Broking and private clients - threat or opportunity for planners

The advent of on-line share trading appears to have been a harsh wake up call for stockbrokers. Zilla Efrat examines whether the Internet poses a threat to, or an opportunity for, financial planners.

The advent of on-line share trading appears to have been a harsh wake up call for stockbrokers. Zilla Efrat examines whether the Internet poses a threat to, or an opportunity for, financial planners.

Are financial planners about to become a thing of the past, replaced by Cyberplanners who can do their jobs faster, at any time of night or day - and at a fraction of the cost?

Already in the United States, there is an Internet site, called IS-Network, which is able to provide asset allocation, portfolio model-ling, portfolio rebalancing and investment recommendations. Another site, the Financial Engines Investment Advisor, can assess investment risk, model financial solutions, recommend investments and create customised products.

The pundits believe that these are just the beginning. And, they say, it is only a matter of time before these types of sites arrive here. By all accounts, on-line share trading has snowballed in Australia. There are at least 75,000 people already registered with an ever-growing number of e-brokers. Indeed, it is estimated that e-traders account for about 7 per cent of all trades done on the ASX.

According to Swiss Re Life & Health's Allan Betts, some on-line trad-ers offer a service at a 95 per cent discount to the same service of-fered by large brokerage companies.

"The financial dynamics of brokerage businesses have been changed forever. Time will tell whether agents and financial planners will feel the same impacts," he says.

Insurance and banking products aside, the next step is already under-way - the launch of managed funds and wrap services into cyberspace. Quicken.com.au, for one, provides both of these on-line in Australia, presenting its customers with a detailed portfolio report and at the end of the financial year, a consolidated tax statement. "The ques-tion is not whether technology will affect financial planning, but how extensively it will alter the shape of the industry," says God-frey Penbroke's head of research, Janice Sengupta.

The Internet is fast commoditising information, providing consumers with 24-hour access to a wide array of research and statistics almost instantly and at minimal or no cost.

The newer breed of service providers offer search tools and product comparators and can link directly to the sites of the product manu-facturers.

Betts says these sites replace the intermediary's role as the "holder of knowledge".

"The previous "Black box" and "tyranny of knowledge" is now open and automated solutions to parts, or all of the advisory process are available," he says.

IPAC chief executive officer Peeyush Gupta says the advent of on-line broking is good for financial planners as it is helping them to crys-tallise their role.

"They have to ask whether they are there to provide information, exe-cute transactions or give genuine advice," he says.

Indeed, industry pundits say developments are increasingly widening the gap between transaction business and advice. It is also sharpen-ing the focus on the quality of advice offered and who financial planners consider their customers to be.

Hillross managing director Jonathan Harrison believes the market is currently divided up into three groups: the do-it-yourself investors, those who like to be advised and those that seek confirmation that what they think makes sense.

"Those who do it themselves prefer to organise their own affairs," he says.

"They did it by fax or telephone before. Now they have the Internet as well.

They were typically not big clients of financial planners."

Those who do need advice will continue to seek out advisers and even some of the do-it-yourself investors will need advice at some time, says Count Wealth Accountants managing director Barry Lambert.

For some, the growth in do-it-yourself investors is a symptom of ris-ing markets.

"As long as market rise, newcomers will come in, do it themselves and think: 'This is easy.'," Gupta says.

"Only when markets reverse, will they realise that this is not so easy. Then we will then see a drop in direct share trading and a swing back to advisers by people who initially enjoyed success."

Nonetheless, Betts says: "For the do-it-yourself crowd and those hov-ering on the brink, electronic services will be in demand as they are more open and less complex and they put control firmly in the hands of the investor."

He believes brand will become increasingly important as advisers strive to differentiate their services from those of other advisers and electronic advisers.

The new electronic advisers have one advantage: they do not need a significant amount of capital to run their businesses. As more emerge, Betts expects the overall value equation to be challenged and the cost of advice components to be carefully scrutinised.

The challenge for intermediaries will be to show that the fees they charge represent good value for the services provided.

"This was always going to be the challenge as they shifted away from commissions to fee-for-service, but it will represent a significant hurdle once alternative, low cost solutions appear," Betts says.

Many financial planning groups say they are looking at their own on-line offerings and some have decided that if you can't beat 'em, you had better join 'em.

One trend fast emerging is for financial planning groups to empower their members with their own online share trading facilities. In mid-June, Sanford Securities will launch Virtual Broker, providing finan-cial planners with the full resources of a stockbroker over the net. It will kick off with on-line share trading and will then offer man-aged funds towards the end of the year. Virtual banking products will come later.

Its move follows that of Hartley Poynton, which recently signed up the first two customers - AMP's Hillross financial planning arm and users of the St George's Asgard Master Trust - for its new on-line share trading service.

Hartley Poynton chief executive officer Tim Moore describes the group's offering as "a tiny sliver in the value chain".

Next up will be unit trusts, bonds, term deposits, international shares, tax reports and wrap services. And, financial planners could be using these "this side of Christmas". These moves will enable fi-nancial planners to buy and sell shares while their customers are sitting in front of them. Some groups will allow their clients to trade on-line themselves. Others will use the facility to provide customers with portfolio details over the net. Harrison sees the trend as "just another tool in the kit bag" which will help advisers give comprehensive service, reliably, efficiently, quickly and cheaply.

"Financial planners can use the service as an implementation mecha-nism. It is no different to sending faxes. It is quicker and it is less costly than using a discount broker," he says.

Moore agrees, adding that the tool will free up time for the real re-maining component that the Internet cannot replicate - personal rela-tionships and trust.

Most industry players believe the need for expert advice can only in-crease over time as the world becomes increasingly complex and the volume of information on the net continues to expand.

They expect the overall cake to get larger as the number of both do-it-yourself investors and those looking for advice rises.

"The advisers of the future will be those who learn how to use the new tools - the can't beat 'em, join 'em strategy - or those who learn how to complement the electronic services offered. But clearly, they need to move up the value chain or face extinction," Betts says.

Perhaps the biggest threat to the financial planning industry, how-ever, is that younger people have already displayed an increasing need for independence and are quite comfortable with new technolo-gies.

"By the time these people reach mature ages, independence may be the norm, rather than the exception," Betts says.