Semantics aside, there is a real difference between financial advice and financial planning. Tom Collins discusses the factors driving financial planners to take another look at the business of providing financial advice.
My first two articles this year have been about consumers and the future. They were reflective, some might even say recondite. So I thought it was time I wrote about advisers, advice and the business of being an adviser.
I should use the words financial planner, instead of adviser, but I think of financial planning as a process, the mechanical process that underpins the advice, ie. just part of the advice giving process. The Australian Securities and Investments Commission (ASIC) recognises advice givers not financial planners. I have started this obfuscation so that you will end up as confused as I do by the end of this article, as I will apparently be contradicting myself.
Today, many advisers overservice and undercharge. Today, many advisers run their businesses as financial planners, not as business people. Fortunately, many are now waking up to the fact that they have to run their practice as a business. Just look at the strong support for Resnik’s recent conference on sales, marketing and practice management, and the prominence it is getting in the forthcoming CFP conference. Even in my consulting work with advisers, I am finding it more of an issue.
There are probably many reasons for this. Some are: many advisers are looking for a way out, many are realising they are running inefficient businesses, and some are starting to worry about the competition. (If the Internet doesn’t get you, the accountants will!) Some are even realising that the practice is worth more if it’s run as a business.
But what is a financial planning business? Is it a business that does financial plans, does transactions, provides reports, does reviews and provides ongoing advice? Are the reviews just investment reviews or financial planning reviews? Does the business provide the same level and type of service to all of its clients? Does the business charge clients appropriately, for example, are clients charged appropriately for the initial plan?
But before we can answer any of these questions, we have to ask what is financial planning? You have Harold Evensky promoting a holistic view of financial planning and Mark Hurley promoting the ‘economic rationalist’ view. In Australia, the CFPs promote full advice financial planning. ASIC, until recently, seemed to support the CFP view of the world, but with CLERP 6 imminent, we now have IPS 146 which seems to allow for limited advice.
A little bit of history. We imported full service financial planning from the US some 15 plus years ago. However, what we did not appreciate was that in the US, financial planning was the preserve of the very affluent, that is, clients with more than US$25 million to invest. Clients with fewer funds were regarded as not being able to afford financial planning. Even today, Mark Hurley writes about marketing financial planning to the semi-affluent, whom he defines as someone with a net worth of US$1 million to US$10 million.
So why are we providing financial planning to clients with $100,000 or even less? I would argue it is because we haven’t been providing true or full service financial planning, but either retirement planning or investment advice. In reality, only a handful of advisers offer full advice financial planning for a majority of their clients, most only do it for a few of their clients. Why? Because they can’t afford to, and, in many cases, their clients don’t require it.
As I have said many times before, financial planners are really arbitrageurs of Australia’s Byzantine regulatory system (ie. retirement planners). It is because of this that it is now allegedly compulsory to see an adviser if you have been retrenched, retired early or just retired. This is what has made distribution popular among the institutions, superannuation funds and consolidators. Furthermore, consolidators see nothing but blue sky by their merging of accountants and advisers. I wish them well!
These institutions, superannuation funds and consolidators are business people. To them, financial planning is a business. We already have examples of them segmenting the marketplace by channel. Each channel will be required to deliver a profitable service/product. The service/product will be defined and systemised, to ensure that the channel is profitable. Further, they will use technology to achieve these goals, be it the Internet, call centres or both.
Where does this leave the adviser-owned practices/networks? (ASIC won’t let you say independent – as some of these groups take commissions – shame!) Will they survive the big and the bold – but the not so beautiful? It depends.
It was the unaligned (I hope ASIC lets me use this description) advisers that introduced financial (retirement) planning into Australia and ensured that their methodology became the standard, even for the institutions. Well, the institutions have embraced it and are spending heaps of money to make it work. Some will make it work.
So, how does the adviser owned practice/network compete? The adviser owned practice/network competes by reflecting on the matters I raised in my first two articles for this year. They have to have a consumer focus and use technology, to not only make their business more efficient, but to help it with its consumer focus. An example of this was an idea that David Koch floated at a recent FPA Sydney chapter lunch. He suggested that advisers should include, as a part of their Internet offering to their clients, a chat room. On a regular basis, they could advise their clients of the forthcoming topic, for example, RBLs or investing in a low growth environment.
Also, advisers should not be afraid of letting their clients do their own transactions. One adviser who realised their clients were using Comsec, provided a Sanford-like facility from their own Web page. This way, they kept the client in their own fold and reduced the danger of the client being enticed away.
The above will only work if the adviser is running their financial planning practice as a business. Your practice/network is running as a business when you know the profitability of each client. This means you know what each client can afford and is willing to pay and have, therefore, tailored your service for it to be profitable in relation to each client. If any clients aren’t profitable, it’s for a deliberate reason. They may be a good referral source, or they may soon be wealthy or it’s your mother in law.
Consumers want a universal offering. There is a place for institutions, superannuation funds and consolidators, as there is for adviser-owned networks and practices. There is a place for different types and levels of advice. There is a place for fees and commissions. There is a place for call centres and salaried advisers. Everyone, in all shapes and sizes, will be competing for the consumer.
To survive, you will have to know what business you are in, and how you are going to meet both you and your clients’ goals. ASIC requires you, as an adviser, to know your clients and know your product. Why not apply the same two requirements to your business?
