Will we ever get over Sealcorp envy?

Advisers never cease to amaze me. I thought I was beyond shock as far as the ego and greed of some advisers were concerned. But from recent articles I have read; conversations I have had; and events that are about to unfurl; ego and greed are in full flight.

Advisers never cease to amaze me. I thought I was beyond shock as far as the ego and greed of some advisers were concerned. But from recent articles I have read; conversations I have had; and events that are about to unfurl; ego and greed are in full flight.

Ego should not surprise me, as ours is still a relatively new industry (sorry profession). New industries and opportunities attract entrepreneurs, who almost by definition are egotistical.

We have all benefited from the entrepreneurs who started and nurtured this industry. Many, and there are too many to mention by name, have given a lot back. They have given a lot of their time and support to help the growth of other planners, the FPA and the industry.

For some, egos were satisfied by being perceived as industry leaders. But we did not mind, as this was more than a fair price for the selfless contribution they were making.

However, we now have ego that only seems to be sated by greed. How else could you explain, what Rob Keavney so eloquently calls “Sealcorp envy”. Of course, Robert is referring to the sale of Sealcorp to St George Bank for $272 million just over two years ago.

It seems that the mantra of these advisers is: “What’s mine is mine and what’s yours is mine also”. I have seen many examples of the attitude, but had hoped it was dying out. Maybe we are in for one last explosive flurry of it, before it dies out for good. I am the eternal optimist.

This whole issue of advisers wanting an interest in master trusts (and wraps), or a share of on-going profits or profit on sale, not only raises questions of greed, but also ones of conflict of interest, disclosure and professionalism. I separate this issue from that of advisers owning shares in the dealer - which I support.

But you might say, wasn’t it the advisers who made Sealcorp so valuable. So why shouldn’t they share in the profit? I would agree that their support of Asgard did add to the value of Sealcorp, but they had already been adequately rewarded for that support. The retort would be “we earned some commissions, but we deserve some of the profit as well.” My answer is no — not directly. All Sealcorp’s profit belongs to the shareholders. However, advisers will profit from Sealcorp, not directly, but by their use of Asgard adding value to their own businesses.

Surely, if one could argue that if it was reasonable for advisers to share in Sealcorp’s profit, because of their contribution to its success, then Sealcorp could equally argue that they should share in the profits of adviser businesses, because of Asgard’s contribution to their success. But this logic does not fit with the greed mantra.

Another example of greed was the recent sale of Godfrey Pembroke (GPL). Many of its advisers were shareholders, many being shareholders before the merger of Godfrey Weston and Pembroke. A reasonable number of shares changed hands after the merger — with one adviser, with his associates, owning about 5 per cent of GPL.

So here was a dealer that encouraged its advisers to be shareholders, and when shares became available they were first offered to advisers. Those advisers that held shares did very nicely when GPL was sold. However, I bet you cannot guess what the reaction was of some of the advisers, who never took up the opportunity to take up shares in GPL. You’re right!

As I said earlier, I do not see anything wrong in advisers owning shares in a dealer. In fact I believe it benefits all parties in the same way as company share schemes. For example, I have heard of one adviser who took the greed mantra to the point of saying “that a dealer should never make a profit, they should really run at a loss”. Now if this adviser had been a shareholder in the dealer, he may have had a different attitude.

Advisers having an interest (shareholding or profit share) in master trusts, however, is a different thing. Master trusts are products, and from the perspective of disclosure are no different to investment products. If an adviser put 80 per cent of her clients’ funds with one fund manager, in whom the adviser has an interest, there would be all sort of disclosure requirements. Some advisers would ‘tut tut’ about it, questioning whether such action is in the best interests of the client.

Master trusts (and wraps) vary immensely. Management fees (MERs) vary from less than 50 basis points to nearly 300 basis points. Many have a range of entry fee options, with a nil entry fee option that loads up the MER for a period. Their structure and features vary considerably as well. You could ask whether one master trust could suit all clients. If not, then shouldn’t an adviser have a range of master trusts to recommend to her clients?

This does not happen for a variety of reasons, from administration to volume benefits to protecting interests. At least one operator of a master trust, who also provides financial planning software, provides the software free once the adviser has $10 million of clients’ funds in the master trust.

How many advisers disclose this? These disclosure issues and conflicts of interest are heightened even further, when the adviser has an interest in the master trust.

The irony is that firstly advisers would make more money if they focussed on their clients and their own business, rather than worrying about how they can get a slice of someone else’s business. Secondly, master trusts are not where the money will be in the future.

Most advisers haven’t seen competition yet. Life since 1994 has been beautiful. Well that is all going to change with serious competition with serious money starting to attack this industry.

The big have cannibalised other industries, other professions and left the small with the crumbs. How many suburban solicitors and accountants are now working harder for less money? Most! Why should our industry be any different? Other industries and professions are being radically affected by technology. Why should our profession be immune?

Change always creates opportunities and threats, winners and losers. Some of the more intelligent, less self-focussed, advisers are starting to position themselves for the future. Some interesting dealer structures and alliances are emerging. All those that do seize the opportunity and become the winners will have one thing in common. They focus on their clients, providing their clients with the products and services that the client wants.

This change isn’t going to be easy. It will require substantial resources, management skills, but most importantly a desire and commitment to change business models. (This will be part of the subject matter for my session at the forthcoming Financial Planning Solutions Summit 2000.)

Life has been too easy. Many advisers have been making more money than they ever anticipated (or could have in any other role) and are reluctant to make the lifestyle sacrifices necessary to remould their businesses. Regular readers of my column might be thinking Collins is repeating himself. Well, actually, I am quoting from Mark Hurley, CEO of Undiscovered Managers, who has just published a worthwhile paper (91 pages) on the future of the financial advisory business.

Maybe I should be an optimist — those that put their clients first might win after all. The greedy egocentrics won’t be willing to change their business model and will continue to pursue their mantra. They will be impervious to the changes, smug with their success. Let them look down on us mere mortals who have seen the future and say unto us: “Let them eat cake!” History tells us who will win.