Independents' day to get more pie?

Independent financial planners have had it too good for too long and their success has not gone unnoticed. While most are yet to feel the pinch, cashed-up challengers are whisking business away from under their noses. And this book of business should not be sneezed at.

By Peeyush Gupta

Independent financial planners have had it too good for too long and their success has not gone unnoticed. While most are yet to feel the pinch, cashed-up challengers are whisking business away from under their noses. And this book of business should not be sneezed at.

Leading the charge is the banks. Most of the large banks have decided that financial planning is a good business to be in. And, despite image problems, they are tightening their grip on the industry.

In 1995, the inflow of funds into managed investments was essentially split three ways: one-third to banks; one-third to fund managers like BT and Lend Lease, through independent financial planners; and one-third to life offices. While the size of the pie has increased rapidly since then, the banks have been taking a bigger slice, as the tables below illustrate.

A few quick sums show how the equation has changed. Retail funds inflow to the top ten managers increased from about $1.8 billion to $12.5 billion between 1995 and 1999. But the banks’ share of this jumped from 15 to 53 per cent. If the trend contin-ues, it won’t be too long before independents hold less than 10 per cent market share. In other words, the viability of many planners is at stake, especially those who are un-able to fund the research and development essential for growth.

This sea change in the distribution of financial services has not fully caught the atten-tion of independent planners, who have long discounted the banks’ attempts to set up investment advice chains. However, as the evidence clearly shows, the banks are get-ting their act together.

Further, the traditional bank approach of offering only in-house product is also changing. Bank clients now gain access to a range of investment managers through master trusts. As many bank-based advisers are offering unfettered advice and rec-ommendations, independent planners may lose their critical point of differentiation - independence.

At the same time, another serious competitor has entered the fray - the superannuation fund. Super funds have twigged that, just because a person leaves a company, it does not necessarily follow that they have to leave the fund. So they are marketing aggres-sively, spending big bucks to keep their members. As a result, the supply of lump sums is drying up.

So why aren’t financial planners already feeling the squeeze?

First, the logical explanation. We’re in the ninth year of a boom. Portfolios have gen-erally performed stronger than history suggests we have any right to expect. People have money in their pockets and, when demand is strong, just as in any business, con-sumers are less price-sensitive.

Second, the psychological explanation. If it ain’t broke, don’t fix it. The pie has been getting bigger as fund inflows continue to increase. Who wants to believe that the good times will not roll on forever?

As the supply of funds becomes tighter, however, prices will come under the spot-light. Firstly, the price financial planners charge for their services will face consumer pressure, while the price of acquiring new clients is likely to increase. The banks have a big advantage here with their lower cost structures, massive marketing budgets and the clout of national brands.

So is this the end for independent planners?

The challenges for the independent are substantial, but there are also solutions. To take advantage of them, however, independent planners need to get smarter. While dealer groups provide some support, they do little to head off the threats because they do not help planners run stronger, more efficient businesses.

Strategic alliances between independent planners offer a more profitable alternative through the sharing of costs, intellectual capital, business processes and joint market-ing and business development strategies.

Costs can be shared on more than support materials. They can also go toward assist-ing advisers to develop competitive businesses that deliver sound, reliable outcomes for clients. Rather than wasting time putting out fires caused by inferior business pro-cesses, planners have more time to concentrate on what’s important - retaining exist-ing clients and getting new money in the door.

After all, not everyone wants to put their life savings with a bank … but they still need a damn good reason not to.

Biggest winners of new funds — retail

Year to 30 June 1995

Top 10 Managers Net Inflow ($m)

BT 617

Lend Lease 271

Westpac 269

Citicorp 192

Ipac 132

Perpetual 86

Norwich 78

First State 75

GT Management 59

JB Were 67

Biggest winners of new funds — retail

Year to 30 June 1998

Top 10 Managers Net Inflow ($m)

Commonwealth 2619

Westpac 2047

Mercantile Mutual 1483

BT 1439

AMP 1309

NAB 1015

ANZ 876

Lend Lease 809

ipac 586

Rothschild 300

Source: ASSIRT