Why financial planners who are prepared to change can thrive

As the industry undergoes significant change, Jim Stackpool looks at the challenges facing financial planners and explains how they can continue to thrive in a difficult market.

Gerry Harvey, chairman of Harvey Norman retail group, recently voiced his concerns that increased discounting of products in the retail sector is sending many retailers broke.

Harvey, who has made a very successful career from his discounting tactics, was quoted earlier this year as saying “our shops are busy and there’s a lot of activity but it’s hard to get the dollars because of price reductions”.

When a veteran of discounting such as Harvey publically notes how hard it is to make money due to price wars, it delivers a sobering message that the basics of getting your price right is tough for every business and should never be taken for granted.

Financial planners take note. The debate about price for financial planners is far more than whether you get paid by commission or get paid by fees. It’s becoming a debate about whether you are going to get paid at all.

Financial planners are fast heading towards a tipping point. For a number of reasons, the majority of financial planners have been in the enviable and luxurious position of selling something for which they didn’t have to mention a price in dollars.

Most planners quote pricing in percentages, small percentages, which to most people does not mean much because people don’t buy their bread, milk, cars, houses, holidays in percentages, so when they hear they are paying 1 per cent or 2 per cent of something, it doesn’t add up to much.

Nor have financial planners been subject to the type of serious discounting that Gerry Harvey takes for granted every day. Prior to the relatively recent not-for-profit industry superannuation network advertising campaigns on our Sunday night televisions, the only threat to the financial planner’s livelihood has been significant market corrections.

Though tough, these corrections have been thankfully short-lived for most.

As superannuation is mandated, most financial planning firms have been starting every new year knowing there is at least an additional $2.4 billion every month in new super alone, even if they don’t do anything.

For the majority of long-established planners taking ongoing trails of fees/commission/income from their clients' superannuation, it’s a constant trail of income for often ‘just being there’. It’s amazing the industry hasn’t had more incidents like Westpoint, Basis Capital, Storm Financial and Opes Prime. But it’s all coming to an end.

To date, clients have generally stuck with their planners and only shifted when they have had a clear reason. In the near future I think this is going to alter. Clients are going to be seeking reasons to stay with a financial planner as it becomes clear they may not be getting value from their planners.

As a consultant to the industry for 20 years, all of my observations are second hand. I have been lucky enough to work with both small practices and giants in the industry who have foreseen, predicted and prepared for these events long ago. This article outlines what I believe are the three major causes of the forthcoming tipping point for financial planners. Like most ‘tipping points’, the contributing factors are not all connected.

Consumers

Do you really believe that the majority of clients care as much as the media tell us they do about how you are paid? Do the majority of your clients want to know your conflicts of interest and ask to see your register of conflicts? No they don’t.

Consistent with this view is Jeremy Cooper’s findings. Even though superannuation is mandated, most Australians are apathetic to the management of their growing superannuation amounts.

In his survey entitled ‘Supernomics’, Dr Sacha Vidler reports that despite legislation in 2005 allowing the switching and choice of funds, only 3 per cent of Australians bothered to change funds. And of those who did change, it wasn’t due to dissatisfaction but because people had changed jobs.

This is one of Cooper’s motivations behind his suggestion to introduce a cheap, no-frills universal superannuation fund to provide an offering at relatively half the cost of today’s funds.

He believes that for the majority of Australians, the industry is overcooking its offerings — it’s too expensive for the need or demand. He’s reporting back to a government in an election year that wants to offer more Australians a cheaper alternative as they strive to fund their retirement.

Cooper suggests consumers aren’t paying attention to ‘cheaper’ (and potentially better performing) superannuation options if the comments by David Whiteley, chief executive of Industry Super Network, are correct. Whiteley must be pulling his hair out.

He has consistently compared the performance of his industry funds to ‘for-profit’ funds and laments: “Why is it in the Australia superannuation industry the more your pay, the less you get? Competition within super is not working. There is a profound market failure."

Whiteley goes on to cite investor inertia, complexity of investment offerings and commissions paid to planners as an axis of evil that restricts greater market efficiency. Make no mistake, Whiteley is out to correct his perceived ‘market failure’.

Whiteley and many more people like him will make an impact on the Australian consumer. While we may have forgotten how many attempts it took to break up the cosy monopoly between Ansett and Qantas (remember Compass?), I am certainly not paying anywhere near as much as I used to pay 10 or even 20 years ago for my regular flights between Australian capital cities when airline competition was cosy.

How are planners best preparing for the inevitable client mood change? Consider Fausto Pastro, head of financial planning for William Buck in Sydney. I have known Fausto for 15 years and consider him to be one of Australia’s greatest planners.

He doesn’t care what consumers think or how they behave, but he cares a lot about how his clients think and behave. Fausto recently told me that not one of his firm’s clients has ever brought up the subject of fees, commissions or how he is paid.

He and his team have been fully prepared for the fees versus value discussion.

They have spent lots of time scrutinising their offering, validating the value they are adding, and walking in the client’s shoes as much as they can as they articulate their pricing and value.

He wonders if his clients just don’t read the press/media about the reputation of planners, shadow shopping, the collapse of ‘advice’ groups, the stories of destitute investors, the perceived in-built corrupt links between manufacturers and providers — all the stuff that we in the industry read every day.

But Fausto and his team have never been challenged. Why? Their clients only do business with them because they trust them.

Fausto and his team have made the building of trust with their clients an art form. Their objective is to work solely with people who they can trust and who trust them.

Fausto’s clients don’t come to him and his team to buy their products or their efforts. They come to buy greater certainty in their financial lives and the best possible chance of achieving the financial outcomes important to them.

If your client base is predominantly full of people who don’t trust you with their financial lives, who don’t consistently take your financial advice, or haven’t actually acknowledged that your advice is value for money, it would be dangerous to assume that you are their trusted adviser.

Sure, it could be said that Opes Prime, Westpoint, Basis Capital and others generated ‘trust’ between their advisers and clients.

Unfortunately, there will always be exceptions no matter how good the legislation or regulations may be.

Legislating against another Bernie Madoff won’t stop the next Madoff or crook intent on breaking people’s financial worlds apart.

The last few years have heightened the uncertainty that plagues everyone’s financial lives. Consumers' search for greater certainty will always be manifested by their short sighted search for the perfect financial product or prophet.

Getting consumers to focus on the long term is the noble job of industry associations and politicians.

Getting our clients to financially live for the long term and focus on the short term is every planner’s job and the essence to managing and profiting from the growing demands of the fast-changing marketplace.

Great firms like Fausto’s will thrive and very effectively defend themselves from the daily rigours of a Gerry Harvey type operation that has been purpose built for hordes of product-buying consumers rather than selected advice-seeking clients.

Industry restructure

No matter what a Fausto-type firm or Gerry Harvey operation might aspire to become, the tectonic plates underpinning every financial planning firm’s foundations are shifting.

Thanks to bumper profits, worldwide accolades for global financial crisis performances, the desire to spend their capital rather than distribute it back to shareholders, and a belief that their long-term prosperity is linked to better distribution, Australian banks are on an aggregation path like never before.

In the long term, who ends up buying an AXA, or an IOOF, or a PIS isn’t as important as the effects (and side-effects) of the inevitable aggregation.

The big players will want to get bigger if they are going to be competitive in the game that Gerry Harvey plays every day.

If the big players don’t have scale, the pricing of their services and products won’t be competitive nor will they have competitive advantage when bargaining for the services that are essential to their own day-to-day operation.

The scale game being played out at the moment is just another hand (albeit a big one) on a heavy flywheel of fundamental change that is going to redefine every planner’s business life.

Neatly described by Jim Collins in his book, Good to Great, as the concept of the ‘flywheel and doom loop’, the inevitable and unstoppable momentum will create a wake that will wash over us all.

Most planners aren’t prepared for these floodwaters. For instance, planners are getting stuck in the very basic debate of fees versus commission.

Believing that the issue is simply a case of whether to charge by commission or charge by fees. Attempting to validate your services because you either charge by commission or charge by fees is similar to validating your approach to better health because you smoke Winfield Reds versus smoking Dunhill Greys.

Against the backdrop of the new scale game being played by the tussling financial hardware providers, the long-term viability of your advice proposition is going to be severely tested if your price, whether payable by manufacturer (ie, commissions) or client (ie, fees), is going to be determined as a quantum of the products supplied rather than the quality of advice delivered.

In essence, your financial planning proposition will be little about fees or commission but about value — are you worth it?

Another significant factor in the industry restructure is the plight of medium sized dealer groups.

Most medium sized dealer groups in Australia are staring down the barrel of significant re-investment in IT, re-investment in ageing adviser businesses and possible redevelopment of advice processes in light of new fiduciary responsibilities.

Many of these dealer groups are hopeful that a ‘liquidity event’ from a major funder will be enough to both reward founders and lock in new advisory talent, who they don’t want exiting with the goodwill of existing clients.

The scale game will produce a few (say, three) very large organisations that will attempt to offer everything from the very basic through to the very elaborate (think IBM in early 1980s when it offered everything from the IBM PC through to mainframes, with related support services for each group).

Provided offerings are compliant and transparent, these mega hardware groups won’t care too much about what offerings they provide as long as they get the flow through on platforms, individually managed accounts, separately managed accounts, managed discretionary accounts, or any vehicle that greases the flow of monies with the least tax and data friction between entities.

The ‘sales forces’ of the mega-groups will be both aligned and ‘non-aligned’, offering fiduciary and non-fiduciary services and advice.

The majority of their authorised representatives will probably be salaried and portrayed as independent local ‘bank managers’, ‘business managers’ or ‘client managers’.

There will also probably be an increasing number of ‘franchise’ operations offering everything from basic ‘cookie-cutter’ advice through to ‘private banker’ advice. They will still go to great lengths in order to maintain their sources of product distribution.

Tactics such as low interest loans, overseas jaunts, three years of product commission up-front, fee holidays, offers of equity in product platforms, and capital to fund business acquisitions or growth will continue to be used.

As the mega-groups aggregate billions more under management, clipping the ticket all the way, they will pass on ‘savings’ to their customers in the form of lower ‘charges’.

An increasing number of their ‘sales force’ not being paid ‘commission’ (remember the Financial Planning Association and even the Ripoll review wants commissions gone by 2012) means they are now more competitive with Whiteley’s industry superannuation fund proposition.

Whiteley’s group of funds must soon move into the delivery of more expensive advice offerings in an attempt to stem the tide of defections.

Industry funds have been doing a good job of managing monies but a lousy job of retaining members once they wish to take their lump sums and seek advice as to how best to live off those monies.

Too few of them have built quality, scalable advice offerings like Bill Danaher’s Qinvest.

The bottom line regarding industry restructuring for the retail financial planner is if planners can’t articulate that what they do is worth the price they seek, they’re going to go out of business regardless of how they charge.

Therefore, whether they charge by commission or charge by fees matters little.

I have no doubt that the ubiquitous practice of charging and pricing by quantum of product bought and commissions paid has not helped planners articulate the value they add.

It has in fact boxed planners into the same corner as product manufacturers, meaning the consumer can’t tell the difference between the two different roles.

The new breed of financial adviser

The third significant ingredient heralding change is the new breed of adviser. Great firms don’t have a problem getting new clients — their referral mechanisms work well (ie, satisfied clients advocating potential clients). But all firms have a problem finding quality advisers and staff.

At least once a week we get a new unsolicited resume out of the blue from a young, enthusiastic and qualified adviser looking to join a firm in which, in their terms, they can 'flourish'. They want to give impartial advice, not advice tainted by predetermined product options.

They don’t want to (and legislatively can’t) follow the career path of their long serving industry directors. They want to be paid well and their pay is aligned to the value of their advice, not the amount of product sold.

They want to work in a dynamic team where everyone is goaled and remunerated on a common basis. And they want to do all this in a fraction of the time it took their bosses. Unrealistic? Possibly. Is this the reality we are faced with when hiring?

Definitely.

Most well established planners today made their name and money when the ratio of planner to client was much higher, when compliance was slacker, when commissions were the norm and when institutions provided everything, including the overseas holidays.

Succession issues are systemic in the industry as planners age. Up and coming successors don’t want and can’t afford the sought-after equity price.

However, these well-educated up and coming advisers haven’t been taught the soft-skills of engagement, of pricing, of pitching, of consulting and don’t appreciate these skills as much as their technical skills.

As the industry evolves to cater for these circumstances, planners seem to be making one of two choices.

The first group aims to build for themselves an ideal life, similar to the old group agency days and today’s barrister chambers where the fee earners work in their own silos and the clients are attached to a planner not a firm.

In this model, clients don’t belong to a firm, instead they ‘belong’ to a planner who guards, cares and builds a community of ideal clients that aims to provide an ‘ideal life’ for the planner.

The second group is the group we tend to work with. In these firms, the client belongs to the firm. The planners (and their team) are remunerated based on team performance rather than individual performance. There is less of a dependency issue as clients interact with many planners within the firm and the primary focus isn’t just one planner.

The core skill of the firm is the overall management towards broad financial outcomes for the client.

Both types reward well. The former aims to be a well-paid job where the equity is in a diminishing value of a client base. The latter is a business aiming to be independent of anyone’s personal exertion; where value is based on ongoing profitability.

The individual planner model has little inherent value beyond the planner while the teamwork model has the potential for significant value. No one model is better than the other, they are just different.

Tipping point

Planners are approaching a tipping point in their business lives that will have as much of an impact on them as the floating of the Australian dollar had on financial markets in December 1983. It’s important to note that clients won’t be ready for the changes either.

It’s natural for all of us to resist change and it is logical for existing clients to want the relationship with their planners to stay the same. Many don’t want or expect things to change regarding how they are charged or how they are serviced.

Good planners know that every client deserves respect, but commercially that doesn’t mean every client deserves equal service in the current world of product delivery or the new world of advice. Trying to recognise the clients who want advice and a proposition aligned to outcomes versus clients who simply want products is tough.

Building a business that caters for both (ie, the new company proposition alongside the old company proposition) is as tough as living in a house during major renovations — when the builder is the home-dweller, the extensive building effort can only be done in their spare time, the majority of the current occupants (ie, existing clients) won’t live in the new addition, and the plans for what the completed dwelling will look like aren’t crystal clear.

If your time left in the industry is less than, say, five years, it would be wise to focus on strengthening your business or client base in the next couple of years.

There is still considerable, although reducing, value being offered on clients bases and planning businesses with more buyers than sellers. It’s generally a two-year period from germination of the selling idea to its reality and most purchasers will want a commitment for possibly another 12 months after agreements are signed.

Discounted tax returns, discounted property conveyancing, and discounted medical bulk billing are all examples of low price professional services in accounting, law and medical. Similar discounted services in superannuation, driven by low price and large mass market propositions, will inevitably spread like cane toads.

Gerry Harvey’s day-to-day reality will soon become the reality of financial planners and financial planning groups that fail to prepare.

A few like Fausto’s will thrive, most will cease to exist in the form they are in today and will remember the 1990s and 2000s are the ‘good old days’. Bring on the new days.

Jim Stackpool is managing director of Strategic Consulting & Training and the author of What Price Advice.