There is a core of client-focused professionals, assiduously lifting their standards. These individuals are swamped by the influx of new planners, recruited mainly by banks and life offices, whose corporate culture is rarely characterised by quality individual client service.
Are these environments likely to foster centres of excellence in putting clients’ interests first? There are some first-rate planners working in such dealerships. These individuals will know that not all their colleagues are at the same level.
Nor does working in a small dealership guarantee inherent superiority. TheAustralian Securities and Investments Commission(ASIC) found little evidence for this.
In my view, the study was rigorous and based on appropriate research methodology. The scoring of plans was in the hands of experienced and genuine professionals from the industry, not members of some perceived ‘ratbag consumer fringe’.
One flaw was an exclusive focus on the initial advice process, ignoring ongoing service. A good quality plan, which promised ongoing service that would never be delivered, could still achieve a high rating.
The survey revealed the inevitable consequences of having an inexperienced industry operating on flawed business models.
Approximately half the planners in Australia have joined the industry since 1997. ASIC classified anyone who joined before this as experienced. What an extraordinary situation. Imagine if half Australia’s lawyers had between zero and six years experience, and were given great autonomy. Many institutions’ business plans project the annual recruitment of a hundred plus planners. Where will they come from? Rapid influx maintains the average industry experience at a low level.
Are the survey’s key conclusions justified? These were:
many advisers who work on commission seem to churn;
many institutional planners recommend related products;
many planners do not practice full and transparent disclosure; and
some advisers produce ‘push-button’ plans, quickly prepared with template portfolios.
Who can protest that none of these are true?
The inherent flaws in how our industry is structured will be apparent if we apply the following principle: if an industry/corporate culture espouses one set of values and rewards another, the other will always prevail. What does our industry reward?
Many advisers charge little or nothing for initial plans. Therefore, they are not paid for the time to develop detailed advice. Hence they produce push-button plans.
How are the key executives in the large dealers remunerated? Are bonuses geared to sales revenues and funds under advice, or quality of service? Whichever this is will be their focus.
How are individual planners rewarded: on sales volume or service quality? It is reasonable for planners to have a strong revenue component in their income but does this reflect client retention (satisfaction) or mainly funds placement?
It is old news that fee for service is preferable for clients, as the survey suggested. If planners receive more commission from product A than B, many will be tempted to use A. If ongoing remuneration is from trail, paid whether ongoing service is delivered or not, many will not provide service.
This latter has an impact on the industry’s culture. Few prospects would become clients if told that the planner will deliver as little ongoing service as possible after funds are invested. Consequently, a segment of planners suggest or imply an ongoing service relationship, which is rarely delivered. This is a fundamental deception in the sales process.
Obviously not all commission-based advisers will follow these practices. However, if you believe this is not representative of the industry norm — read the ASIC survey.
Why are planners resistant to fees when everyone who has changed to them is so enthusiastic, including about their advantages in the sales process? The survey reveals a consumer thirst for objectivity and transparency. Selling on this basis to intelligent buyers is incredibly easy.
Some advisers express the fear that clients will not pay for their service. This reflects a self-belief that one does not provide value for money. In some cases, this may be a sad reality.
However, other planners underestimate their real value and the willingness of people to pay to be properly looked after. It is feared that the same individuals who pays for legal and accounting advice won’t pay for financial advice. That’s rubbish.
Then there is the perennial issue of independence.
Institutions which employ planners to sell a product are entitled to hire this sales force. However, this is neither planning nor advice. Our industry terminology fails to distinguish a product salesman from a planner. It should. Insurance legislation recognises agents and brokers who work for product providers or clients respectively (in theory).
The UK requires advisers to either sell all in-house products or none. This is ethically sound but it has left the independents starved of capital. No institution is interested in them. A quality organisation needs both capital and independence. We addressed this through the private equity market and others may follow.
The survey also highlighted the inconsistency within dealerships — one firm had one plan ranked ‘good’ and four from ‘okay’ to ‘very poor’. Not all inconsistency is a failure of quality control processes. In most large dealerships, real power is in the hands of the planners who own the client relationship. Some dealers do not impose too heavily for fear of alienating advisers.
This allows individual planners responsibility for such key activities as asset allocation, product selection from a broad recommended list, structuring advice, the development of fee and service offerings and so forth. Differences in quality are inevitable.
Dealers who operate this way can build a large brand but not a premium brand. This poses a threat for the good planners who operate in such an environment, that colleagues can damage the reputation of their organisation.
One criticism in the survey was questionable. It objected that uncommercial clients were turned away. The community does not expect doctors or lawyers to work unpaid for people who can’t afford to pay them. Government addresses the problem in the medical area (prescribed fees, tax incentives for health insurance and so forth) and through legal aid.
The community, for better or worse, has not considered it a social issue that not all can afford good financial advice. Business cannot fill this gap.
My organisation has a target client audience. We might not turn away others but we charge a fee for initial advice that covers our time. The quantum of this fee may have the same result as turning a client away.
We cannot be expected to do otherwise. We are absolutely committed to really caring for our clients. We cannot be expected to become bankrupt by serving everyone else.
The survey ought not be a surprise. It highlights the inevitable consequences of our industry structure — lack of independence, commission and so forth. What will high quality planners do, who are embarrassed by the perception that we are all shonky?
Some may flee to establish small dealerships to avoid tarnishing by association with others. Therefore, to preserve quality, they move to the smallest and least commercially sustainable business structures.
Others group together seeking some economies of scale, but allowing individual autonomy, reflecting their loose association.
Most such businesses lack both business leadership (as opposed to quality planning skills) and the capital to compete in the long run. Their autonomy also fosters divergent services, the inconsistency of which is an ongoing weakness for the organisation as a whole.
As I have written before, we will see the development of a small number of quality mid-sized boutiques where the like-minded will join to build a premium brand. These firms will need to be profitable — a new trend for dealers. They will be culturally unlike most firms that exist today. There will be recognition and focus on the core skills of the various individuals within the organisation, with reliance on others in who they have confidence for the other parts of the process.
This is a development from individual planner being the centre of all decisions today.
How will they distinguish themselves from the rest of the market? Their clients will know and will tell others. They may even be lucky enough to be included in a survey sample.
What welcome PR that ought to be!
