Vertically integrated dealer groups - weighing up the pluses and minuses

Milana Pokrajac explores the pluses and minuses of vertically integrated dealer groups and the concept of a so-called ‘benign institution’.

Related: Vertically integrated advice vs self-licensing and non-aligned advice

If a customer walks into a Toyota dealership looking for a small, fuel-efficient car, it is fair for them to assume they will be sold a Prius or a Yaris. It is also safe to assume that the customer would expect to be sold a Toyota car and not a Holden Barina. 

But if they walked into a car dealership operating under a different, seemingly independent brand which  has a confidential commercial arrangement with Toyota, that would create problems, according to Pinnacle Practice founder Anne Fuchs, who used this analogy to explain what is currently happening in some sectors of the Australian financial planning industry. 

From the point of view of a financial planning practice, the so-called ‘product push’ was always listed as one of the big disadvantages to being aligned to a dealer group that is owned by a product or platform manufacturer.

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In the Australian market, those product manufacturers are usually large banking groups which own several parts of the value chain, including administration platforms, insurance and superannuation products, as well as a range of other investment solutions. 

Apart from owning financial planning divisions which bear their name, the big players in the financial services space also own one or several dealer groups which operate under their own brands and Australian Financial Services Licences (AFSLs). 

The purpose of a dealer group is to allow aligned practices to run their businesses as efficiently as possible without all the hassles of owning an AFSL. 

But if that dealer group is vertically integrated, there is a chance the adviser base will in part be viewed as a distribution channel for products manufactured by the parent company, according to Fuchs. 

Fuchs, who is in the business of matching financial planning practices to appropriate dealer groups, said a large proportion of her current clients are wishing to move away from bank-owned licensees and into the independent financial advice space. 

The reasons they’re unhappy, she said, predominantly revolve around the lack of alignment in terms of business goals. 

“They [financial planning practices] often view professional development days as product push only; they feel like their professional development integrity is compromised,” Fuchs said. 

“They also feel like their business agenda around moving to fee for service is not genuinely supported by the dealer group and that the licensee is only supporting them in order to get a share of wallet.” 

Another reason why those particular practices feel unhappy under an institutional umbrella is an expensive or clunky platform offered by the mother firm, Fuchs added. Kate Humphries, managing director of Pathway Licensee Services, has heard similar feedback from her client base. 

“Whenever I hear stories from advisers who have moved away from the aligned space into the independent financial advice space they always tell me that there was an underlying intention that the planner or the practice would be favouring the group that they are aligned to,” Humphries said. 

“It’s now very difficult to argue that, if you are part of an aligned distribution channel, that you are not influenced or biased by who is ultimately your parent.” 

A move away from the product push

Some large banking groups, however, have recently made big efforts to create transparency and dispel the myth of the so-called ‘product push’ on aligned practices. 

Salaried advisers are generally still subject to revenue targets, as BT Financial Group and Macquarie have recently stated to the Parliamentary Joint Committee. 

However, things might be moving in a different direction when it comes to bank-owned dealer groups. 

When the Commonwealth Bank of Australia acquired Count Financial, its chief executive David Lane told Money Management the group would retain its open-architecture approved product list (APL) as well as provide its planners the freedom of platform choice – although the Colonial First State platform was offered at heavily discounted prices to Count advisers. 

Head of AMP’s advice business Steve Helmich said AMP-owned dealer groups also have very broad approved product lists across investment, risk and debt. 

“We don’t have any bias to in-house products versus any products on the list,” Helmich said. 

“What we tell planners is it’s their role to pick the most appropriate solutions for their clients from the list, or if the client is already in a better solution, to leave them in that solution.” 

BT Select head of practice service distribution Kon Costas said “channeling” or “locking advisers in” is not something that generally happens in vertical alignment. 

“From a BT Select perspective, vertical alignment doesn’t mean that you’re locked in or that you become institutionally owned in terms of the look and feel of the business,” Costas said. 

“Vertical alignment means that you’re leveraging off the strength and the capacity of the group to be able to allow you to run free and do what you do best – run your business, grow your business and help your clients.” 

According to Fuchs, it is generally helpful for the bank-aligned practice to support the administration platform owned by the parent-company, as they are usually offered to them at heavily subsidised prices, which ultimately results in a cost-saving for the client. 

The significance of commercial alignment cannot be ignored and needs to be considered by financial planning practices, Costas agrees. 

“The reality is that if you’re not commercially aligned to where you’re licensed, it’s not going to be a positive relationship,” he said. 

“What I mean by commercial alignment is that you’ve got to be passionate about ¨ you’ve got to want to be part of a group that’s going to support you and help you grow new business.” 

This type of model – where an institution refrains from the product push through its dealer groups – is called the ‘benign institution’, according to Fuchs.

While the ‘benign insto’ concept is more dominant with non-bank or smaller institutions, Fuchs said one dealer group that’s owned by a major banking group has made a big move to this model, as it realised it has found the “sweet spot”. 

“The benign insto is where practices are able to keep the parent company at arm’s length in terms of the way the APL is constructed and the ethos/culture of the group,” Fuchs said. 

Under this model, the practice doesn’t get the product “pushed” to them, but they’ve got access to the resources and deep pockets of the parent company. 

“I think it’s a really sweet spot for dealer groups.” 

So what about the independents? 

The appeal of the institutionally-owned dealer group does, in fact, lie in the vast amount of resources a financial planning practice can take advantage of in terms of support and infrastructure. 

Support in the areas of compliance, adviser training and supervision, software, client management and engagement, marketing and business succession are vital when it comes to the value proposition of any dealer group, and vertically aligned ones generally have the resources to provide top-of-the-range dealer services. 

Heavily subsidised dealer fees are also part of the appeal, according to Fuchs. 

There are not too many financial planning practices that wouldn’t be fit for a vertically integrated dealer group, Costas said. 

“Vertical integration is all about alignment, support, infrastructure and being able to – in this day and age – provide all of that support, capital and resources to back the components that a business requires,” he said. 

“The institutions really have that strength, support, service and solution as opposed to what unfortunately a non-institutional alignment has.” 

However, managing director of Infocus Wealth Management Rod Bristow disagrees with the claim that only bank-owned dealer groups can offer that level of resources. 

Infocus, which has more than 110 advisers working in around 70 aligned practices, announced last week that it had bought a 25 per cent stake in a business that was previously held by National Australia Bank’s wealth management arm, MLC. 

The move has made Infocus one of the very few mid-sized dealer groups in the Australian financial advice space that are fully independently-owned. 

Bristow said his dealer group maintains one of the highest support staff-to-adviser ratios in the industry, which includes business development managers who help advisers grow their business, as well as training and relationship managers who work inside the businesses and help solve immediate issues. 

“I don’t necessarily think that size is the proxy for the level of resourcing or capability in the business,” Bristow said. 

“At the end of the day, if you’re an institution and you’re distributing through your financial planning channel, then there are decisions you make about how much capital you want to invest in that particular channel,” he added. 

“But when you’re independently-owned that’s your life blood.” 

There was a huge amount of movement towards institutionally-owned dealer groups in the lead-up to the introduction of the Future of Financial Advice (FOFA) legislation, and many instos were happy to take those practices on, even offering what has since been deemed “golden handshakes”. 

But accepting those golden handshakes has backfired on some practices, as Futuro managing director Dennis Bashford recently pointed out.

Speaking at the Association of Financial Advisers National Conference in October last year, Bashford said Futuro had lost three practices to a major institution offering sign-on payments in the last 18 months, but those practices had regretted their decision soon after. One paid a six-figure amount to come back to Futuro. 

This points to cultural alignment as one of the most important values a dealer group could offer, Bashford said. 

“I don’t think there is any one particular option that is going to suit everybody and I think every option is going to be a compromise,” he said. “But I think people need to really look very closely at what they want.” 

Many practices are prepared to pay the higher dealer fee for independence, Fuchs said. 

However, that is not their only distinction. 

“There are a lot of high quality groups [in the independent financial advice space] so I think this thing about size is ridiculous,” Fuchs said, adding they are generally better at providing specialised support and catering to specific client segments. 

“They are not trying to be everything to everyone and that’s the one thing about those large groups,” she said. 

“Whether you’re vertically integrated or independent, that business model of the past where you just licence people and you’re everything to everyone is dead.” 

Bristow added the structure of a non-aligned dealer group allowed it to implement big changes at a much quicker pace than institutions do, saying further changes to the FOFA legislation would not present a huge challenge in terms of amending planner software and other advice-related processes. 

Each to their own

At the end of the day, however, it’s all about what a particular practice is looking for.  

There is always an option for financial planning practices to own and maintain their own AFSL. But in terms of practices which want to lease a licence, Fuchs noted a particular pattern. 

“People who are attracted to vertically integrated dealer groups tend to be the younger advisers still in start-up mode who don’t have access to funding, or firms seeking to change platforms before 30 June,” she said. 

Independently-owned groups are nowhere near as resourced, Fuchs added, and practices need to be aware they will be paying more. 

“But generally groups that move to the independent space are established businesses in most cases and they are not seeking the cast of thousands in the marketing department anymore,” she said.  

“They’re accepting of that because there is an alignment of ideology.” 

Ideology and culture seem to be of essence. Bristow cautioned practices to look past the so-called glitter of the initial offer, as joining a licensee or switching from one to another is a long-term investment. 

“You want to be sure that the dealer group that you’re going to aligns with your values, can support your business model, is prepared to work with you in partnership to deliver what you need and is flexible enough to accommodate any changes and activities that you want to run in your advice business,” Bristow said. 

Dealer groups, too, are in a position to refuse a practice if they don’t think it aligns with their own business and cultural values.

Steve Helmich said this was sometimes the case with practices wanting to join AMP, with advice standards and commitment to planner education being the key things the company is looking for. 

“If they want to have someone who’s got very high standards in what they do and who’ll provide a good structure and learning opportunities and give support with software, training and succession, who even has some clients for them to purchase if they’re looking to grow their practice or join other practices – then a vertically integrated model is ideal for them,” he said. 

“But if someone just wants to have their own boutiquey practice with their own brand and no support portal – they can work as well. It’s a big market out there and we’ve got to accept that across the Australian population consumers will look for different models and that’s great, that’s good, that’s competition.”