Stewart Bell looks at the proposed Future of Financial Advice reforms and the changes they have already brought to the industry.
The Future of Financial Advice (FOFA) reforms have challenged every adviser in Australia to determine how they will price their services after July 2012.
The banning of investment commissions will change our industry on a scale not dissimilar to the introduction of Financial Services Reform. Although the reforms have not yet been finalised, and the implementation date is still over a year away, it is interesting to look at the impact they have already had on the financial services industry.
The issue is polarising our industry.
Many large institutional providers are seeking to attract mass Australia to lower cost products like never before.
Reacting to the efforts of industry funds, the large institutional providers are marking out a new battlefield: the commissions being paid by disengaged customers with no real need for an ongoing advice relationship.
On the other side of the fence, things are very different. Advice businesses are striding confidently into a world where advice itself is the product.
Here, the full cost of professional advice (expensive as it may at first seem to those accustomed to product cross-subsidisation) is presented unapologetically by advisers who have confidence in the value they provide.
They recognise the effect good advice has on clients’ lives.
They choose to work with clients who value that advice, understand the importance of an ongoing advice relationship and are willing to pay for the benefit of receiving that service.
Such clients can afford to invest in advice because they know it will deliver them a financial return, emotional benefits and a means of managing and minimising the many risks that can derail even the best-laid plans.
Business reviews
FOFA is acting as a catalyst for many advisers to undertake total business reviews. Legislative and market forces are seeing significant numbers of advisers scrutinising their advice offerings, the products they use for their clients, the way they charge and their business costs.
This has placed pressure on licensees to do the same.
Many advisers are moving clients away from master trusts and retail products into more contemporary products, as well as seeking better technology solutions that offer better value and enhanced functionality.
They are also reviewing their back-office processes, advice delivery and client communications — and making significant improvements.
This has led, in many cases, to advisers increasing their advice fees. But they are presenting clients with a total cost package that is cheaper and more cost effective.
These advisers, as well as increasing profitability and enjoying longer relationships with clients, are leading the profession in client satisfaction ratings.
Those who master the challenges associated with communicating the total value of their offering are also finding themselves entering a far more enjoyable working world.
Changing demographics
A demographic shift is also occurring in the people who are seeking advice. Historically, most businesses built their success on the highly sought-after retiree market.
These clients generally arrived with an asset base already accumulated, and required assistance throughout their retirement.
Conversely, the wealth creator who has amassed little in the way of savings but has big dreams for the future was comparatively poorly serviced and, in many cases, largely ignored.
This has manifested itself in a number of ways:
- The view that financial planners are ‘only interested in those with money’ is being observed in more asset-rich clients entering their forties and fifties;
- Advisers uninterested in helping build wealth from scratch and exclusively charging based on portfolio value are increasingly being seen as ‘product pushers’; and
- Advisers who have been able to service wealth creators — either by taking a calculated loss or by charging in a way that is divorced from asset value — are seeing increased referrals of clients’ parents unhappy with the manner in which their affairs were managed during the global financial crisis.
The increasing emergence of fee-based pricing models has seen more advisers able to profitably advise aspirational and income-rich clients requiring support in the areas of budgeting, savings, cash-flow modelling, gearing strategies, risk insurance and estate planning.
Advisers successful in these areas have leveraged specialised sets of software tools and product suites to assist with service delivery.
The advisers in this space have the added benefit of the perception of higher-quality advice, since their service is not tied to a strict monetary characteristic. Because they are usually required to examine strategic areas not always tied to a product solution, they often consider a greater strategic scope of advice.
Polarisation
There is polarisation occurring, with increasing recognition of the difference between ‘transactional customers’ and ‘advice clients’. The process will continue now and beyond 2012.
Some people simply seek a specific financial product or service: they need insurance, they have a lump sum, or they need advice following a redundancy.
Once that need has been fulfilled, their interest in a continued relationship is minimal.
These are ‘transactional customers’. Attempts to provide a profitable, ongoing service to this portion of the market will increasingly depend on price.
Early signs suggest that this is a space that large institutional providers are keen to target, seeking profitability from volume.
Many small to medium-sized individual advice firms will find themselves unable to compete.
Advice clients have different needs.
They often have complexity in their affairs, or seek a personal adviser.
They value the ability to seek the opinion of a qualified expert who deeply understands their personal circumstances and can confidently tell them what to do. They value having someone ‘on watch’, ensuring opportunities are not missed and threats are nullified.
Firms playing in the former space will be challenged to provide low-cost, one-off solutions. Firms in the latter space will need to understand the individual requirement of their clients, and deliver value that justifies the fees required to mobilise such an offering.
Sale values of client bases are falling, but those for quality advice business are increasing. The 3.5 times revenue figure has fast become 2.5 times. By next year, that may fall further.
Large institutions are scrambling to offer favourable purchase terms to young start-up advisers in order to extract dormant value before 2012 hits.
Conversely, the value of quality business has grown: six times earnings before interest and tax, eight times, 10 times — and even higher.
There is little doubt that the FOFA reforms have already instigated significant change in our industry, and will continue to do so over the next 18 months and beyond.
Any business owner who has not yet taken action would be well advised not to wait until they’re left behind.
The issues that need addressing at a practice level are many, and the future success of every advice business will be largely dependent upon the time and effort expended by its management to address this evolution.
Stewart Bell is an executive consultant with Elixir Consulting.
