Industry continues to bury its head

Changes in the market can generate changes in opinions. Tom Collins takes a sweeping look at the multitude of changes facing the financial services industry. He even revisits an earlier opinion.

"The future ain't what it used to be" is the title of a recent article by Harold Evensky. Evensky's article and recent state elections in Australia are making me really think about change and its impact.

Evensky quotes nineteenth century German philosopher Arthur Schopenhauser. "There are three steps in the revelation of any truth: in the first, it is ridiculed; in the second, resisted; in the third, it is considered self-evident."

Evensky then asks where are we? One, two or three?

Politically, I would proffer that we are at one. The major parties are used to sharing 90 per cent of the primary vote. Now that they are receiving about 70 per cent and, as a result, minor parties now have the balance of power in a number of parliaments.

But how are the major parties responding to this? Are they asking why they are getting less votes, what are the electors wanting, is there any way they can change, etc? No, they are ridiculing the minor parties and anyone who votes for them. They are not accepting that there has been change, and that if they want to remain relevant, they too have to change.

At our industry level, I would proffer that we are somewhere between one and two. There are still players in our industry that believe they can continue to prosper as: transaction jockeys; the crafters of bespoke plans; and the operators of cottage practices. And, from these players, we are seeing a mixture of ridicule and resistance to change.

Many of us don't like change. It's disruptive, it takes us out of our comfort zone, its uncertain, and there are always winners and losers - and we can never be sure whether we'll be one of the winners. But change is inevitable! As I have often quoted, Charles Darwin once wrote: "It is not the strongest of the species that survives, nor the most intelligent; it is the one that is most adaptable to change"

Therefore rather than wasting our energies on ridiculing and resisting change, we should be focusing our energies on how our clients and we can partake in the change and benefit from it - being adaptable. But before we can do this, we have to understand what is changing, why it is changing and the rate of change. Just because something is new; is the rage in the USA; or is surrounded by a lot of marketing hype; does not mean is a change we need now or necessarily in Australia.

Two examples of this are WAP and screen scrapping. WAP to date has been a marketing hype, a service without any broad application yet. Screen scrapping is successful in the USA but will not be in Australia. (That's a big statement Tom - especially since you were signalling its emergence some twelve months ago.) I argue this for two reasons.

Firstly, in the USA, until last year, banks were only allowed to operate in one state. There are many states in the USA and many Americans are mobile - and many work in one state and live in another. This meant many Americans had a number of accounts at different banks. Therefore screen scrapping makes sense. However, in Australia, you would be struggling to find many people with accounts at more than one bank.

Secondly, the USA has size. If one per cent of Americans use screen scrapping, that's 2.8 million people. In Australia, one per cent would give you only twice the number that can fit into the MCG.

Which brings me to the Internet. Most focus on change seems to be focused on the Internet. This is reasonable, but possibly it is blinding many of us to the other fundamental changes that are going on in our industry.

Currently, most of the changes going on within the industry are to do with distribution. Institutions are buying up distribution, consolidators are becoming as common as dot coms were last year, new distribution channels are emerging (accountants, stockbrokers, superannuation funds and insurance agents) and many players are experimenting with the Internet. Add to this the overseas players like Merrill Lynch, Charles Schwab, E-Trade and T D Waterhouse. Also more and more fund managers are offering wraps and master trusts.

Why? Because they know that whoever is closest to the client, controls where the money goes. Axiss Australia estimates that at June 2000, assets in managed funds in Australia totalled $590 billion, with the volume doubling over the past five years. Further, Axiss expects average annual growth rates of 10 to 20 per cent over the next ten to fifteen years. Currently, depending on which criteria you use, Australia is the seventh, tenth or eleventh largest managed fund marketplace in the world.

This means that a lot of players with existing large client bases and deep, deep pockets are very serious about being successful about distribution in Australia. Not all will succeed, but the face of distribution will change dramatically over the next few years. These players will buy distribution either through buying intermediaries or via price wars - both are already happening.

And once they buy intermediaries, will they leave current practices alone? No, there is too much at stake - they want efficiencies, they want volume. Is this good or bad? It is neither, it's change. The industry is moving from adolescence to early adulthood and will suffer the pain of this transition. Those that can adapt with this transition (ie grow up) will prosper, and those that can't - no matter how strong or intelligent - will fail.

The Internet is not the cause of the change, it is just one of the tools that will be used by the change agents, especially the new distribution channels. It will be used not only to deliver information and advice to clients, but in many B2B applications, for example fund managers delivering information to advisers. Interestingly, currently, most wrap and master trust operators are fearful of giving clients any or too much Internet access in case they upset advisers. Those operators will rue that fear if they do not overcome it soon.

The other significant change the Internet will facilitate is the delivery of scalable advice. The days of face to face full financial planning advice are numbered. Such advice will be the preserve of the complex and affluent client. Even today the young wealth accumulator cannot afford full advice, and the adviser cannot afford to advise them either. Advice will be delivered by many means and in a variety of forms and at various levels.

I have outlined a sample of the changes besetting this industry at the moment. These, and other changes, even if not successful, are at least disruptive. Those that are successful, Andy Gluck in "Emrace the Change" says "will quickly transform into a competitive threat, dramatically transforming the marketplace and your business".

Final quotes from Evensky, quoting JackWelch of GE: "When the rate of change outside exceeds the rate of change inside, the end is in site."

And quoting from John Bowen: "If you are not a little paranoid as a financial planner your not paying attention."

And for an industry that thrives on conceit: The assumption that tomorrow will look like today +/- a few percentage points! The future ain't what it used to be.