Integration is a win for all stakeholders

The client, a middle-aged man with a family and small mortgage, was still hopeful of retiring within 10 years.

He explained his financial details and then burst out: "I simply don't have the time to study all the options. As soon as I think I understand how to structure my finances, they change the rules and I have to start all over again."

This is typical of the kind of cry for help that we in financial planning receive every day. Our clients face greater levels of complexity than ever and they are confused and uncertain.

What they seek is leadership in their financial lives, and that's the challenge facing us in financial planning.

As such, our industry has developed three basic delivery models:

- the independent contractor who pays for the services of a large dealer group (the most common model at present);

- the tied employees of large institutions (already very strong with the banks' network of planners); and

- technology-based operators who will deliver financial products directly.

But now a fourth way is developing - the shareholder/employee in a multi-disciplined service provider, also known as the integration model, as distinct from the consolidator model, though the two are similar on the surface.

The difference is that the integrator seeks to have the same services, products and systems running out of each planning practice, as well as bringing together the skills, client bases and expertise from each practice. In essence, it is a dealer group model owned by the planners as shareholders and not a publicly listed vehicle.

The integration model is the service delivery that will build the better brand equity in a marketplace chock-full of clients in desperate need of leadership.

Only the integration model can deliver a win for all the stakeholders:

- Clients receive holistic, team-developed advice (financial leadership).

- Advisers gain better lifestyles and improved margins.

- Shareholders gain greater value from their ownership of their dealer groups.

The explosion of information available to clients has been breathtaking. The processing and storage power of today's technology has led to a plethora of online information services, which clients find readily accessible. Newspapers and industry specific magazines magnify the quality and volume of quantitative analysis.

When this new wave of information became available in the 1990s, clients began to confuse information with knowledge and many implemented their own investment programs.

Most have now discovered that quality information is useless without the skills to interpret it, and dangerous if plans are implemented without the discipline that professional planners bring to the equation.

As a result, many of these do-it-yourself style clients are now returning to planners and fully accepting high fees for the privilege and security of financial leadership.

What is true of financial planning tactics and strategy is equally true of the legislative framework.

The raft of legislative changes in the savings and taxation policies has seen many clients unable to cope. What we have also witnessed is a disturbing number of planners with insufficient knowledge of this framework to effectively service their clients. For verification, one needs only to consider the many so-called tax-effective schemes struck out by the Australian Taxation Office (ATO), or to log on to the Australian Securities and Investments Commission’s (ASIC) Web site.

Yet Australia is sitting on a social welfare time bomb. In 30 years we will not have enough employees to pay for our unemployed and retired. Dramatic change will be needed to implement effective savings policies.

Those planners able to provide client access to technical expertise when legislation changes as it must, and soon, will enhance their relationship. Those who cannot will lose clients.

Back to the information overload: It is impossible these days for any individual to maintain perfect technical knowledge of both legislation and the financial markets. It cannot be done.

The logical corollary is that the days of clients receiving their financial planning advice from the one source are over. Only the pooled knowledge of the financial planning team can deliver client leadership and security.

In a multi-disciplined office, clients receive specialist advice in tax, estate planning, investment, social security and attendant matters.

As sole practitioners, we would always struggle with this holistic approach. Sure, we would outsource the advice, but that meant more cost to the client and generally less margin to each adviser.

Control of the client's experience was also diminished and client loyalty could only be maintained if a senior person, usually the key adviser, managed the process.

In today's multi-disciplined office, the service delivery can be packaged. This packaging provides the client with more manageable expectations in terms of what he/she receives for fees. But it also allows the dealer group to build a systemised approach to service delivery that improves margins, reduces compliance risk, and allows the leverage of staff.

The fourth way is proof at last that the planning industry has emerged from its days as a cottage industry where the planner did most of the work.

In the cottage industry, the planner is a combination of salesmen and technician. Few are managers. They do not leverage their staff, and when their client base grows beyond their personal capacity, they reduce their margins by bringing in another planner who is just as bad at delegation.

What you end up with is a bunch of high-priced people spending the bulk of their time doing low-priced work, thus reducing the satisfaction levels of both planners and clients.

At the heart of the integrated model is the team. Clients understand their administrative needs can be solved by an administrative person. They receive more satisfaction and confidence from dealing with a team than with dealing with an individual.

This naturally helps the dealer group better maintain the goodwill of the client at a brand level. Dealer groups are thus better able to build brand equity.

The integrator model offers staff improved job security and margins, and brighter prospects for career advancement. Greater distribution obviously enables dealers to have more leverage with product providers. It is a simple fact of life that fund managers offer better margins to dealer groups with higher volumes.

The independent proper authority holder was generally not receiving the benefit of this extra margin as it was captured at the dealer level and not passed on.

Most dealer groups now own their own product (master fund, wrap account etc). However the independent proper authority holder, despite building the value of the fund, gains none of these ownership benefits.

With the integrator model the employee/shareholder now usually has full ownership of the product, with all the benefits of the transfer of its value.

The traditional planner or accountant would receive endless visits from salesmen. Technology providers, training providers, research providers all have their gaggle of door-to-door salesman.

Sometimes dealer groups would use their buying power to purchase services which they would then roll out across their group. These were usually deals which actually benefited the dealer more than the proper authority holder.

With the integration model providers have to deal at a central level with companies with much greater buying power, and therefore able to reduce costs and provide enormous benefits to shareholder/employees.

But what of the results?

So far, very mixed. Of the three which tried to run this model one has failed, one has been a successful consolidator and one has been a consolidator but is now trying to be an integrator.

The challenges they have faced have not been well handled to date and one must accept that the integration model poses strong management challenges.

Clients need to be educated on how the model can benefit them in terms of service and value. They need to be walked through packaged services and the team-based approach to problem-solving.

We find that once they understand the benefits their sense of loyalty is enhanced, resulting in growth in brand equity.

Staff needs to be taught to delegate and to build confidence in the teams of which they are part. When they can clearly see the benefits of team-based service and packaged delivery they have no problem in explaining the benefits to clients.

Product suppliers need to move their mindset away from dealing with the individual adviser to dealing with central control of integrators. We have found this to be one of the most difficult challenges to date. Fund managers have obviously found it more comfortable dealing with individual planners than they have with the strength of integrators.

To a large extent it is up to those in the integration model of service delivery to impress upon the fund managers the compelling logic of the fourth way.

Ross Anderson is Managing Director of Investment Taxation Specialists.