Non-aligned dealer group executives have long been warning that the new Future of Financial Advice reforms would lead to consolidation in the financial advice market. George Lucas argues the evidence is already apparent.
The decision by the Commonwealth Bank (CBA) to pay $373 million for the planning group Count Financial is just the latest in a growing line of acquisitions that is seeing the big getting bigger and the small and independent disappearing in the wealth management industry.
If you think that’s hyperbole, then just look at the evidence. Snowball has gone to Shadforth Financial Services, Plan B Group has picked up 31 per cent of the Queensland-based My Adviser, and IOOF has snared DKN. The daddy of them all, of course, has been AMP’s merger with AXA Asia-Pacific.
But it’s the CBA’s decision to move on Count, as well as the warning Count founder Barry Lambert issued when seemingly reluctantly agreeing to the sale, that should set alarm bells ringing in the industry, in Canberra, and most importantly, among consumers.
Lambert’s comments were prescient and blunt – the Federal Government’s reform agenda is forcing consolidation on the industry by driving out the independent financial advisers. If Lambert is right, the end result will almost inevitably see an industry dominated by the “Big Four”, as well as a few big institutions such as AMP and IOOF.
When Labor began its reform agenda for financial services, there can be little doubt it had independent financial advisers in the gun, especially those who were remunerated by trails, not fees. They were portrayed as the devil incarnate.
In doing so, Labor had the explicit support of the industry funds and also the implicit support of the banks and large financial institutions, which quickly, and rightly, recognised that Labor’s reforms had the potential to deliver them new opportunities that they could capitalise on better than the industry super funds.
But what Labor’s policies are doing is only benefiting the large institutions, and the move to break the nexus between the adviser and the product provider is being unwound by the current reforms. Labor, maybe naively, believed that the removal of trails and its replacement by a fee-based industry would ensure advice in which the consumer would benefit.
The underlying assumptions driving this reform were twofold: those advisers who took trails were lazy and in conflict with their clients’ best interests, and consumers were clamouring for the abolition of trails. On the latter, no evidence was ever proffered. Indeed, a cynic might ask what aspect of the banks’ services most riles their customers.
The one word answer is their fees.
What is happening now is what those much-maligned independent advisers argued at the time; the average consumer (for argument’s sake let us say having assets under management of $250,000 or less) is simply not prepared to pay up to $3,000 for a statement of advice, as well as ongoing fees.
But consumers still need advice, and rightly so. In the current investment climate, advice is at a premium. So where will they get it?
There may be only one option – the banks and large financial institutions. Only they are in the financial position to be able to offer advice as a lost leader, comfortable in the knowledge they can “direct” consumers into their products. What they are losing on the swings will be more than compensated by what they are picking up on the roundabouts.
For the independent advisers, as Lambert argued, the struggle to compete against the larger players that have the benefits of cross-subsidisation will push many to either sell their business (and the banks and institutions are buyers, seeing value in these businesses that may not be justified in the current economic climate) or leave the industry.
The number of independent advisers disappearing will be compensated by a growth spurt among advisers at the big financial institutions. The CBA now has nearly 2,000 advisers on its payroll, AMP-AXA has more than double that number at 4,000 and ANZ has recently announced plans to increase the number of its advisers.
But how will these advisers be remunerated? The suspicion has to be that part of their salary will be indirectly linked to how much of their employer’s financial product they can sell. Otherwise, the push by the banks and big financial institutions into wealth management lacks a business case.
No doubt the good advisers working for large institutions will develop good client networks and be amply rewarded. In the past, an option for them was to then set up their own practice, expanding the industry, and in the process, generating competition. Today, that option is far less enticing.
Thus the end result of Labor’s reforms will be less competition, not more. Instead of a diverse industry, we are on a path to having a financial planning industry dominated by the Big Four, a few large institutions and the bigger industry super funds – almost a carbon copy of our banking system.
And we all know how much consumers are enamoured with the banks. Even the industry funds – Labor’s preferred winner out of the reform process – will find it difficult to compete as they lack the established infrastructure of their big competitors.
As always, the net loser, when competition is reduced, will be the consumer, who never asked for this reform in the first place. They will be confronted by a more concentrated industry where cheap fees will come at the price of prescriptive product recommendations and asset allocations.
The sad reality is that all the work done over the past decade to unwind the tied selling model and add competition into the advice industry is being unwound by the new Future of Financial Advice regulations. It’s back to the future for financial planning.
George Lucas is managing director of the boutique investment house Instreet Investment.
