Over the past five years, the acquisition by banks and insurance companies of independent financial planning groups has become common market activity. These acquisitions and mergers have been driven by banks and insurance companies wishing to secure distribution channels.
The result of this activity has been to significantly change the landscape of the financial planning industry. An increasingly top-heavy distribution market has developed, with the larger players carving out greater percentages of the funds under advice pie.
This year’sMoney ManagementTop 100 Dealer Groups survey demonstrated this trend. It revealed that the large dealer groups accounted for 90 per cent of the total number of financial planners in the Top 10, who in turn are responsible for 91 per cent or $185 billion of the funds under advice.
If this sounds familiar, it is possible that you recently heard these words at the Eighth Rainmaker Marketing Symposium, where Colin Scully, previously with Bridges Financial Services and Bleakleys, told the assembled delegates that the industry they work in has undergone a number of watershed changes.
In doing so, Scully highlighted that the two most commonly perceived benefits of a more concentrated market are economies of scale and improved service delivery for both dealer groups and clients.
However, future predictions over the direction of the industry increasingly point to the return of employee-owned financial planning structures where future distribution platforms will be more flexible, Web-enabled, and provide a plethora of services for both clients and financial services.
Tapping into his experience as former managing director of Bridges, Scully says after a few years of the large institutions gobbling up the larger dealer groups, we are starting to see a move back the other way.
“Even though there may only be a handful of platforms capable of providing all these services, which are scaleable and at greatly reduced rates, there will be an abundance of distribution channels,” Scully says.
Scully also predicts a future when existing distribution channels will become fragmented and new channels will emerge. He supports the key findings of a report entitledTrends in the Australian Retail Funds Management Marketplace, released by Cerulli and Associates last year, and restated that capturing distribution would no longer serve as an effective strategy for fund managers.
“Disillusioned planners will begin to break away from fund manager controlled financial planner networks and those planners will establish employee-owned practices,” Scully says.
Greed and disenchantment are identified as two of the key drivers for the predicted fragmentation of distribution channels.
“Planners believe they should get more of the revenue rather than giving it to their large dealer fund managers. They also believe they should have received part of the sale proceeds when their large dealer was acquired by a fund manager, bank or insurance company,” he says.
“Planners also want to own a part of the administration service/master trust/wrap account that they support, so that if a sale takes place or it is listed on the ASX, they will financially benefit.”
Scully suggests planners will become disenchanted in having to sell their fund manager’s product, particularly in the case of poor performance.
“Dissatisfaction with services is higher among fund manager affiliated intermediaries than it is among employee-owned firms,” he says.
However, Scully believes there are two other factors also adding momentum to the fragmentation of distribution.
The first is changes in legislation, particular with reference to the Australian Taxation Office and its introduction of the Alienation of Personal Services Income (APSI) and the Financial Services Reform (FSR) Act , both of which will force planners to decide whether they are employees or business owners.
The second is an ageing industry, with many successful financial planners being at an age where they are already considering their exit strategy from the industry.
Scully believes global asset management organisations in the future would offer support to independent financial planners to break away from their fund manager-owned groups in return for an increasing share of the intermediaries placement of client funds.
This can already be seen with services such as Navigator’s Smart System, where no one financial planner group has a majority of funds in the master trust.
Finally, the Internet will also help to dissipate the costs associated with marketing and communication, and provide financial planners with further confidence to move away from the large dealer groups.
Such a fragmentation of the large dealer groups will have a profound effect on the future landscape of the financial planning industry.
Scully says key high-net-worth clients are likely to follow the financial planners on the move to their new firms.
Not being tied to any fund manager or insurance company, financial planners will be able to sell products they want to sell. They can select a distribution platform they feel best accommodates both their needs and clients’ needs.
Importantly, fragmentation of distribution channels will further enhance levels of competition between financial planners.
Further, planners will charge their clients a fee based on funds under management and in doing so, will link their own remuneration to their ability to grow their clients’ assets.
The outcome of this will be to promote new levels of relationship building between the client and the financial planner.
