Point of view: Strong future for small licensees

Recent ‘Point of View’ comments on the future of ‘networks’ by Ray Miles and Paul Brown (MM September 9, August 26) raise some interesting challenges and concerns for institutional networks.

Having had a hand in the design and running of similar businesses, I have for some time been concerned about the fundamental flaws in this kind of structure. While I agree with Ray and Paul about the challenges, I feel their responses need more consideration.

The personal financial planning industry is still going through major realignments in business relationships. Many of the original networks are now actively disintegrating and the remnants are becoming institutionalised. By and large, the planners who were the backbone of these businesses — and especially the newer ones — do not share in the value they added as part of a growing network and are now also rapidly losing their independence.

A couple of years ago, most forecasters were saying there would only be a few institutionalised networks surviving along with a residue of practices disparagingly dismissed as ‘cottage industry’ businesses. This was a seductively easy assessment to make — and one that is (not surprisingly) endorsed by the institutions themselves. Many of the reasons given by Ray Miles for this happening are repeatedly quoted by others as ‘logical’ — economy of scale, regulatory pressure, the advent of ‘efficient’ customer relationship management systems enabling institutions to personalise their offers and so on.

This thinking under-estimates the attitude of consumers to institutions. Most people have little respect for financial institutions and typically only suffer them to provide transactional services.

Given the opportunity, they prefer to get financial advice from an adviser recommended by someone the consumer trusts (family, friends and so on). An obvious flaw in the institutional model is the lack of personal attention and commitment by their planners who are not ‘owners’ of their business and are constrained from acting naturally and independently. This basic flaw gives rise to the cultural issues highlighted by Paul.

Ray Miles justifiably warns of the demise of medium-sized Australian financial services licensees with representatives in different sites. They will struggle to protect their brand and are likely to be less competitive because of lower scale leverage.

However, neither commentator seems to have fully appreciated the essential ingredients that will make communities of single office licensees very competitive, able to offer individually customised services, able to maximise the value in their privately owned business and be good places to work in.

Smaller, independently managed and owned planning businesses are clearly in the box seat to establish trusted client relationships. However, they must be cost competitive against the industrialised planning processes of the institutions, and will increasingly need to position their business against the strong branding efforts of the big players. Both are achievable.

The successful independently managed and owned planning business of the future will be focused on six critical success factors:

n Business relationships that enable sharing economies of scale with like-minded independent businesses through carefully constructed networking that adds the network value to that of the individual practice;

n A highly industrialised and constantly improving business platform that integrates planning, transaction, management and review. These platforms, based on modern software both front and back, are now available to small practices as well as large networks. Small business will typically adapt much more quickly to these developments, whereas institutional networks cannot easily keep up with the pace of change;

n Carefully developed market positioning for their preferred clients;

n A strong focus on excellent client communications to ensure clients are properly informed and own the planning decisions. As well as responding to client needs, this focus is increasingly essential for good professional indemnity insurance outcomes;

n Well integrated staffing and office systems, with a maximum of electronic storage. The paperless office is already a reality for progressive small businesses and is within reach of them all; and

n Business plans that focus on sustainable growth underpinned by explicit succession strategies to release the full value of the business.

The favoured financial planning businesses will be autonomous, independent businesses with all the above characteristics.

They will be highly cost competitive through access to the same scale benefits as the large institutional businesses with which they will be competing.

They will willingly share their business experiences and will have the high capacity for innovation that characterises small businesses. Their winning edge will be their rapid adaptability and their willingness (and ability) to give value to clients in their chosen market segment and to release the full value of the business to its owners down the track.

David Williams is general manager of Diversified Portfolio Managers, which is majority owned by independent financial planning licensees. He was previously a director of RetireInvest and chief executive of Bridges.