A-grade advice you can privately bank on

Back in December I attended a conference on private banking. There I heard a speaker say the following:

"Global private banking is making financial planning in this country look very second rate…..a financial planning industry that is undercapitalised, under siege and, in many instances, still working with the 1980s' investment advising methodology"

Although I would like to argue with that statement, I cannot.

Look at the history of financial planning in Australia. It had its genesis in regulatory arbitrage and embraced a 'professional' designation conceived to legitimise American-style commission-based product sellers. Today it lives on hand-outs and favours from the fund managers and is now trying very hard to either bury itself under a mountain of paperwork or strangle itself through regulation.

The speakers at the conference see private banking of the future as more than liabilities or asset management, more than just integrated financial services. Instead they see their value in future as being able to access best-of-breed products, seamlessly delivered and with a superior client interface. In many ways they see financial planning as just one of the components of private banking.

So there's the rub: What really is financial planning? Is it the way it's defined by the FPA, or is that just one of its definitions? More importantly, is financial planning just one of the disciplines that help a person establish and achieve their financial goals?

But back to the private banking conference. The topics there could have been straight from an FPA convention. Some examples: "Understanding new market dynamics";

"Accurately assessing clients needs and objectives"; and "Getting it right - specific client requirements". Amongst the issues discussed was defining who was eligible to be a private banking client (one suggested those clients who generate more than $10,000 in fees for the bank) and what to do when someone is no longer eligible to be one.

All speakers identified superior personal service as the key to private client banking, but with the need for some hallmark product that differentiated the service from both competitors and from other arms of the bank. They saw the need for private banking to be global, because of the gradual erosion of both national economic boundaries and of product and service boundaries, but with a local flavour and focus.

The thundering herd?

An example of a group trying to take advantage of all this is Merrill Lynch. Very few financial conferences are held these days - and the private banking conference was no exception - without a Merrill Lynch speaker featured. They speak with a vision and a passion that is backed by a committed organisation that has vast wealth to back it. I'd hate to think, for example, how much money they are spending in Australia to establish their presence.

Merrill Lynch, more than anyone else (with the possible exception of Charles Schwab), have the ability to shake up financial planning in Australia. But unless they can adapt their current model to suit changing times and local conditions I do not believe they will be as successful as they could be.

Whether private banking in Australia, as opposed to global private banking, can deliver a better service is another question. The banks have the money and the resources to deliver.

But will their culture let them?

Most banks now have two distinct distribution channels: one for the delivery of 'standard' financial planning and the other for private banking. These appear to target the lower end and the upper end of the market respectively by delivering a packaged product to the lower and a tailored service to the upper.

And a number of the bank-based fund managers - who strenuously argue that they do not compete with financial planners - are growing their private banking divisions. Some are even offering paraplanners annual salaries of up to $75,000.

The big A

So back to the earlier quote in my first paragraph about a financial planning industry that is: "undercapitalised and under siege". Any argument? How about: "still working with 1980s' 'investment advising' methodology"? Regular readers would know how strongly I agree with this statement.

The private banking conference provided me with more evidence that the financial planning industry is in for a major shake-up, led mostly by the banks and companies like Merrill Lynch. Unfortunately, most financial planning groups are, as the speaker said, either undercapitalised or wedded to the past. Even the current debate about master trusts versus wrap services is more about protecting the status quo than anything else.

Speaking of the status quo, that brings me to the FPA, which seems to be oblivious to the changes swirling around the industry. With its focus very much on education and regulation, it doesn't seem to be able (or want to be able) to address the broader issues of client control and choice. It seems to think the client can have both as long as they go through a financial planner.

The FPA would be better spending its - sorry, our - money sending delegates to the Schwab conference rather than to the IAFF conference. Rather than hearing the same tired old lines from predominantly commission-based product sellers, they would be surrounded instead by more forward-looking, fee-based investment advisers.

At the most recent Schwab conference held in December there was a session entitled: "The Evolution of Advice: The Next Ten Years". It identified three key trends: products remaining commodities, the commoditisation of advice and the essential role of the adviser.

Advice was then divided into "small-a" advice and "big-A" advice. Small-a advice was defined as asset allocation and portfolio optimisation - product selection was not even considered. Big-A advice was identified as providing clients with the knowledge to enable them to make an informed decision. Unfortunately, most planners are still in the rut of providing small-a advice.

Most players in our industry - with the exception of a number of dealer groups - have made very good money since 1994, a point touched on by Bill Healy at the Cairns Convention. But very little is being invested back, probably because those most likely to do so are the dealers.

Unfortunately, most planners maximise their current revenue by not investing in systemising their current business but still believe that business has some enormous value. Recently, however, some 'senior' planners have found to their dismay that potential purchasers want to buy systems, not egos.

There is hope. A number of dealer groups that have recently asked me to help them with their businesses realise, as I'm sure others also do, that they must change the way they do business, the type of advice they provide and the role of their advisers. They are investing in their businesses and, more importantly their people. None see the FPA as the place to turn to for help, or even as the place they should turn to.

What does this say about FPA? Just as financial planners cannot be all things to all people, so I am starting to question whether the FPA can be all things to all people.

It was a lofty ideal and probably made sense when the industry (sorry, profession) was in its infancy. But now I believe there is too much for one organisation to do, and too many areas of conflict.

Tom Collins is a consultant to the retail financial services industry. You can contact him on [email protected]