MM: What are the new challenges that advisers will need to face in the coming months and what was the key lesson from COVID-19 pandemic?
Arthur Kallos: I see many positives that have come out of this pandemic and lessons on how advisers want to serve clients and how we are going to deliver to their clients’ needs and preferences to form stronger relationships, deliver peace of mind through increased accessibility and engagement, leading to long-term customer relationships.
Depending on how clients were served by advisers, some advisers had to see their clients face to face as part of their value proposition and that was tested during the pandemic, particularly in Victoria.
But overall, I think for the industry and for the consumers it was a turning point for the advice relationships and value exchange that had to be embraced by all stakeholders.
It actually forced advisers to better understand “how my clients determine value” versus “how I would like to serve my clients”.
Face-to-face appointments were challenged so advisers had to look to other means to continue their services and assist their clients through the pandemic and that forced them to look at how they did things, and to explore video meetings, electronic/digital signatures, online engagement tools, etc.
With no other options available, apprehensiveness on applying such methods was overcome and I think we proved that through the pandemic advisers and consumers have probably realised that there are other ways to be serviced, and potentially prefer these new ways.
In the medium-term, I think all businesses need to ensure they have a robust disaster recovery or COVID-like response plans or a business continuity plan. It will also be about ensuring that advancement in compliance technology, such as regtech, and to ensure that the cost of compliance can be driven down to ensure that advisers’ business models will remain sustainable for a broader range of clients. In addition to that will be the professional indemnity costs and the relationships between rising potential costs and the appreciation of compliance regtech by insurers to help to keep these rising costs at bay.
MM: What are the strengths of your business and how well are you positioned for the future?
AK: Spark Financial Group is the controlling entity of both Australian financial services licenses (AFSLs), [Axies and Aura Wealth]. We acquired Aura in March 2020 and through 2020 focused on harmonising our services for all the advisers within each AFSL. We are most suited to practices that are seeking access to greater scale, access to innovative technology solutions, a dynamic adviser culture, and a hands-on practice development approach.
We are not a multi-hundred AR [authorised representatives] group and do not intend to be because we are focused on the growth of our practices, rather than growing AR numbers for the group. If we focus on growing our practices, then the AR numbers will take care of themselves. We are looking to stay at this mid-size AFSL space, where sufficient scale is accessible to pass onto our practices whilst remaining accessible and high touch instead of becoming a larger-size AR group with hundreds of representatives where you can start to lose your ability to remain personal.
Through 2020, Spark invested heavily in the harmonisation of methodologies, tools and processes for both AFSLs – we had to bring our advisers on the journey, and through COVID-19, this was quite the task. I am delighted that these initiatives are now implemented along with the integration of our regtech solutions.
Our focus on technology partnerships and integrations remains key, where 2021 is about implementation and deployment at practice level to ensure our advisers are equipped to enable growth through increased scale, efficiency and capacity.
With the reduction in adviser numbers and future movement of clients looking for new homes via sales of financial planning practices, we are focussed on helping our advisers be ready for this coming opportunity.
MM: What are Spark’s plans with regards to its two AFSLs? Will they be ever be merged?
AK: Spark Financial Group is a shared services business, with the resources and capability to 100% manage our AFSLs, Axies and Aura Wealth. We see no advantage to move our advisers from one to the other in the short-term.
All advisers receive the same level of support from Spark and since the merger, both AFSLs have received increased services due to our greater scale and benefitted from our thought leadership on the role of technology across our group.
Perhaps in future, we could use the AFSLs to segment the adviser capability and authority, meaning if we received clarity from the regulator on scaled/specific advice, we could appoint advisers to one of these AFSLs and separate holistic, full advice to the other. Time will tell.
MM: How do you think the business model across the industry will evolve and which ones will struggle?
AK: The way the advice offerings have evolved over time, with advisers having been urged to deliver more holistic financial advice, has forced advisers to develop value propositions that would attract higher net worth clients, so you have got many advisers who are trying to be in that segment. This has created a great divide in the market for advice where consumers need arguably more but cannot access advice because a) they cannot afford it or b) advisers are not willing to service that market because they cannot deliver their value proposition at this price point.
So, of course, it is going to affect business models and that is why we have this whole scoping exercise that we need to understand entirely, and this would then allow us to form a business model that can fill this gap in the market.
Advisers are moving away from the institutionally-owned AFSLs subsidised by products, which employed vertical models.
These have now been largely disassembled due to those businesses divesting and as a result of that, advisers had to look for a new home. To the defence of these models, that was how advice was affordably delivered to the mass market, however, it was these models that were also seen to be taking advantage of consumers.
For the advisers within, although operating within these parameters, it was these models that often caused poor consumer outcomes. Unfortunately, the poor consumer outcomes were not isolated to vertically integrated models, and we had advisers in our industry operating outside these parameters and conducting themselves in a manner that was not in their client’s best interests which brought our industry into disrepute.
MM: Do you think the industry is currently overregulated?
AK: Yes and no. As I do not think it is overregulated in the efforts to protect consumers, however, it needs further development to address the gaps raised earlier around affordable advice.
I think that the reality is that if you choose to be a part of an aggregated offer or a business model such as a dealer group, where advising within the parameters set today, the reality is that one poor advice document by any adviser can create a lot of damage or disturbance to every stakeholder on that AFSL and the clients within.
In our AFSL’s we strive to ensure that we have correct monitoring and supervision processes in place to reduce that risk. We must protect all our advisers and their clients.
Traditional compliance methods were delivered through a human review and so the more people you had doing it, the more costs would amount and those costs would be passed onto advisers (and ultimately their clients) putting pressure on their business model.
What has changed though are the various technology compliance (regtech) solutions that have come onto the market. As AFSLs start to investigate and test the solutions, that would be a catalyst towards decreasing the amount of human effort required to oversee advice processes and quality, which in turn will drive down compliance costs.
This allows AFSLs to gain a higher level of compliance oversight without unnecessarily increasing these costs to the advisers. Therefore, we are aiming to protect advisers and their business models to enable them to serve their clients in a compliant and cost-effective manner. My message here is that if your AFSL is not looking at these solutions, then it will need to do so. At Spark we have studied this carefully and created a technology ecosystem that incorporates these solutions seamlessly and as a result we can deliver more value through our broader licensee offering.
Arthur Kallos is founder and chief executive of Spark Financial.