Taking on the brave new planners world

My regular readers will know that my last article was my 50th forMoney Management.

In it I reviewed how the industry had changed since my first article — some four years ago. I finished that last article with “What will the next four years bring? Straight-through processing, consumer focus, proper disclosure, the breaking of the nexus between advice and implementation and affordable financial planning to the wealth accumulator”. In this article, I would like to explore these and other changes we may see in the next four years, and why.

This industry, as I have said elsewhere recently, has become fat, lazy, complacent and arrogant. In many ways it reminds me of Henry Ford when he said: “you can have the Model T in any colour — so long as it’s black”.

Henry had revolutionised car manufacturing with the introduction of the production line, and in the process spawned the car industry. But he too had become complacent and arrogant.

General Motors, on the other hand, responded to consumer demand and became extremely successful. And Ford nearly went broke.

In our industry it was the life companies, banks and stockbrokers who were only offering ‘black’. The fund managers and financial planners were the ones who offered ‘any colour’, and in the process spawned the industry as we know it today. But, today, they too are now only offering black. However, there is a range of new players ready to bring colour back into the industry and meet consumer demands.

The next four years will be the make or break period for many of today’s players, whether they be fund managers, platform providers, dealers, advisers or even the regulators. We will see margin squeeze brought on by both consumer and media pressure as well as by new players. This squeeze is coming at a time when all players’ costs and revenues are being challenged.

Regulatory and compliance costs are up as are insurance costs. Anyone, whose revenue is asset based, is probably looking at a 20 per cent plus drop in their revenue. Advisers, in particular, will have clients demanding more and more from them as their clients question their portfolios’ performances. Many clients may ask what value has the ongoing review process delivered to them.

This squeeze, coupled with the increased costs, will mean that all players will have to become more efficient and more disciplined. We might finally get process, but we will definitely get straight-through processing (STP). Full STP has the potential to strip 75 to 100 basis points out of costs. But this will only happen if we have a re-arrangement of who does what.

One likely possibility is that fund managers will get out of administration and leave this to three or four specialised administration (registry) providers, as there is now for share registries. Why not? In some ways this has already started with wraps and managed accounts. However, at this stage they are an addition, not a substitution.

Am I suggesting that wraps might disappear? In their current form, yes. I see them having the potential of morphing into fund registries and thus taking all of the administration tasks away from fund managers. When this happens, this will probably lead to more investment vehicles being structured as managed accounts rather than as unit trusts.

Does this mean the unit trust structure will disappear? A collective investment structure will stay, especially for non-local investments and non-listed equities, but whether that will be a unit trust structure is questionable. It would make sense that there was some common international collective investment structure.

Am I suggesting the same for superannuation master trusts? Not yet! The law requires superannuation funds be structured through a trust vehicle. Even though stand-alone funds outsource their administration, many are now either moving to corporate master trusts or re-structuring themselves as master trusts. So in superannuation, administration consolidation is already going on. And some are pushing for a review of the need to have a trust structure for superannuation.

Distribution will be the fun area. The institutions will succeed, but not dominate. The boutiques will flourish. The mid-size firms will struggle. But all will have to focus on process, as this will be the only way to contain and reduce costs and minimise risk. To many of today’s advisers, process is a dirty word. They believe that plans should be crafted by hand.

In the car industry, process (read production line) has not only brought down costs (read efficiency), it has also improved quality (read minimised risk). But more than this, the production line has brought choice. And how much of the car do the car manufacturers actually manufacture? Very little — they mainly design, assemble and distribute. This is a far cry from Henry Ford’s dream of total vertical integration — from the coal and steel mines through to the car yard and finance company.

Choice will be the next thing in our industry. I don’t mean superannuation fund choice, but the consumer choosing how, when and what type of advice they want, coupled with who they get the advice from and the type of payment. The consumer will decide whether they want information, guidance, limited advice or full advice. They’ll decide how they want to access it: face to face, workshop/seminar, over the phone or via the net. The medium may vary depending of the type or importance of the advice being sought.

Consumers will want to take back control of their monies, yes their monies, and they will decide what access rights (query and transaction) that their advisers have to the products or platforms their monies are in. This is the reverse of what happens today, but this will happen. They, the consumer, will want to select whether they want ongoing service, and if so what type and how they would like to pay for it.

Not only will the consumers and media drive a lot of this, but so will the new distribution players, such as superannuation funds, general insurance brokers and mortgage brokers and the new style accountants.

Many super funds are already providing financial planning advice, with CFPs, and doing it for a very low price and in some instances for nothing. Some of those that have been doing it for a while are starting to realise that there must be a more efficient, less risk-prone way to do it. Others not providing full financial planning are providing limited advice on areas such as asset allocation. And they are doing this via the web and call centres. Watch this space.

These new players, and the banks, who have natural financial relationships with their clients from an early age will build the systems to service these clients through their life stages, especially the latter ones.

Supply will catch up with demand. Unlike the current situation, where there is a shortage of advisers, within four years there will be a surfeit. This will have many ramifications, but one will be that advisers will have to both actively market themselves and provide the services their clients want. For large dealer groups this means brand, but a vital component of brand is consistency — which means process. For the boutiques this means personal service, not brand, but it does mean to a targeted market segment — not all things to all people.

The next four years will be exciting, there will be winners and losers — some unexpected. There will be some left field new players. With fund choice, the temptation might be too great for a few — as it was in the UK. But I firmly believe that over the next four years we will develop a more efficient, price sensitive, consumer-focused industry.