Provocateur: The regulator fills the vacuum

Clients are showing their frustration with the financial planning industry by withdrawing their money, reducing the ‘riskiness’ of their portfolios (and lower long-term potential returns) and, in a number of cases, starting legal action.

Dealer groups and fund managers face declining revenue and increasing compliance costs. TheFinancial Planning Association(FPA), theAustralian Securities and Investments Commission(ASIC) and the Australian Competition and Consumer Commission (ACCC) will all have new leaders.

New fund managers, new products and new platforms are continuously begging for attention. In the midst of this mayhem, ASIC has quietly published PS 175 which, in its own way, will utterly transform the way financial planning is conducted in Australia. From now on, process will have to be the dominant theme in conversations about successful, compliant, planning businesses. Here’s why and how.

Control your business

The first activity that you will have to undertake in this new environment is the re-definition of your business. You cannot help your clients control their lives until you put your own business life in order. The process for doing this has four steps:

* Decide where in the ‘service value chain’ you can add the greatest value — you have to live your value proposition!

* Find the clients that you can work with (and eliminate those who are going to mean trouble) in the first meeting or before, if possible, through selective branding. Working with only those who will work with you cuts frustration, time and costs.

* Gain a new and sustainable source of income by doing real financial planning (not product flogging); and

* Put in place the necessary processes to assist your clients to take charge of the things they can control.

Clients take control of their own business

What is it that clients can control? Where can they evaluate options and make decisions?

It may surprise a lot of people who feel they have lost control over their lives that they can regain control and make their goals and dreams happen. To do this, they have to look at their four ‘budgets’, understand the trade-offs and then commit to the allocation decisions they make.

* Despite what many people think, they can control their own time. They can decide the appropriate split of work and leisure, when they can measure the results of these decisions in the coin of meeting long-term goals. They can decide to study more, retire later, take on a second job or ask their partner to work part time. Each will have consequences on their cash flow.

* Despite major concerns about the use of credit cards and other debt, people can decide how to spend their money — how much to use for current spending and how much to put aside for future income needs — and can, with appropriate information and guidance, get out of debt-traps. Good money planning is at the core of real financial planning.

* The next major decision for clients is to what level are they willing to self insure or how much personal and property risk do they lay off onto insurance providers? Most people do not see insurance as part of goal achievement, but rather a product they might need. Appropriate insurance means that long-term goals can be funded; even when death, disability or trauma forces financial changes on clients’ lives.

* The final thing that clients can control, with the help of their financial adviser, is the amount of financial risk they will take above their comfort zone in order to achieve their financial goals. Will they agree to invest in tax effective Australian shares to lower their investment tax liability and seek potential long-term growth, or will they let their aversion to volatility limit their goal achievement?

Planner as guide and coach

Where does financial planning fit into this critical decision-making?

Good financial planning will become a process that meets the obligations set out in PS 175 and will:

* Assist clients to determine their real goals and put them into a financial context.

* Assist clients to realistically assess their current situation and their assumptions about what is achievable in the future.

* Help clients work through their four budgets and showing them the financial ramifications, in terms of their likely goal achievement, of the various trade-offs and options available.

* Provide the technical information that will allow client decisions to be carried out in the most effective and efficient manner.

* Provide clients with a written road map they can follow and milestones that they can look for to mark their progress.

* Stop the client from making silly mistakes — like mistaking all the investment market noise about choice as important.

The future is now

What would this style of financial planning look like? It would provide a financial planner/dealer group with a differentiated offer that would at once meet the client’s needs, meet dealer and planner compliance requirements, and provide a financially rewarding and stable business.

The comparative chart (above) spells out the differences.

The role of the financial planner in this differentiated-offer business will focus on their ability to work with clients, to transmit information and to explain the outcomes of trade-offs. The tools they will require will be different. The way they are remunerated will also be different. It will become increasingly difficult to argue that fees based on funds under advice are an appropriate basis for reward.

What should I get paid for?

Financial planners currently get paid for implementation [filling in some forms and attaching a cheque] — they often give away planning, and where annual reviews are done they are largely investment related and paid for by trailers. This results in a nonsensical and unstable remuneration system where cross subsidisation is rife.

The three components of financial planning are really:

* Planning and re-planning which is in the process of being commoditised

* Product selling and review

* Coaching/mentoring

Of these three, the real differentiated value is in the coaching. What is that worth? Whatever the client will pay and still think they have got good value.

Summary

While the need for real financial planning has never been greater, the current frenzy around platforms, funds management, chasing investment performance and embracing extraordinary and unproductive choice have actually alienated clients. Many clients are rightfully questioning the traditional financial planning value proposition of ‘I can make you more money’.

The consequence of a process driven value proposition to prospects and clients is participation in a simple, clear and sustainable business. For planners and dealer groups it means a compliant and scaleable business. For the industry as a whole it means the professionalism that it seeks. And is it not strange that it has been the industry regulator who has defined the rules?

Differentiated OffervsCurrent Industry Offer

* Streamlined* Convoluted

* Simple* Complex

* Lifestyle outcomes* Product outcomes

* Client directed strategies* Planner directed strategies

* Continuous relationship* Event driven relationship

* Cash flow management* Investment return - risk management

* Passive and active investments* Active investments

* Agreed planning fees*‘Hidden’commissions

* People within a process* People only

* Wealth accumulators and retirees* Lump sum investors

* Insurance related to goal achievement* Insurance as product sale

* Planner as experienced guide and coach* Planner as technical expert

Paul Resnik is an unrepentant industry provocateur—you can whinge at him at[email protected]