Getting back to core business

A potential disadvantage of outsourcing paraplanning is that advisers can come to rely so much on the services of a paraplanning firm that they abdicate their professional responsibilities to it.

The worry for many people in the industry is that financial planners will treat paraplanners from outsourcing firms as technical experts and allow them to actually devise a client strategy rather than merely prepare a Statement of Advice (SOA).

“You certainly don’t want to implement a model where a financial planner starts outsourcing the provisional advice to a paraplanner,” says Tribeca’s chief operating officer John Prowse.

“The financial planner should still be the technical expert and in control of the client strategy, while the paraplanner concentrates on writing and formatting the SOA and performing associated back-office functions.”

The role of outsourcing

Prowse says the role of the outsourced paraplanner is to “ensure the documents comply with all the various laws, and that they are produced in clear English and formatted properly to present as good documents”.

Dominic Kelly, principal of Canberra-based CFBS Financial Planning, which uses the services of an outsourcing firm, says the “very real” risk of financial planners abdicating their responsibilities to paraplanners is the result of the prevailing skills structure of the industry.

“Our industry is rife with financial planners who are good sales people, but are very reliant on their paraplanners to provide the technical knowledge required to devise a client strategy,” Kelly says.

“I can easily see how some financial planners would actually outsource the client strategy to an outsourcing firm, while ostensibly outsourcing the preparation of an SOA.”

Kelly says the “danger involved in a financial planner using someone else’s strategy is that at the end of the day you won’t really understand it yourself, with all the potential consequences that flow from this”.

The key for any good financial planner is to be a “very good communicator, both in their devising of a strategy and in the writing of it, and to have sufficient technical knowledge to put the best possible strategy in place for the client”, he says.

The risk of losing your technical edge, he says, mostly lies where advisers are outsourcing complex plans that require the modelling of up to six or seven different scenarios.

“We make sure we do those plans internally because we can learn so much from them on the technical side.

Getting a second opinion

On the other hand, Kelly thinks it’s important for a paraplanner to offer technical suggestions on the merits of an adviser’s strategy as part of their service.

“It’s great for the quality of a document that we get a second opinion from a paraplanner and, as with an internal paraplanner, you could use them to research areas you haven’t had time to research properly.”

Michael Spurr, chief financial officer and head of Count’s dedicated paraplanning division, says its five paraplanners would “never put anything in a SOA that they did not believe is in the interests of the client”.

Spurr says most advisers using the services of the division, which serves in-house advisers only, are told of this requirement upon submission, a policy which in “most cases so far has served to prevent any instances of conflict” between the two parties.

“Any adviser outsourcing to a paraplanning service has to accept there has to be a bit of give and take between him or her as the adviser and the paraplanner in the outsourcing firm.

“It’s unlikely outsourcing is ever going to satisfy you fully if you’re a perfectionist in the way you like to produce your SOAs, as no plan is going to be written 100 per cent to your expectations.

“You have to be able to say, ‘I’m saving a lot of time and some money here [on the costs of employing a permanent paraplanner], and I have to accept therefore that the output isn’t going to be 100 per cent the way I would have written it myself’.”

The benefits of using a third party

Spurr says the major advantage of outsourcing is that an adviser “receives an independent viewpoint, possibly leading to an alternative strategy, which may end up being better for the client.

“In fact, advisers get three different perspectives on what’s best for the client, including that of the adviser, the paraplanner, and proofreader in the outsourcing firm.”

An independent view offered by the adviser is also “one of quite a few reasons” why Prowse thinks a small to medium financial planning business would want to outsource to a paraplanner.

This is notwithstanding that Tribeca recently strategically divested itself of the paraplanning (and compliance) component of Paraplanning Professionals, which it bought in 2001.

Another reason, according to Prowse, is that “the technical expertise that often comes with the services of a specialised outsourcing firm can contribute materially to an improvement in the quality of the plans”.

He adds: “Presumably, with an outsourced paraplanner, you are dealing with somebody who can apply a lot of quality standards to the actual writing and production of the documents.”

Prowse’s view of the medium-term future of outsourcing is that at least three models will emerge, two involving outsourcing firms, and one employing in-house paraplanners.

“Small outsourcing outfits will run with three or four individual advisers with which its paraplanners are culturally very aligned, and you also would hope there will be careers developing in reasonably specialist paraplanning outsourced organisations.

“The third string of course would be the large organisations, such as dealer groups, that set up a central paraplanning division offering two career paths, one as a paraplanner, and one as a paraplanner leading up to an adviser.”

Alternative investment strategies

Roger Rosentreter, director of Paraplanning Professionals, which has been operating since 1997, says the strength of outsourcing firms lie in identifying potential alternative strategies that an adviser may not be familiar with for a number of reasons, including changed legislation.

“It is our duty to point out to advisers any new technical developments that could impact on the client strategy, precisely because we witness these developments on a regular basis.

“If a strategy suggested by the adviser comes out a little bit different than expected based on the [adviser’s] figures, we will then go back to the adviser to work these concerns through with them.”

Rosentreter says IFP Solutions’ main activities are drafting SOAs and reviewing documents, the latter typically being about “reporting on the client’s portfolio and making some minor heads-up changes” on existing documents. He says the company’s SOAs can reflect fully-fledged plans, including trusts and self-managed super funds, or can be drawn-up specifically for a certain purpose, such as buying insurance or a super rollover.

The review documents are treated as a full SOA for the purposes of pricing if there’s a strategic change initiated by a client, or as an additional SOA if nothing material has changed in the product line up.

Statements of advice

Kelly, meanwhile, who is currently in negotiations to recruit a new outsourcing firm, admits to having “retreated from an intention I had earlier this year to take the outsourcing route in a major way”. He explains: “I have found since then that you spend so much time going back and forth to the paraplanner that for the most part you might as well have written the SOA yourself.”

He added that outsourcing firms “typically have a technical bent but are not that creative, so invariably you get something that is highly technical but doesn’t present very well. It is not uncommon for me to have to spend a good half-hour when a SOA comes back from the paraplanner just trying to understand it myself, never mind giving it to a client.”

The firm’s usual modus operandi is for planners to write up the strategy, which is then attached as an appendix to the SOA, while its office administrative staff type up the SOA itself.

The company does not employ an internal paraplanner and “does not envisage doing so, at least in the immediate term”, Kelly says.

It now outsources only when it is “very busy with a lot of plans or when we have a time-consuming, as opposed to a complex, plan. I do the SOA for the very complex plans myself, because there are five or six different models to work the strategy around.”

He says outsourcing firms are very good for simple plans, where a client is simply placing money or an investment, but points out that if you have enough staff it’s cheaper to do them yourself.

However, he emphasises that he has “no problem” with pricing by outsource firms, which he says is “very good” at an average of about $400 a plan, and $600 for a complex plan.