Extracting real value from badging

In May last year, Tynan Mackenzie launched its own wrap account known as the Personal Financial Service.

It now accounts for more than $800 million in client funds under administration, which is a substantial figure when you consider that it has only been in existence for just over a year. The wrap is a BT-badge and includes superannuation, allocated pension and ordinary money accounts.

The success of the wrap provides an interesting case study on the success financial planning practices can have with badged products, and raises questions on how to extract the value from these vehicles so that the business benefits from such success.

By way of background, Tynan Mackenzie has offices in Wollongong, Melbourne, Sydney and Brisbane, and has increased the number of advisers working for the group.

The growing size and spread of operations around Australia meant the business needed a single set of back-end processes to keep process disciplined and control costs and risk in our business.

The old industry approach of each adviser in a practice choosing their own combination of retail funds from a wide menu of products simply is not logical or viable when one wants to build a professional, ongoing advice business.

For example, the relatively low ‘client-value’ activity to obtain necessary client data to provide an accurate valuation statement absorbs enormous resources, and providing a client with a tax position on their investments is a nightmare.

The main advantage with the wrap is that we are in control of all of the pertinent information about how our business and each adviser and client are travelling. This leaves us in a position to make changes if and when necessary from one Web site.

This includes the valuation of the client’s portfolio each night, the ability to get comprehensive annual tax statements (which our sister company, a registered tax agent, uses to help the client prepare their annual tax return), electronic/Internet access to all transaction reports, and the automatic collection and disclosure to our clients of our advice fees.

Importantly, the single business platform we have built retains flexibility — the wrap platform gives us access to hundreds of mezzanine-level brand name managed funds and all Chess-registered Australian Stock Exchange securities. The super, allocated pension, ordinary money, margin lending and life insurance offerings allow the client to move around but to stay within the platform as their strategy changes through their lifecycle.

Tynan Mackenzie historically has used master fund platforms from other providers and, while they were fine products, they did not allow the business to develop their place in the overall package of services we offer our clients.

Tynan Mackenzie did not make the decision to select a platform provider lightly. In fact, the group spent two years reviewing master funds and wrap accounts before it chose BT as its current provider. Our business supports the findings of the Cerulli Report that there will be massively accelerated change in the cost and scope of wrap services over the next five years.

We have direct legal arrangements with the wrap provider, which requires it to meet pre-agreed detailed service standards. The contract also has regular reviews and breakpoints if the standards are not met or the product falls behind the rest of the market.

We want to be a large client for our service provider because we want them to meet our needs. We choose to work only with established, quality operators for the obvious reason that the risk of their failure of service is our risk from our client’s perspective.

We want our service providers to make a good return on their investment and we want them to succeed in their business strategy. Having been responsible for similar services in the past, I know it is very difficult to make money while continuing the technology investment to stay with the leading services. Wraps need very significant scale to become good investments for their owners. At large scale, like Asgard, they start to spin-off exceptional returns for their shareholders and also offer increased services for clients.

The industry move from retail funds to master funds and wraps is nothing more than a direct transfer of wealth from fund managers to the providers of these services and the advisers that support them.

With a billion dollars in funds under management, our company is able to cut genuine wholesale arrangements. This is critical to ensuring we can give our clients a competitive deal and actually make money ourselves. Our earnings come from adding a margin to the wholesale cost. This also has to fund our internal servicing costs of the typical day to day requests by clients for valuations, transaction queries, withdrawals, changes to details and so on.

There is no doubt funds under management in a wrap-style vehicle produces more shareholder value for an adviser, particularly as the adviser tends to charge a higher service fee than he would have on a retail product.

Wrap accounts have also helped in another overall industry trend, to lower the total cost to clients for investment, administration and advice services. The industry still has some belt-tightening to do over the coming years and the wraps will probably have to absorb a fair piece of the compression.

The other rapidly looming advisory industry issue — succession planning — is also assisted by moving clients into a wrap account.

The person who inherits the practice is faced with a major problem in the complexity involved in taking charge of the business at a time when he/she is likely to be extremely time poor. To the old-hand valuer of a financial planning business, the reduction in complexity and time available from utilisation of the wrap service is a tangible valuation item.

Does the performance of our business reflect the conceptual reasons why we think our business system, including the wrap, adds value?

The feedback we have is the business is a standout in all of the industry advice business benchmarks — revenue by adviser, funds under management by adviser, average client size and so forth.

As a reflection of the opportunity lost in many financial planning businesses, our client-getting advisers last year each generated more than $20 million in brand new client business compared to an industry average of some $3 million per annum.

Our business now has thousands of client families each receiving personal attention. Our retention rate is outstanding. Our client surveys indicate high levels of satisfaction about our services, despite indifferent investment markets in recent times. Our level of referrals is very high, increasing our ability to grow the business. This would not have been possible without the model that we continue to implement and develop.

The badging process allows Tynan Mackenzie to position and price the wrap as a wider integrated set of services, including high quality advice, tax planning, estate planning, ongoing reviews and personal attention.

And our business also thinks we should be investing in developing our businesses’ market awareness and positioning, not that of BT, Asgard, Navigator or so on.

From the clients’ perspective, they expect us to outsource the mechanical elements to quality efficient operators. But beyond that, they simply expect us to deliver great service.

Tony Fenning is the chief executive with boutique planning groupTynan Mackenzie.