Future of Advice – new game, new rules

Will the Australian financial planning industry follow the model which has evolved in the US? Will it follow the model which has evolved out of the United Kingdom’s Retail Distribution Review (RDR)? Or will it evolve its own model, drawing on many elements and overseas experiences?

Ask CountPlus chief executive and former Financial Planning Association (FPA) chairman, Matthew Rowe, and he will point to a future industry heavily influenced by the synergies of accounting and financial planning. Ask Bell Financial Group’s, Arnie Selvarajah, and he will point to the US experience.

Ask former dealer group chief executive and current AdviceIQ board member, Paul Harding-Davis, and will point to Australia developing its own hybrid in recognition of the almost unique combination of commercial and regulatory realities confronted by industry participants.

For CountPlus chief executive Rowe, the challenge for the financial advice sector is to find a new model capable of carrying through the current transitionary period and beyond. For CountPlus, which recently acquired Count Financial from the Commonwealth Bank, that entails an accounting/planner model and an equity ownership (owner/driver) approach.

The biggest news to hit the Australian financial industry in the past two months has been the changed strategy announced by AMP Limited and the Commonwealth Bank’s announcements spelling its substantial exit from aligned advice, particularly its decision to undertake the gradual wind-down of its Financial Wisdom business. 

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But for Bell Direct’s Selvarajah the AMP announcement is significant because, in many respects, it represents the implementation of a model that has been evolving in the US financial planning industry for some time – a tiered approach starting with self-direction and channelling, where necessary, into holistic advice.

“There are basically three components to what they are talking about – three tiers – self directed for the mass market [delivered via] online, call centres and which is very much general advice.

“Then tier-two is ‘on-demand advice’ centred around life events such as a house purchase, life insurance and family trusts which doesn’t necessarily give rise to the need for a

Statement of Advice (SOA) and then the third tier which is full advice and an SOA,” Selvarajah said.

He said that there were also possible permutations of the AMP model which might be included somewhere between tiers one and two, which entailed co-delivery of advice involving both technology and physical advisers – “that is using robo-type technology but with an adviser involved in helping the client understand what strategic asset allocation they need.”

Selvarajah likened it to the managed accounts model which was being deployed by Bell Direct and others and which was dominant in the US.

He said the end-game was that the role of advisers changed from choosing specific assets to one of strategic asset allocation reflecting the objectives of the client.

Selvarajah said he believed that, in similar fashion to what had occurred in the US, this meant that the nature of advice would also change with advisers focused on the front-end of the process – strategic asset allocation – rather than where they are tending to focus at the moment, the asset selection process.

“Now in a lot of the conversations that are held today that is where advisers believe their value proposition resides but in the US advisers have been outsourcing that investment advice piece and saying [to clients] it is more important for me to work out your asset allocation rather than where it is going to,” he said.

Selvarajah believes that this type of shift in service provision is likely to give rise to improvements for advisers, not least in lessening the regulatory compliance load because the back-end had been automated and taken care of.

SO, WHAT IS THE ROLE OF THE DEALER GROUP?

Not unlike Harding-Davis and Rowe, Selvarajah recognises that because of factors such as the Financial Adviser Standards and Ethics Authority (FASEA) regime, the ending of grandfathered commissions and the eventual individual registration of advisers, the dealer group model has to change.

However, he sees it evolving from an adviser-focused model to a client-focused model.

“Today the dealer group is very much focused on the adviser as a client but I am wondering whether the better dealer groups will recognise the need to target the client and therefore flip their business model to become the client advocate,” Selvarajah said.

He said this would be in the context of monitoring the client’s adviser to ensure that they were delivering in meeting the client’s objectives.

While he sees significant change coming to the dealer group model, Harding-Davis believes that the transition will occur between now and 2024 when the full implementation of the FASEA regime will have occurred and when financial planners will be minimum degree-qualified, individually registered to practice and be members of a code-monitoring body.

Harding-Davis said that when this occurred the nature of the relationship between advisers and licensees would need to change simply because the licensee would not need to be seen to be ‘authorising’ and adviser in the same context as they do today.

He said the relationship was more likely to be that of the dealer group servicing model within which the advisers joined dealer groups for the purposes of practice management and service provision, rather than an authority to practice.

Selvarajah agreed with this analysis, but said it was not inconsistent with the model which had evolved in the US.

Association of Financial Advisers (AFA) chief executive, Phil Kewin, said he expected licensees would continue to play a role, but the extent of that role would depend on how code-monitoring and licensing played out.

He said, however, that there would need to be someone who provided the ‘aggregation of support’ that was currently being provided by licensees but we might see new models arising where some smaller licensees could provide the same arrangements.

Some key players are not waiting for the situation to evolve and have already set up structures to accommodate the changed environment, not least ClearView with the launch of its LaVista Licensee solutions – an entity intended to deliver back-office infrastructure and support for self-licensed advisers.

According to LaVista chief executive, Mike Pope, self-licensed firms have recognised the mounting costs of regulation and opted to pursue an outsourced solution.

The pragmatism which underscored the CountPlus acquisition of Count Financial was reflected in the fact that it was predicated on the belief that dealer group services were expensive and that, ultimately, some member firms might vote with their feet.

The consultants’ report utilised by Rowe at the extraordinary general meeting which approved the acquisition of Count Financial baldly state:

“It is expected that there will be a repricing of licensor services in the market generally. As a result of the envisaged market re-pricing, there is a risk that Count’s member firms may terminate their arrangements with Count if they do not support the new pricing model.”

Self-licensing – viable or problematic?

In a post-2024 world in which all still-practicing advisers are degree-qualified, registered and members of a code-monitoring body, why should they remain under the umbrella of a dealer group?

According to both Rowe and Harding-Davis, the reason is simple – economics.

While both they and Selvarajah support self-licensing, they argue that the Australian regulatory environment makes it not something which should be entered into lightly, particularly in circumstances where the Australian Securities and Investments Commission (ASIC) has signalled its intention to remain animated with respect to financial advice.

Harding-Davis said that even putting the regulatory/administrative burden to one side there was the question of obtaining and maintaining professional indemnity (PI) insurance – something which was becoming increasingly challenging.

“There are potentially many hours entailed in ensuring you are compliant and the question is whether advisers can afford to reduce their face-time with clients to undertake that task,” he said.

However, for advisers considering self-licensing the economics can be attractive when they weigh up the costs associated with dealer group membership which can run from around $85,000 a year to over $150,000 a year when factors such as PI insurance, planning software and investment research are taken into account.

The consensus view is that self-licensing will continue to be a factor but that its rate of growth amongst advisers is likely to be determined by a range of factors, not least of which being the ability to access affordable PI cover.