Your average person is usually at great pains to avoid admitting their mistakes, especially when it comes to the future of financial planning. But then again, Tom Collins is not your average sort of person…
Your average person is usually at great pains to avoid admitting their mistakes, especially when it comes to the future of financial planning. But then again, Tom Collins is not your average sort of person…
I am frequently asked to comment on what is impacting on our industry. Recently my favourite ‘ipactors’ have been technology, competition, and consumers. But I have been wrong. Yes I am wrong!
Consider. What has impacted on our industry the most over the last 25 years. What has shaped it? What helped with its robust birth (after over 40 years of gestation) and nurtured it? What has made advisers an indispensable part of the landscape? What makes us so different to any other country? Why it is regulation! And the piece of regulation that is going to have this impact is not GST, not PAYG, not Ralph, but the Financial Services Reform Bill (CLERP 6).
It was the tax (no capital gains) and social security (no assets test) regulations that helped with the robust birth of this industry around 1980 and it was superannuation regulation that nurtures it even to this day.
In doing so, we saw the demise of the life agent and the rise of the financial planner. Many life agents could not make the transition. With the introduction of the FSRB, are we now going to see the demise of the financial planner — as now defined — and the rise of a new type of adviser?
As Harold Evensky said in a recent article: “My concern is that we won the battle, but if we’re not careful we may lose the war. We have convinced the world that the financial planning process is appropriate….” I touched on this in my “The Lost World: from evolution to extinction” article (Money Management, 11 June 1998) when I warned financial planners about their unwillingness to adapt.
I have just finished reading the latest tome (report) from Boston based Cerulli Associates called “The Internet and Financial Product Distribution”. This started me thinking about the impact of the impact of the FRSB again. Alongside enabling technology, a big dose of consumerism and a hefty mix of competition, it will result in a cocktail that will be too potent for many of today’s financial planners.
FRSB is going to encourage a lot of new players into advice giving. (I say advice because I do not believe it will necessarily be financial planning as most of us would now define it — but more on that later.) These new players will include life agents (those who have specialised in corporate superannuation), general brokers and superannuation fund trustees and administrators. An indication of this was evident at the recent IFSA Workshop and Trade Fair where there were more than 18 training organisations represented.
All of these organisations have (or are seeking to have) courses approved by ASIC as a result of PS 146. They included the National Insurance Brokers Association (NIBA) and the Australian Insurance Institute (AII). Also the Association of Superannuation Funds of Australia (ASFA) has had three of its education units approved by ASIC. These associations are doing this so that their members can give advice once FRSB is enacted. Even though CPA Australia was at the Workshop, I did not include accountants amongst the new players, as there are already many thousands of accountants doing financial planning — and soon there will be many thousands more.
These new players and accountants have the potential to swamp the “advice” industry as they are coming with large client bases, and more importantly, large wealth accumulation-based client bases.
Where will the retirement clients of tomorrow come from? Who will have them already as their clients? Who will they trust? The answer is obvious. Those who specialise in accumulation are the gatekeepers. But what sort of advice will they be providing? (Rightly or wrongly, for this article, I am ignoring bank-owned distribution.)
Most will be providing advice (and delivering and charging for it) on a basis that reflects their background. In the immediate future, this means that it is unlikely to be holistic, in many cases delivered through a call centre or via the Internet, and fees will not usually be asset based. This brings me back to the Cerulli Report and their views on scalable advice, the Internet and distribution.
Cerulli segments information from education from guidance from advice. They even further segment guidance (two sub-segments) and advice (four sub-segments). Avid readers of my column may remember my article on big “A” and little “a” advice (Money Management 29 April, 1999) Cerulli says: “The Internet is being tapped to deliver on-line advice and guidance (OLAG) applications that have the capacity to generate specific investment recommendations.” What does this mean in the Australian environment?
Let’s use the example of a superannuation trustee or administrator. A person joins a company and is provided with information about its superannuation fund. The literature encourages the person to contact the fund if they have any questions. With investment choice they probably will. The fund builds up a relationship with the member. They will be in regular contact through such things as mailings and seminars. As they know their age, their salary, details of their super and insurance, the smarter ones will be targeting their material to suit the profile of the particular member.
While this is happening, the fund will be encouraging members to contact them, whatever their financial need. When the member changes jobs, the fund knows, and they will contact them suggesting that the member rollover into their personal fund. The funds are now setting up allocated pensions to retain the funds at retirement. And why wouldn’t the member stay with the fund. For a good period of their working life, the fund has helped them and they have come to trust the fund. Recently I had access to some market research done by a number of superannuation funds. It showed that 70 per cent of the members trusted their fund and would turn to it for advice on superannuation.
Over the life of a member, a superannuation fund will provide information, education, guidance, and limited advice. This will be delivered through a mixture of written material, seminars, call centres and the Internet. And what will this cost the member? Most likely, no more than their normal fees. And when it gets to full advice, the member will obtain this at a much-reduced price — possibly a flat dollar fee.
A similar scenario will apply to other gatekeepers such as general insurance brokers and accountants because they too are dealing with people during their working life — and the people they deal with are likely to be the more affluent.
And why do I see FSRB, with the Internet as the major catalysts for this. The reason is that it requires everyone in the financial services industry (except real estate agents) to give advice. So we won the battle! Ah, but the war. These new players are the gatekeepers, they earn their revenue from other sources — advice, especially scalable advice, can be provided for little or no cost.
The Internet is the enabler, providing the new players with the opportunity to develop new roles and functions. It will allow the consumer to choose how much advice they want and how they want to pay.
So will the cocktail of FSRB, technology, competition and consumerism end up being a molotov cocktail for financial planners? Will planners lose the war? It will be for those financial planners who chart their way into the future by continuing to bask in their previous and current success. Life is beautiful!
