the ads are pretty stupid …

SC: Well they’re something. We’ve gone from nothing to something and they must have helped ... I don’t think the [CPA] ads are better, but you know we’ve got something out there now and it’s something for us to build on at the very least. I wouldn’t say that he’s done a lot of harm.

PM: I’m sure he’s created some awareness.

SC: I don’t think he’s been negative. It is something, and if we can build on that … I think the FPA’s [Financial Planning Association’s] next leg is to build on CFPs [certified financial planners], and it’s hopefully falling into a logical campaign.

MP: Dazza certainly created awareness. The FPA measure the success by the number of hits on the website, which I don’t think is the correct measure for success because the success is if it makes someone go to an adviser and seek advice, and that’s difficult.

... Dazza’s next step is to professionalise him because he made a bit of a mockery of financial planners and that’s certainly the sentiment that came out of our group ... they were quite embarrassed by it.

LW: That’s what the FPA wants — you had to have something that wasn’t normal. I mean, someone sitting in a business suit — no one would have paid attention to it and I know it had to be something that was really out there. It’s like those Joyce Mayne ads that annoy you — they’re the ones you will always remember.

Dazza wasn’t about anything other than getting the word out about getting financial advice. As advisers, we’re at another level to the people out there that we were trying to get the message to.

LM: I guess it’s back to the target audience. Where they say, ‘We’re the people that need the most advice’, it’s not the 2 per cent who are [already] high-net-worth individuals — it’s the 20 per cent to 40 per cent that will never seek advice.

MP: I think the key thing is they [industry funds] picked a weak spot in the industry, which was commissions, and have done a great job in promoting that. Dazza is yet to promote the greatest weakness because advice means so many different things to so many different people, so that’s probably the next challenge for Dazza.

LW: Our strength is CFP, so that’s the next step.

Industry bodies

MT: On the subject of the FPA, there are a number of associations out there representing financial planners; some good, some bad, some indifferent — are there too many players in the area? Should there be one over-arching entity — one over-arching financial services entity ideally?

PM: I’ve been involved on and off over the years — people say you don’t need any value add, but I just don’t quite know what they mean.

The big issue is how you quantify and measure what they’re going to do for you. The fact is the FPA does an enormous amount that just gets completely taken for granted. The AFA [Association of Financial Advisers] is trying to do the same thing. However, it seems to me that conflicting issues would become far more serious if the two combined.

LW: More money, more ability to advertise; the more people you have the easier it is.

LM: Part of the difficulty that I think the FPA has faced over the years, and has tried to come to terms with, is that it is a reasonably inclusive association for a number of different people. You’ve got your advisers, fund managers, service providers.

The FPA has tried to meet the needs of a number of different areas of the financial services industry and in doing so over the years has encountered the friction of more for the fund managers, more for the advisers; everybody had their own gripe about whom they thought the FPA focused on.

Some of the other bodies you’re probably thinking about have been just a bit more concentrated in their membership, so it’s possibly very difficult for those people to then go and, let’s say, be absorbed into the FPA. But it would be much more powerful if all of those that are involved in the financial services area were to get together.

MT: Would you include IFSA [the Investment and Financial Services Association] in that?

PM: It’s sort of political, isn’t it? The people who are in the AFA don’t want to give up their turf. You would have thought that maybe they could have merged … with that focus on practitioners sort of thing within the FPA. I mean IFSA is starting to cross paths, isn’t it?

MT: Well that was the message we were getting at the [IFSA national] conference.

PM: Why do they want it? I don’t quite understand. What are they going to do that isn’t being done?

MP: I think that’s the issue that the FPA probably has not delivered as effectively as it could have.

Now I know that Jo-Anne Bloch is in the press a lot making noises, but I think IFSA has actually done a great job aligning all the product providers and all the manufacturers; and Richard [Gilbert] has done a great job of getting all their issues, taking them to Canberra and making things happen.

That group in the advisory category then go ‘well, if they’ve done a great job — our body over here hasn’t been as effective — let’s try be the voice under there as well’. So I think that’s sort of what transpired.

I’ll give you an example — I was at the IFSA conference because I find it more valuable than the FPA conference, and that is really quite tragic because I should be at the FPA conference. [But] I go to the FPA conference and there is just no debate.

IFSA was a great debate about issues; people from Canberra were there so if you want something you can go up to them and actually give them your view — whereas there wasn’t the same [forum] at the FPA conferences.

So hopefully there’s a change in that. But I think with the number of bodies — I don’t think we need any more.

I think Jo-Anne [Bloch] seems to be making the right noises, but the problem is they have so many [groups] ... I’ve been in different committees and it’s frustrating being a large group trying to sort out the issues of a small independent person because they’ve got a lack of resources, lack of time, so they look to the FPA to provide dealership services. I don’t think you need any more, but the current ones need to be more effective.

PM: … I’ve not missed an FPA conference, but you do wonder whether they lack high-brow [discussion].

Fees versus commission debate

MT: It’s the fees versus commissions debate. There seems to be a consensus as far as I can tell that it should be up to the client. Are there any strong views amongst our panellists here?

PM: Isn’t the question disclosure? I don’t even think it’s an issue. It’s a matter of disclosure. I think we affect the service because we charge on a percentage of assets on an ongoing basis. So it’s disclosed; they see it coming out of their bank account, so there is no doubt it’s fee for service. The fact is it’s a percentage of the asset. Commission is the old — but again it’s disclosure.

LW: Half the time once you disclose to the clients it’s, ‘Oh is that what I was being charged before.’ Even though it was always a fee scale — once you’ve told clients they’ve agreed to it. I’d say most of our clients would say, ‘What’s the actual rate?’ They forget and whether it’s fee [or a] commission — as long as it’s disclosed — they know.

PM: I had something happen this week which was very interesting.

We’d just done a placement of what would be a new listing. And we’d been paid, I think the brokers call it a placement fee, and I’d disclosed what we were keeping. And I had somebody say, ‘ I thought you did all that for nothing’. We’ve spent a whole week where we’ve done nothing other — so it’s over and above what you normally do. This is different because it’s part of the listing cost but it is an interesting thing, people’s perceptions of it.

LM: We’re mainly fee-for-service, but occasionally someone comes in and because of their cash flow, something’s happened and they don’t have the spare thousand or four thousand to pay and they would rather come out of a super fund if that’s what they’re rolling over or they’re doing some re-investment because they don’t have the ability to write out a cheque at the moment — their cash flow is very tight.

But technically it’s still taking it because you’re saying to the fund manager, please pay us 2 per cent commission based on this or whatever it might come out to be depending on how it works through a platform or direct investment or whatever. So it is a commission — that’s what you’re being paid, you’re not being paid by the client.

PM: I think the client’s point of view hasn’t been reflected. It’s not an issue for clients. It’s a matter of disclosure.

SC: Where does this question come from — where is the issue?

LW: I mean, it’s the industry’s problem really.

MP: I think everybody in the industry cringes and it’s our own industry creating a problem. You cringe when you read the front page of the AFR [AustralianFinancial Review] where a leading banker starts talking about fees and commissions and raises it yet again — this non issue. Who cares how the fee is collected, you have to disclose it and the collection method of the fee is irrelevant. As long as you have a system — whether it’s commission-based or fee-for-service — you talk to the client, you negotiate the fee and you agree on how it’s collected. Your clients understand; it’s in your Statement of Advice — end of story.

But the issue I find the most surprising is when people say, ‘Look, I do fee-for-service’ when the product providers don’t even support fee-for-services. So if you place someone on insurance you’re going to get commission for it. If we’re going to move to a fee-for service-model, the product providers need to provide products that have no provider fee built into it now. Some insurers are moving to that, but there are still a lot of products that don’t do it.

So people that appear on the front page of the AFR that don’t support commission based payments are just an embarrassment to themselves and their organisation and do nothing but keep punishing our industry.

SC: … There are financial planners out there that aren’t all that good at running businesses and going down the track of the giving back good advice and an ongoing relationship which is really where we should be heading. It’s not easy. Being in the industry for 18 years, it’s — you know, I shifted my business a long way to get to where I am today — you’re seeing your clients two or three times a year … but there’s a lot of hard work that went into getting the business to that point.

There was also a leap of faith that this was going to work when you were doing it.

And I think there are probably a lot of people out there who lack the confidence to be able to take that leap of faith in the first instance and then the know-how of how much to charge?

A lot of the industry doesn’t know how much they should be charging up-front.

I know my business — we’re all about less clients more service. So this whole issue of sorting out someone’s $10,000 and $5,000 investment isn’t even on our radar … We’re all about this ongoing service and getting paid for it and delivering what we say we’re going to deliver and loving our clients for the rest of their lives.

LW: And why would these people bother changing, doing all that hard work.

SC: They’re not going to go through all that hard work to change. And do you know what, I’d happily go and buy some of those businesses.

LW: So are some of the younger [advisers] … all of my friends are just waiting for good buying opportunities from these people.

Dealer groups

MT: How do you choose a dealer group? What makes one dealer group more attractive than the rest?

MP: Independence.

LM: It’s very difficult for people when they’re starting out raw straight out of university or facing a career change to all of a sudden be a financial planner — sure they have to undertake some additional studies … But a lot of the larger dealer groups do training. And this is a very important part of just getting your feet wet in the industry.

PM: There’s no doubt Count gets the bulk of its business because of its image. I don’t know whether that’s a plus or a minus though. There’s no doubt Simon and I are aiming at the high-end of the industry, in terms of if we’re looking for people we want the best from somebody else. I think Count still gets the bulk of its new people from within its focus group.

MP: Any adviser looking to join a dealer group — you’d want to have a dealer group that’s not aligning themselves with one platform provider or any product providers. It’s about giving choice to the client and independent research processes, systems and a true-to-label independent model. And certainly one of the strengths we’ve had with Count is giving the options back to the advisers and so they obviously pay for a service, but they’re also getting that back in equity, so that’s the key as well.

LW: But I would say, I’ve come from a large dealer group where I had choice. So I think a lot of the large dealer groups are getting smart in that most of them now have choice. I was working for a large bank but we didn’t have to recommend particular managed funds because it was run by them. And typically, there was nothing really other than a platform, but that makes business sense. To run three or four platforms to me just doesn’t make business sense, so it was easier to use the in-house one for everyone.

MP: But that’s where your choice is restricted because it’s not just product choice, it’s actual platform choice and at a small level it is inefficient in some cases to run multiple platforms, I agree. And that’s why at a dealer group level we have a virtual wrap. But all of our platforms are built into that so that the adviser gives us one system and that can shoot off to whatever platform provider they want and that is the true-to-label model of choice. It’s not just investments but it’s got to be the platforms.

LW: To me, a platform is just administration and to be honest it doesn’t make any difference to me because I would just say to the platform provider, I want this.

PM: I think if your dealer only had a master trust you’d have some serious issues.

LW: But if it’s much of a muchness. You know, I’ve used six or seven of them and there are a couple of better ones out there and I know I’m now running a small business so would I have three or four platforms? It’s administration. The most important thing to me is the investment I can give to my clients — the insurance I can give to my clients and the advice I give them.

MP: But that’s all accessed through the platform at a price and if you’re only using one and you’re not spending time researching what’s out there how do you know you’re giving your clients the best price, the best choice, the best features?

LM: I think there’s also another issue when people are looking at moving dealer groups and part has to do with their own personality or trait.

There are those people who are a little bit more entrepreneurial and they are able to go out and hunt down or they know someone a bit better at marketing and networking.

Someone’s who’s quite happy to tap a salary, irregardless of whether they’re a top producer or middle producer, know they have security. That might be fine for them to stay in a particular organisation. They don’t have to go out, they don’t have to knock doors or worry about if someone’s going to come through the door and not get paid.

Succession planning

MT: I assume there is always someone behind you pushing upwards. How important is it in a practice to have a succession plan in place?

MP: You need to think about who’s going to be the next person to step into your shoes and train and develop them because it takes a long time to do that. It’s not something that you can just hire someone and they can just be ready from the day that you retire. You’ve really got to work together on that process.

PM: Therein lies the challenge. At 58 to take the money and run has some appeal, but in reality, I don’t want to retire. What am I going to do? I think we’re probably fortunate. It is an industry in which you could change your working habits and bring somebody along behind and move into a different sort of role. The problem is if you sell out you sell out and they want you to go.

Classically, I would have said until recently I had principal risk, in that I was it. I’d bought another practice, he is a lot older than me and still working so it’s more likely he would disappear and I would have to look after that, but a younger guy has come down to join me. He offers some solution to me in that if I want to disappear for a few months, John could literally take over, which is good.

LW: So, do you see yourself offering him equity?

PM: He’s come out of another practice in which he owns a small equity and the problem was he left that because he couldn’t see how he could ever get it to the stage where it was ever going to be big enough, so it might be that we work a different model.

LW: I was going on three years … and I would have stayed there if I’d been offered equity. I knew half his client base inside out and he promised me equity in three years and it wasn’t there.

PM: I think it is an issue — if a practice is worth $2 to $3 million, it’s a large amount to swallow to buy. I think an issue in as much as anything is that it’s daunting. I think a lot of them buy them in the belief they don’t have to do any more work.

LW: I’ve just started in a firm again and I’m running the firm’s financial planning business and within 12 months I’m going to be a partner. I’m working long hours, I love the business and it’s the way to keep me there.

PM: It’s interesting, the evolution. There’s no doubt I could sell part to John if he wanted to do that. I think he’s a bit reluctant from where he owned 5 per cent — the problem being it doubled his production but didn’t double his income because he then got rewarded on his percentage of the total. And it was a very big business and to get to the level he needed to get to would have meant he had a massive debt hanging over his head, which is the difficulty. Maybe it’s easier if you’re talking about individual practices.

I think the challenge for a lot is to find the $140-150,000 income practices, which you buy for $200-250,000 or whatever. They’re really good buys for somebody starting out ‘cos it gives them their base to which they can grow and it’s probably serviceable.

SC: We’ve done quite a bit of succession in our group. Myself, I bought out my brother three years ago. I’ve had two partners buy in a year ago, I sold out of a second practice on July 1, this year, and it all revolved around succession and who was coming through. We found it to be a really strong process to bring everyone together — it puts money in my back pocket for all the years of hard work.

I think that bringing young people through and putting them on a program works fantastically well. I first cottoned on to that listening to Phil Guest — that’s what I’ve got to do. And what they’re trying to do is create value at all sorts of levels. You want to create value with your client list and value with your business, the way you do business. Then you want to create value in your dealer group — and the product — to be able to have various levels that you can have people buy into is very important.

PM: It is interesting that I’ve had two approaches in the last six weeks. One on the telephone from somebody I know quite well, and the other one completely unsolicited — it’s out there.

SC: I was speaking to a business broker earlier this week and he tells me that there are currently 16 businesses for sale and over 1,000 willing buyers. So where’s the 20 per cent of this industry that’s going to exit? Their biggest problem is sifting through the over 1,000 people that want to buy and get down to a serious five people that are interested in this business.

LW: But you were saying before that there are a lot of businesses out there that aren’t run well, so ... there are a lot of businesses that don’t have it in place.

SC: They don’t have it in place and they are going to struggle to sell because no young person wants to buy it because they’re looking at it and saying, ‘That’s a crap business, I don’t want to buy that’.

LW: You guys have worked on your succession planning and probably won’t have any problem selling your business, but there’s still a lot of bad business out there.

PM: Oh no, I agree. There’s a fellow that works with us, Jim. He is 66, and he knows that because of the way his business is not on computer — he’s a former bank manager with fantastic relationships with his customers (and he calls them customers) — he realises the way it’s currently structured, it isn’t worth anything. So the answer is he’ll give it to me when he retires. He’s basically said that ‘when I’ve had enough, I’ll give you this’.

LM: Again, it gets back to personality types. I’ve known some people that you feel are very capable but they don’t want to take on the responsibility of running or owning a business, or they don’t think they have an ability to do that, and it’s also finding those people who have all those wonderful qualities and want to throw heaps of money at you.

PM: I think one of the other challenges the industry faces are with those who are coming out of university with degrees in financial planning and have an expectation that they will be one when they arrive, which is just silly.

SC: I was going to bring that up before.

LW: That occurs in every industry.

MT: It happens in journalism too.

PM: If they come with an ordinary degree they’re fine, but if they have a degree in financial planning — how quickly can I be one? I’m PS 146 compliant, turn me loose.