2001: The year of living dangerously

By understanding trends in the industry over the past 12 months, TOM COLLINS believes advisers can be better prepared for the challenges that will face them over the coming year.

For this article I have thought about what trends and themes have been emerging over the last 12 months. There have been a lot of conflicting things going on, a lot of noise, innovation in some areas while in other areas, there has been steadfast, defiant resistance to change.

There has been consolidation, but also there has been fragmentation.

There has been disintermediation, but also there has been reintermediation. Then there is the patronising "Life is Beautiful" set who think the 'Raj' is alive and well!

Not only have we had the banks buying up distribution, but also we have had the emergence of the consolidators. How successful either strategy will be, only time will tell. However, for once, I will back the banks.

They have the customer base, the time, resources and money to make it work. The consolidators have none of these.

I really struggle to understand the business case of the consolidators - unless it is a short-term ramp. For the longer term, I cannot see where they have the resources and money to add value. To accumulate a number of disparate businesses and change them into a cohesive unit where economies of scale can be achieved, whilst retaining and maintaining the enthusiastic support of the original business owners, is more than challenging.

There has already been a court case in Victoria over an employed accountant who left an accounting/financial planning practice that had been sold to one of the consolidators by its principals. He became disillusioned (where was his future?), so he left and took his clients.

This was challenged in the courts, but he won the right to take, and continue to service, his clients.

How long before some of the principals become disillusioned, either by now being on a salary, having less or no control over their business, and watching the consolidator's share price go south?

The other threat to consolidators and the other buyers and aggregators of dealers and advisers, is the emergence of the virtual dealer or practice. There are now service providers that enable a dealer group to outsource almost every back office and support activity.

This was pioneered by Securitor years ago but now you have Lonsdale, ThreeSixty and Investor Web. For stock broking, you can use either Sanfords or Hartley Poynton. For the wrap you can use BT, Macquarie, Perpetual, ASGARD, FlexiPlan, Summit and so forth. Or you can pick discrete providers for compliance, paraplanning, commissions and training amongst others.

The emergence of these providers will encourage advisers to split away from larger groups and boutiques to band together. These providers will also make it easier for new players to enter the industry. So I don't see mass consolidation of distribution, nor do I see a bright future for consolidators - unless they can find a way to add substantial value.

Technology was supposed to lead to disintermediation, but will it?

Intermediated distribution is prospering, whereas direct distribution is patchy.

What is really happening is reintermediation and the smart (and those fearing extinction) players are using technology to make it happen. As I have said in earlier articles, those precious intermediaries who think "Life is Beautiful" are victims of the continuum theory and their own ego. Not only is supply and demand at work, but also the fear of extinction.

One of the interesting players in the industry at the moment is the discount broker, especially with Charles Schwab finally opening for business. The ETrade's and the Com Securities of this world have moved to the direct marketing of managed product with others not far behind.

ETrade is even setting up a wrap. The next move for these players is advice, which will most likely take the form of scalable advice based on Schwab's US model.

Another interesting player is the life agent. I went to the recent AFA (Association

of Financial Advisers) conference and was pleasantly surprised. Yes, some of the old guard was there, but the rest were looking for ways to morph their businesses into the future.

There is a willingness to change, probably born out of fear of extinction. But it appeared to me that most risk writers had woken up to the realities of today and were exploring ways to capitalise on their client bases and selling skills. The enthusiasm at the conference was infectious - something that has been missing from recent FPA conventions.

Both brokers and risk writers - the transaction kings of the past - have realised they have to change or face extinction. They both have client bases, selling skills and supporters with resources. They will become formidable, efficient competitors, the brokers for the high net worth client and the risk writer for the wealth accumulator.

The other competitor for the high net worth client will be the banks.

Once they get their act together, no one will be able to compete with the range and type of services they will be able to deliver. Already, Deutsche Bank and Macquarie Bank have their act together.

For wealth accumulators, the other competitor will be the superannuation fund trustees and administrators. Earlier this year they had a very enlightening conference on superannuation and financial planning.

And once the tax system settles down, accountants will be the natural advisers for SMEs (small to medium enterprises). Where does this leave today's financial planners, who in the main, are retirement planners? It leaves them in a difficult position unless they realise what their real value add is. Their value add is in being holistic, as each of the other players (except the banks) have an expertise in a particular area of financial planning.

They (today's financial planners) have to accept that they either have to lead a multi-disciplined team or be a part of one. (Even investment advising is really a speciality.) They have to stop pretending that they can do all and be all things to all people, because if they don't, they will become exclusively irrelevant.

What is really happening is there is more choice, not only for the consumer, but also for everyone. The fund managers have more distribution channels available to them. Dealer groups can be structured in many different ways. Advisers can choose roles and channels. There are now many ways to be trained and many providers. There is a range of support service and product providers, for example, 21 different providers of software. And wraps and master trusts - soon there will be one for every client!

Also you can pick which association or associations you want to belong to, and which qualifications and designations you want. And, it would be remiss of me not to mention that you now have a choice of industry magazines.

In summary, it has been a confusing year. There even has been some losers, and the trend seems toward more choice, and more and varied competition. Those in the industry that do not understand this will be the losers in the future. As I have quoted previously form Charles Darwin (in short): "It is not the strongest or the most intelligent that survives - it is those that adapt best."