2000: The year of the hangover?

Industry pundits believe that planning groups and fund managers could be set for a tough year in 2000, following 1999 buying revelry. Samantha Walker investigates just who’ll come up trumps.

Industry pundits believe that planning groups and fund managers could be set for a tough year in 2000, following 1999 buying revelry. Samantha Walker investigates just who’ll come up trumps.

“I would describe 1999 as the year of planner overconfidence and 2000 as the year the hubris continues,” says industry stalwart Paul Resnik.

Fighting words indeed. Although he is no stranger to controversy, it is also true that Resnik should by now know the apples from the oranges. So what was it about 1999 which left such an impression?

The first thing to note about last year, he says, was the rush for fund managers to buy up new distribution networks. In 1999, mid to large dealer groups continued to be snapped up — including Garrisons by Challenger, Godfrey Pembroke by MLC and The Money Planners by Pacific Rim Investments.

Meanwhile, other groups decided to build up their distribution a different way by buying a stake in a dealer group, such as ANZ did with Protax.

Resnik says this trend will continue into the new year, with bought up dealer groups enjoying the last stages of euphoria over the new deals, an attitude he de-scribes as “naively optimistic”.

It seems that these dealer groups have the best of both worlds: cashed up institu-tions as owners while as well as their operational independence, in most cases. But even though they are currently being left to their own devices, Resnik warns of a hangover setting in in the years to come.

“These early stages are like a honeymoon. That works fine until there’s a problem — it might be a correction, a fraud, product failure or some other trigger — and then the shareholder says ‘it’s my business and I’m seeing values disappearing’,” he says.

The other major player in all of this, Resnik says, is the banks. Already, the indus-try has seen the clout of the big four banks growing. The most recent market share reports of research groups Assirt and Morningstar bear witness to this, with the four major banks all ranked in the top ten retail fund managers by asset size as well as by inflows for the September 1999 quarter.

“The banks will be rampant in the next few years in terms of distribution,” Resnik predicts.

Leo Wassercug from KPI Research says we have not seen the last of the scramble for new distribution networks either.

“(This) year will see continued growth in the financial planning market, and in-creasing acquisitions of dealer groups by financial institutions, even if they are only minority shareholders,” he says.

Part of the growth of the financial planning industry that Wassercug is referring to is coming from the convergence across the financial services industry as a whole. The much hyped entrance of accountants into financial planning certainly seems under way, as the recent Money Management/KPI Research Top 100 dealer group survey showed. According to the survey, one in five financial planners belonging to the top 100 dealer groups across the country are accountants.

This comes as no surprise to the Australian Society of CPA’s (ASCPA) and the In-stitute of Chartered Accountants (ICAA).

The ASCPA’s financial planning spokesperson Brad Pragnell predicts more ac-countants will move into financial planning in the new year.

“Obviously, this trend will continue. I don’t think development has reached its saturation point yet. Accountants should be able to provide more than their market share,” he says.

The ICAA’s Robert MC Brown is willing to go even further. As reported else-where in this edition of Money Management, his bet is on accountants dominating the financial planning industry before the decade is out.

Brown believes that the planning industry is in sore need of accountants to bolster the profession, just as accountants need to move into offering financial planning services in order to remain fully relevant to their clients.

“The accountant replacement process slowly started 20 years ago and is gathering significant pace as institutions desperately look around for anyone half reasonable to act as a distributor for their products and services,” Brown says.

“Perhaps a small and subtle sign of things to come is that there is now serious dis-cussion about the meaning of the letter ‘A’ in the post nominals of both major ac-counting bodies. Does it refer to ‘accountant’ or ‘adviser’?”

However, it is not just the accounting groups who are moving into the planning in-dustry. Stockbroking groups are entering or becoming increasingly prominent in financial planning (Ord Minnett, JB Were, Hartley Poynton and D&D Tolhurst, to name but a few) and, according to Wassercug, will surely be the new focus for the next buying round of the institutions.

Parallel to the scramble for distribution, 1999 saw the real emergence of financial planning co-ops. KPI Research’s Tom Collins argues that more will come of this trend in 2000, “despite the Consolidated Financial Services fiasco”.

“Advisers are perennially complaining that the dealer is taking too much of a split…and that the real money is to be made from running the funds under advice. That’s why you have adviser groups setting up co-ops,” Collins says.

The Financial Planning Association’s (FPA) chief executive officer Michael McKenna also sees financial planning co-ops (or collectives) as a way for smaller dealer groups to increase their clout.

However, not all commentators share the same view. Resnik remains cynical about the financial planning co-operative as a feasible business proposition.

“I guess I would argue that most planners are genetically not capable of managing a dealer group. And if you’re a smart planner, you’ve been sucking the blood out of fund managers and life companies for 10 years,” he says.

“A lot of co-operatives will take many years to get off the ground, and they will hate every minute of it. They’ve jumped into bed with people they don’t know in products they don’t know. At the moment, they’re confident, but it’s overconfi-dence built on accident,” he adds.

The emergence of financial planning co-operatives (AustChoice, Consolidated Fi-nancial Services, Fiducion) comes at a time when many planners are disillusioned with the slice of the cake on offer to them from the business they write for the ma-jor financial services institutions.

However, these institutions are also feeling the brunt of consolidation. In 1999, Royal & SunAlliance bought Tyndall Australia, Tower Financial Services bought FAI Life and AMP finalised its messy acquisition of GIO. More tellingly, US manager the Principal Group bought BT Funds Management.

Many in the industry believe that the recent relaxation of foreign investment rules in Australia will herald the entry of major international fund managers, particularly American managers. This may have a significant impact on management expense ratios (MERs), they say.

According to PricewaterhouseCoopers’ senior partner David Prothero, these larger and leaner foreign managers will be able to offer investors cheaper products with MERs of about 0.5 per cent, almost a third of average Australian MERs.

“The logical response by managers — to rationalise the number of funds — will be hampered by the lack of tax relief on funds rollover from trust to trust. Without that relief, local funds will be more vulnerable to the competitive threat posed by the new entrants unless their MERs are reduced, at the expense of managers’ profit-ability,” he says.

The ASCPA’s Brad Pragnell says the next one to two years will see “a lot of mar-gins under pressure”.

“Foreign fund managers will be pretty stroppy on commissions. Judging from the experience in the United States, fund managers will be looking at their margins closely and reviewing commission rates.”

However, the FPA’s McKenna believes that while Australian fund managers’ MERs will decrease, it will remain a user pay market.

“I think competition and international pressure will drive MERs down a little but there’s only so far they can go. If you wan