Breaking with the past

Breakaway dealer groups make good newspaper copy. With the same elements of any TV drama — warring factions, disgruntled individuals, secret deals and an occasional bit of mud-slinging it’s not hard to see how financial advisers, whether involved or simply industry bystanders, get caught up in the intrigue.

Last year saw RetireInvest in the spotlight when a rebel group of 22 Victorian RetireInvest planners decided to leave and set up the independent Iris Financial Group, eventually recruiting their former colleagues in Tasmania.

Earlier this year, Deakin Financial Services took centre stage when former founder Murray Hills left to start Platinum Group Financial Services, encouraging all those Deakin advisers based in WA to join him.

These scenarios are not uncommon, nor are they a new phenomenon. On the contrary, the entrepreneurial nature of financial planners means breakaways are endemic to the sector as a whole.

An outgrown relationship

Dealer groups following a rapid growth strategy are most at risk in terms of breakaways. In fact, an active recruitment strategy can ultimately backfire as the group, hindered by time constraints, struggles to offer services to a diverse range of practices.

Even where dealer groups grow more slowly, advisers may leave and set-up on their own because they feel they have “outgrown” the services offered by the dealer group.

Phil Butterworth, chief operating officer at DKN Financial Group, explains: “The practice management may cater for the lowest common denominator. Or it may not cater for the lowest common denominator, but gets averaged out to cater for that as well.

“So the people who are really in growth mode or have significant practices find that the people they deal with, or are paying for through their dealer fees, aren’t equipped to deal with their acquisition or succession strategies.”

George Haramis, general manager of RetireInvest, agrees: “People who break away might say ‘I’ve outgrown the model, and I feel like now’s the time when I want to do my own thing’. Which is fine, and obviously they are small business people and are entrepreneurial, and they are entitled to feel like that, particularly when they reach a stage where they feel their business has grown to a sufficient size, and they want to pursue a course which is different to the dealership.”

Going it alone

According to Allen Harrison, chief executive officer of the Iris Financial Group, the original nine principals who left RetireInvest were “disenfranchised; probably paying too much for what they got, and they were probably a little tired of the over-promising and under-delivering”.

But Harrison adds that, as business owners, the group also felt that they could probably do a better job running their own dealer group, and tailoring the group to the needs of their practices.

Harrison explains: “We think we can do it better. We think we’ve got more flexibility, we’re more nimble; we believe we can improve our overall client offer. We believe we can meet clients’ needs in a more efficient manner by going down the independent model path and selecting a partner like Sealcorp/Asgard.”

Errol Rabaud, formerly general manager at Aurora Financial Services, and now managing director of the recently formed AAA Financial Group, faced a similar choice to the ex-RetireInvest practices. “We were a business in our own right. But we had a parent company that wanted to control that, rather than let us grow our business the way we wanted to.”

While advisers and Rabaud owned 49 per cent of the business, Mawson Securities held the majority of shores with 51 per cent. Since his departure, Rabaud has recruited 40 advisers from Aurora. “Some of the Mawson advisers have come across as well,” Rabaud says.

Retention strategies

Where a practice simply outgrows the services available from the dealer group, it is virtually impossible to institute measures to keep practices on board. Haramis says: “It is disappointing, but you have to be a realist. It’s going to happen at some stage, so you just get on with business and make sure you’ve got all the bases covered.”

But while it is impossible to be all things to all people, Rabaud says there are certain actions that will encourage people to stay. Most important, he says, is transparency. “You’ve got to be transparent, and you’ve got to do what you say you are going to do.

“We’ve only just been going for a month, but at our first conference we issued share certificates to all those who had signed up with us. They became shareholders, and will be registered on the ASIC [Australian Securities and Investment Commission] site as shareholders of the business immediately. I was waiting to do that for two years where I was [Aurora].”

Haramis agrees with the need for transparency, saying: “We’re as transparent as we can be in terms of what we are trying to do and why we are trying to do it. We have reviewed what has happened in the past, and acknowledged what things should have been done, and tried to rectify those.”

Service levels

Recognising that financial planners resent paying for services that their practices don’t need, Butterworth says DKN offers a more tailored fee arrangement, rather than the usual one-size-fits-all. He says: “Our philosophy is that you pay for the basics. Therefore, our costs for being in the dealership is low, but we then work with you to budget any expense items to bring in external people.”

DKN has relationships with third party consultants who can deliver the appropriate practice management expertise, whether this involves human resources solutions, succession planning or acquisitions. Planners get a discount on the consultancy fees, as DKN is effectively buying wholesale services, and there are no charges where services aren’t required.

Butterworth adds: “I don’t want to be harsh, but a lot of people employed by the institutions haven’t run their own businesses before, and they are the ones being trained to give advice to successful practitioners about how to move the business forward. And to have that type of service built into your dealer fee — well, that’s why you outgrow it.”

Dealer to dealer

Despite the attraction of being in charge, running your own dealership requires some serious capital. Haramis says: “What I don’t understand is when planners want to leave a dealership and they have very small businesses — less than say $50 or $100 million — and they want to apply for their own licence.

“Why would you bother, given the licensing requirements, the ASIC requirements, the business risk and the rest of it? I think, rather than do that, they should spend more time with the dealership working out what they need.”

However, the increase in dealer-to-dealer services may enable those smaller groups wishing to run their own licence to do so profitably. For instance, Iris Financial Services has an arrangement with Sealcorp that provides a range of back-office services, including the Asgard platform.

Butterworth says: “I think there’s a great space for dealer-to-dealer services. Some of the institutions have tried to set them up, and been unsuccessful at penetrating because it always came back to product harnessing instead of just offering a professional stand-alone service.

“Those that are stand-alone and offering a professional service will do quite well. We’ve certainly used a few of them.”

Client ownership

Advisers looking for the exit door also need to find out whether their dealer agreement gives them ownership of their clients — after all, it may be difficult to set up your own dealership without an existing customer base.

Most agreements now give advisers ownership automatically, although they may be required to notify clients of their intending move, or give them the option to remain with the dealer. Older agreements may give the adviser no rights to their client base at all.

For the Iris Financial principals, a co-ordinated approach meant their departure from RetireInvest was relatively painless. Harrison explains: “The group had a representative team when they took their proposal to ING/RetireInvest — in terms of what they wanted and how they wanted it. It was quite structured, rather than just a shotgun approach from nine offices going at RetireInvest in different ways.”

Rabaud adds: “I made sure I had a walk-in, walk-out agreement [with Mawson Securities], so I remained in control all the way along. So you had a company that owned 51 per cent of the business, but I owned 95 per cent of the relationships.”