Where to from here in planning’s evolution?

Asa financial planning practitioner, I have seen significant change to the industry in terms of consumer expectations, product design and flexibility, educational standards, awareness of financial planning and all of this in an environment of increased regulation and compliance.

The latest trends in the industry have centred around remuneration styles, fee-for-service versus commission and planning models, product-driven recommendations versus holistic advice. Much of this is linked, and to fully understand the long-term trend, we must explore the past.

Historically, planners dealt only with high-net-worth clients before moving onto retirees, pre-retirees and then the redundancy markets. All of these revolved around the investment of lump sums for upfront commissions or fees.

Where can the market go now? Competition will continue to squeeze margins in the lump sum market and many smaller practices will struggle to survive.

Mature practices will continue to reap the rewards of past efforts. There is little they need to do in the short-term to stay viable, given the large trailing incomes generated from substantial client bases. This income buffer will give these practices breathing space and an opportunity to adapt to the new financial planning environment. Those that do not will be absorbed into larger practices and institutions, all of whom will offer a raft of products and services.

Surely the next evolutionary phase in financial planning will be the commoditisation of much of the value proposition currently on offer.

Online access and discount placement firms will continue to grow and flourish in a direct correlation to consumer knowledge and direct access channels.

The need for advice will not decrease but the link between the advice, product, placement and ultimately the planner remuneration will undoubtedly vanish as the evolution continues.

Given these changes and the diminished importance attributed to the current business model, what will be the value proposition going forward?

How many planners truly focus the client’s attention on the future and set long-term financial goals?

An example is a client who has a small lump sum to invest. Most advisers will take the lump sum and give the client a generic plan that talks loosely about the need for review. Surely the value proposition for a group of professionals should be to add value to the client by improving their financial wellbeing. But is this the case now?

Imagine if the planner also managed the client’s finances, even down to assisting with budgeting and cash flow management. Questions such as ‘how much do you want to retire on?’ must be asked, and a plan of contributions and debt management put in place to generate a savings mentality that will add significant value to the client’s financial wellbeing.

If this model is adopted, a large untapped prospect base opens up to the planner as a source to build long-term relationships.

This approach is more holistic, goal and lifestyle oriented, and shifts the emphasis away from the product and onto the client’s needs.

From this base, product sales will flow, but it is not the primary purpose of being and the current commission structures will become less relevant.

This methodology has significant advantages over the current one-hit-wonder type approach. The relationship is maintained, the business knows more about the client and can sell a raft of financial products not normally offered by the traditional financial planner.

Product lines such as general insurance, loans, estate planning and taxation services will be commonplace. Obviously this cannot all be provided by the financial planning firm itself, but it can manage the relationships and become the central hub of an individual’s financial wellbeing.

I am sure that most planners see the benefits of this type of approach but cannot overcome the financial and resource issues it creates: “How do I make money now out of this type of work?”

This is a valid argument but one that must be addressed for the financial planning industry to truly be seen as professional in the eyes of its clients.

The simple answer is that the transition will be gradual. Trail commissions will continue to be an important component of the planner’s income while the holistic approach is developed.

Only those practitioners that have a large client base will be able to develop into the new business model. Those with small client bases who rely on upfront income will continue to struggle against ever shrinking margins, leading possibly to the ultimate demise of the small practitioner.

This trend is likely to continue until the industry is predominantly fee for service and where products are secondary to the process.

Nick Connor is generalmanager of Connect Financial Planning & ConnectCredit Union of Tasmania.