Facing up to the challenges of rural financial planning

The financial planning industry is in a state of flux – although arguably, regional planners have it a bit tougher in some areas, such as succession planning, financing and adapting to the FOFA reforms, writes Caroline Munro.

One of the greatest advantages regional planners have over their city counterparts is their closeness with the community. While the industry as a whole grapples with winning back consumer trust, planners in regional areas are really at grassroots, and often enjoy stronger client relationships.

Chief executive of the Association of Financial Advisers (AFA), Richard Klipin, says the adviser/client relationship is a more intimate experience because the adviser tends to be part of the fabric of the community.

As a regional planner, you “live and breathe in the community”, says Greg Schmidt, principal of Regional Financial Planning in Rockhampton, Queensland.

“It’s nothing against city planners,” he adds, “but if you live in the city you probably lose that sense of community. The care factor may be higher if you live in a smaller community as you have to meet clients head-on and have no regrets.”

However, there is a downside to this closeness, Schmidt admits.

“I would like to specialise, but the stronger the relationship with the client, the more things they want you to deal with.”

Being a generalist practitioner has other implications on the business, which may make it difficult to adapt in a FOFA world. 

FOFA

Both tranches of FOFA have been announced, yet the AFA has vowed to keep fighting against key elements of the reforms. Klipin feels that the impact of FOFA is likely to be more pronounced in the regions, particularly when it comes to opt-in and the pricing issues that the reforms create.

“By their nature, regional advisers are general practitioners, seeing both high value and low value clients,” he explains. “What FOFA will drive is the increase in the cost of advice, impacting the affordability of advice in middle and lower middle income Australia.”

David Harris, principal of Regional Financial Solutions in Guyra, New South Wales, is not against regulation – as long as it is implemented in the right way.

“We need to get some integrity back into the industry and take the short-term view out,” he says. “Regulation is required, but the way that FOFA is going, it will not do that. It is just going to shift the balance away from the clients and into different profit areas.”

Sandy Hopps of Strategic Partners in Toowoomba, Queensland, says every adviser is concerned about the administrative burden of FOFA.

“We’re predominantly a fee-for-service practice anyway, and most of our clients are used to it being hands on,” she says. However, for those C and D clients that are less active there is likely to be an increased administration burden, she adds.

Fees are a difficult proposition for people in the regions as they tend to be more price sensitive, Hopps said, adding that her business was unlikely to receive the same level of fees as city financial planners.

Harris says his business will be able to adapt to the reforms, although it will be more expensive to look after clients and will therefore push up fees.

“The concern for us in a regional area is that we provide advice to everybody, including people that don’t have a lot of money,” he explains. “I’m worried that they will end up going to the non-advised union sector. While they may get a reasonable product, they won’t get the same quality of advice.”

If FOFA comes in as it has been drafted, Harris will reduce the number of clients his business can service more thoroughly.

Concerned about the impact of FOFA on their businesses, regional planners are looking to their local government representatives. Klipin says they have no less of a voice than their city counterparts.

“There are specific nuances around advisers in the regions, and that’s a conversation we’ve had regularly with both the Government and Opposition,” he says. 

He notes that a number of independents represent the regions, including Rob Oakeshott in Port Macquarie and Tony Windsor in Tamworth.

“I don’t think regional based advisers are being disenfranchised, but certainly at a political level it is important to outline and explain the nuances and differences, because the community that Rob Oakeshott represents is a very different community to what Bill Shorten represents.”

Selling up

With a bit more clarity on the direction of FOFA, more businesses are starting to come to market, although Alan Kenyon of mergers and acquisitions specialists Kenyon Partners states that supply is still not meeting demand. He says business owners who were preparing to sell in the lead up to the global financial crisis (GFC) and consequently held off their plans may now feel that it is time to come back to market.

Yet those financial advisers frustrated with an increasing compliance burden are also looking to leave, he adds.

Schmidt agrees that more businesses are coming onto the market as a result of an aging adviser demographic. However, he adds that more feel that FOFA will make it too hard to do business.

“I know advisers who are probably five years away from retirement, but have basically brought that forward due to current market conditions, FOFA, and constant regulation of the industry,” says Schmidt.

But it will not be an easy sell, as prices are under pressure and buyers are scrutinising businesses. Kenyon notes that, in general, pricing has become more complicated as buyers analyse closely the sources of revenue and refuse to go anywhere near toxic assets, high levels of gearing, and exotic investments or strategies. Prices are also down as a result of different multiples being applied to different revenue sources, he adds. 

Harris recently sold one of his practices, yet notes that buyers are concerned about FOFA and are steering clear of practices with a large number of clients. This may be worrying for regional practices with a large and diverse client base.

“Under the new FOFA rules, it will be very difficult to service a large number of clients to the level that is required by the rules,” Harris says, adding that even institutions are less interested in ‘C’ and ‘D’ clients.

The succession planning concerns of regional planners, exacerbated by a skills shortage, are well known. So what of the traditional plan of passing on the business through the family? Financial Planning Association (FPA) general manager for professionalism, Deen Sanders, says even this avenue is under threat.

“We have heard from a number of experienced financial planners that while things are volatile, they don’t necessarily want their children to follow in their footsteps,” he says, adding they don’t have the same confidence in business models.

Dealer groups are well aware of the succession planning challenges all advisers face, and are addressing this area as part of their own value proposition. Getting advisers to move into the regional areas is part of AMP’s recruitment strategy, says AMP Financial Planning managing director Michael Guggenheimer. He adds that the group also has a facility to connect buyers and sellers.

ANZ Wealth recently announced an online facility for advisers looking to buy or sell a practice.

“When you have close to 2,000 planners in your network, the mergers and acquisitions activity should be able to make a compelling competitive advantage,” says ANZ general manager advice and distribution, Paul Barrett.

Kenyon says some advisers can look to the regional peculiarities of their business models. In Queensland, for example, it is common for an adviser to work out of multiple locations.

“More up-and-coming businesses that choose to be in a regional area will look at having multiple locations,” he says. “Part of the solution for succession planning there, will be to make the business highly attractive to someone whose own business is a three-hour drive away.”

Financing

While planners have the appetite for buying practices or committing to growth, do they have the actual means to do so?

Regional practices are not viewed any differently from city practices when it comes to lending criteria, says NAB Financial Planner Banking national manager, Shane Kirsch.

“Our risk assessment is exactly the same. We focus on the exact same fundamentals, being the key risks in that business and its ability to service a level of debt.”

Kirsch acknowledges the general complaints that financing became a bit more difficult post-GFC, but he says from NAB’s perspective, underwriting standards and policies have not changed.

The only difference for banks now is they need to ensure they understand the business fully, and may ask more questions around the type of business, the sustainability of its revenue streams, and how it can support the debt, says Kirsch.

He adds that FOFA and changing business models may mean that all financial planners will have to work a bit harder in communicating what changes they will have to make in their businesses.

Kenyon says banks are not as focused on numbers as they are on the business’ chances of success. Lenders are also looking closely at the critical issues in a planner’s geographical area of business, Kenyon adds – for example, whether it is supported by a large industry and the possibility of it closing down. 

Klipin says that by their nature of business, regional planners may have additional challenges in getting a loan. Because regional planners’ client bases tend to be a lot wider, the revenue per client will often have different market economics to practices in the cities, he explains.

“It impacts on all business profitability indicators, because on the one hand the adviser may be dealing with Centrelink clients, and then on the other hand they will be dealing with local small business operators, and then they will do everything in between. So the sustainability of income and clients is a whole lot more variable in the regions.”

Regardless of the issues, finance is most successful when the planner works with a lender that understands the industry, Kenyon says.

“Unfortunately, there are not too many specialist bankers in regional areas,” he notes.

Sanders argues that lenders generally have a lack of understanding around the complexities of a financial planning business, regardless of where it is situated. Klipin disagrees.

While he acknowledges that most specialist lending teams are in the capital cities, he says the good banks take the time to understand the nuances and differences inside the client base.

“Regional advisers are not disadvantaged, but it’s important for them to understand what the banks are looking for in terms of their risk management criteria,” Klipin says.

Well-structured proposals are the key in any business, according to Kenyon.

“You need to demonstrate, give them the information, and give them the chance to say yes. More importantly, you need to think through what you are going to do to be successful.”

Sanders says while lending criteria is tightening in different areas, it is encouraging to see a changing competitive dynamic.

“A number of institutions have been quite public about being open for business,” he says. “It is reasonable to expect that regional practices may have a bit more explaining to do to educate lenders about their business models.”

Hopps says her business is looking to acquire a practice, and she felt that the lender was not asking more of her than they would a city planner. But she is concerned about the downward pressure on valuations since FOFA came out.

“If we are working on a multiple revenue basis, regional practices are worth slightly less than city practices,” she says. “That has to come into the financing equation at some point.”

Harris felt quite positive about financing, noting that while CBA pulled out, ANZ has come back to the market.

“From a finance perspective, it is not too bad at the moment because it is going to be based on EBIT rather than multiples of recurring revenue,” he says, adding that it will be a more business-orientated way of looking at the practice.

Barrett notes that ANZ’s lending criteria is developed to support regional practices, however, it is becoming increasingly important for dealer groups to support all their advisers, he adds.

“The challenge for licensees, particularly in a FOFA world, is to make sure that they are building compelling offerings for their advisers. We are trying to address the issues, which for all planners are opt-in, succession planning, and access to funding. There’s no doubt that in a FOFA world not only do advisers find themselves having to work that little bit harder, so too do the licensees,” Barrett says.

Support services

Planners are under pressure and are looking to their sources of support, whether that be their associations or dealer groups. The FPA has noted an increase in enquiries from regional planners for its services.

Hopps has clients across Australia and says, like everyone else, she is fearful that FOFA will increase operating costs.

“We think we know what some of the reforms are going to look like, but there are some things that haven’t been ironed out yet.”

Schmidt says it is difficult to know how FOFA will impact on financial planning practices, although his business was already putting in new systems and processes, and improving its overall value proposition before the regulators decided to step in.

“The problem is that some businesses can’t afford those additional resources and hours. You have single adviser practices, with one adviser and one support staff, and it’s quite difficult for them to introduce measures that regulations expect them to meet.”

Schmidt’s practice is licensed by the Garvan Financial Planning dealer group, and he says that being part of a strong group has helped his business adapt to change. He says Garvan has increased support services in recent years as its focus shifted from product.

“But it goes back to the size of your practice and the resources you’ve introduced to make your business more efficient,” he adds. “For any adviser, there are three important issues to get right to meet any challenges the industry throws up: efficient processes and systems, good staff and an innovative and supportive licensee.”

Harris agrees that more advisers under pressure will look to the bigger dealer groups for support.

AMP has also recognised the importance of supporting regional planners. Guggenheimer says as part of its growth plan AMP has decided to locate infield support in regional areas.

Barrett says another way groups will demonstrate their value proposition is by enhancing efficiencies through improved technology.

“We are looking closely at the relationship between the financial planning software and product systems that financial planners use to ensure that wherever possible it is as integrated as it can possibly be,” he says.

He adds that paraplanning, research, and compliance services are also areas that need to be reviewed to ensure that advisers experiencing margin pressure can be as successful as possible.

ANZ Wealth also recently announced a phone-based adviser service, which Barrett says will be particularly helpful for regional planners struggling with operating costs, and those keen to provide holistic as well as limited advice.

Education is another area that most dealer groups are investing in, and online capabilities are removing the travelling, cost, and time constraints for regional planners.

“The advent of online technology means that it is a whole lot easier in terms of getting information,” says Klipin. “While it is difficult to get the right people, training is very accessible.”

It is not just the dealer groups looking to up their services in regional areas. Kirsch says NAB’s model supports regional practices, in that accredited bankers are dotted all over Australia.

“Ours is a localised distribution model, in that we have specialist bankers in regional areas to support advisers,” he says. “And we are actually growing our distribution and putting bankers in more regional locations.”

PI Insurance

Concerns around the cost of professional indemnity (PI) insurance can be found across the financial planning industry, although this may be yet another pressure for regional planners with smaller practices. 

The FPA has for some time complained about the lack of competition in the sector and the cost of premiums. Yet an increase in claims post-GFC has only exacerbated the situation.

Sanders says regional planners may be particularly impacted because the size and nature of the business may affect the affordability of PI insurance. He feels that the PI industry does not understand the dynamics of regional businesses, asserting that in other professional fields there may be discounts for regional practitioners less likely to be exposed to corporate scandal that one might see in the metro areas.

“I think that is understood in some markets, but not in the financial planning market; and I think certainly regional planners are probably disadvantaged by many of their service providers that have a lack of understanding about the different business models or environments that they work in,” says Sanders.

For now, it seems that all planners are paying for the misdemeanours of a few bad apples. Vero head of casualty Alex Green says they still receive up to 100 claims a month. 

“I accept that there are individuals that feel they are unfairly paying for others’ faults,” he says. “We have been trying to constrain the level of increases, but overall, premiums are still well under claims costs at the moment. It is actually costing us to insure financial planners, which is why premiums are going up and will continue to do so until they reach a stable level.”

Green says regional practices are not viewed differently to their city counterparts. And although he recognises that there are some differences, ultimately, he does not think regional practices have much lower risk than planners in other areas.

“But we’re always open to understanding the risk as well as we can, and for a small practice which is owner-run and has a good track record through the GFC, we will definitely look on them more favourably,” says Green. “They deserve to be treated separately.”