The new face of financial planning dealer groups

Consolidation is changing the face of the financial planning dealer group sector before our eyes, while small-to-medium players continue to struggle. Milana Pokrajac reports.

“Consolidation is bound to continue and conflicts are going to be an issue for a long time.”

These are the words of MyAdviser managing director Philippa Sheehan, who spoke to Money Management only a day before IOOF Holdings made a bid for MyAdviser’s parent, Plan B Wealth Management.

MyAdviser, in which Sheehan herself has a 10 per cent stake, is a 136 financial planner strong dealer group, about to be packaged and sent off to IOOF – not unlike DKN Financial Group about a year ago.

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And this is the harsh reality financial planning dealer groups must face today, as the new economic and regulatory environments make it all the more difficult to survive.

In the past two years, the financial services industry has seen unprecedented levels of consolidation, with most acquisitions being followed by comments about “securing distribution channels”, “gaining scale” and “tapping into” this or that market.

Here is a snapshot of the past 18 months:

• ANZ Banking Group buys ING Australia;
• ING Investment Management falls under UBS;
• AMP and AXA make it official after a year-long acquisition saga;
• Shadforth and Snowball merge;
• AMP buys Cavendish Super in a bid to expand its presence in the self-managed superannuation fund (SMSF) space; and
• most recently, IOOF flags plans to acquire Plan B.

The small are swallowed by the big, while the big are taken by the bigger. Chief executive officers get beheaded and replaced by the instos’ own men and women.

But what hurts the financial planning industry the most, it seems, is the sight of what were previously non-aligned and completely independent dealer groups taking shelter under the umbrellas of some of the largest institutions in the country.

DKN went to IOOF, while Count finally gave in to the Commonwealth Bank last year after a ten-year courtship. Hillross – which is owned by AMP – bought Iris Financial Group and Matrix Planning Solutions placed itself on the block.

“Anyone operating in the non-institutional space with less than 100 authorised representatives would struggle,” said Don Trapnell, director of risk focused dealer group Synchron, which has 235 authorised representatives.

He says that with the introduction of the Future of Financial Advice reforms, smaller licensees will have great difficulty meeting the costs of compliance regimes and the administration of running a dealer group.

“It is a competitive market out there and margins are very tight for authorised representatives, especially with the big instos putting out the golden handshakes to say hello to people,” Trapnell said.

In fact, out of the 20 largest dealer groups in Australia,18 are either owned by a larger institution or have institutional links.

So conflicts will, indeed, need to be well managed.

The one area Philippa Sheehan would like to have cleared up with clients right from the beginning is about who the practice is licensed through, who owns that licensee and what ties to products they have.

“This should not be hidden in a Financial Services Guide,” she said.

“All we can hope for with those institutions and banks is that we see a true focus on objective based advice that only links back to products when it suits the client’s specific objectives.”

Growth can be a dirty game

Once these acquisitions occur, what follows is an even more interesting game – and a dirty one at that.

The transition period is when the licensees are at their most vulnerable, as aligned practices tend to re-evaluate their positions and often consider a switch to another dealer group.

Judging by what the industry has seen over the past 18 months, this is something that BT Financial Group and MLC know very well.

Once AXA’s practices started their transition to AMP’s network, MLC struck with an aggressive strategy, sending their business development managers out to poach those sitting on the fence.

Similarly, as Count Financial's practices made their way to Commonwealth Bank’s network this year, BT announced it would try and take advantage of the acquisition.

It has been reported that the insto was offering Count advisers so-called ‘sign-on fees’ ranging from five-times earnings and from $500,000 to $1 million.

But while AMP offered generous welcome packages in the hope of protecting its practices from MLC, Count took it up a notch and prepared a counter strike.

Count Financial chief executive David Lane directly targeted Securitor advisers by sending them a letter which read: “We believe that such payments, if they are not accompanied by similar payments to existing advisers, fail to sufficiently recognise the loyalty and growth potential of existing adviser firms". Ouch.

But while this saga unfolded, various figures in the industry raised concerns about the abovementioned sign-on fees and what sort of product obligation comes with such money.

Genuine advice or a sales force?

Again, looking at the top 20 dealer groups, the majority stay true to their parent companies when it comes to preferred platforms and investment products.

For example, NAB-owned Garvan Financial Planning uses MLC MasterKey as a licensee-preferred wrap for allocated pensions and personal super, and MLC Wrap for investments.

This doesn’t mean that the advice provided by financial planners owned by these groups is in any way conflicted or inappropriate and Colonial First State executive general manager of advice Marianne Perkovic said there were plenty of examples where people need advice, but not the product.

“Probably the best example is something like social security – people will need strategies around Centrelink and how to transition to retirement – and that’s the product which is advice, rather than putting clients into an investment fund or something like that,” she said.

In addition, the best interests duty which will come into effect as part of the FOFA reforms will (ideally) prevent advisers and their institutions from ‘pushing’ products onto people who do not need them.

The word ‘sale’ has become a dirty word in the financial planning world, which is not necessarily a good thing, according to Trapnell.

He believes the idea of financial advice needs to be sold to clients and potential clients, and that there is no shame in that.

Organic growth strategies

Without scale, according to head of AMP Financial Planning Michael Guggenheimer, it becomes much more difficult to provide support services to financial planners.

“We in AMP Financial Planning recognise that we have significant scale in our business and I believe that that significant scale has allowed us to, in turn, invest in and support our financial planners through these [difficult] times,” Guggenheimer said.

He said institutional backing is particularly useful for small business owners operating in smaller or regional communities.

Nevertheless, the financial planning industry keeps growing, and it has done so regardless of the market conditions, with different dealer groups looking at different growth strategies.

Financial Wisdom, for one, is focusing on making small business financial planning sustainable.

“For the last 12 months I’ve been very focused on trying to make sure that advisers can be more ‘referrable’,” said Mark Ballantyne, general manager of Financial Wisdom.

“We’ve done quite a lot of training on client referrals for advisers because we feel that’s very important.”

The group had remodelled most processes to reinforce the referral culture. Their statement of advice templates have a referral policy, client newsletters profile referrals, while practice development managers offer day-long training on this subject.

Marianne Perkovic, who manages all financial planning businesses owned by the Commonwealth Bank, said her focus has been attracting more advisers to the industry and making advice more accessible.

She believes the real growth is yet to happen, once FOFA comes into effect.

“While hurdles are absolutely harder for somebody to become an adviser today than what they were five years ago, that’s a positive,” Perkovic added.

“I think we’ll attract better people, so that’ll make it more attractive for professionals who want to come in, do the right thing by their customers and build a good business.”

Regardless of the growth strategy, in reality it is all about making a business sustainable for years to come.

Synchron, for example, had a reality check in 2007. Don Trapnell said he did an analysis of the firm and found the average age of a Synchron adviser was 59.8

“We did our calculations and worked out that we wouldn’t have a business if we didn’t do something about it,” Trapnell said. “If we didn’t lower the average age of a Synchron adviser, they would either die or retire away from us.”

To combat this threat, Synchron developed its NextGen program, which specifically targets the learning needs of younger advisers, particularly those aged 40 and under.

With the launch of the NextGen initiative, Synchron attracted a number of young advisers who now comprise a third of their 235-strong base of authorised representatives.

With 83 advisers now under the age of 40, the average age of their authorised reps today is 49.6, which Trapnell said represents a huge drop.

SMSFs the obvious choice

While the retail versus industry superannuation fund war raged on over the past few years, one sector of this industry – self-managed super – achieved tremendous growth.

Some companies, like AMP, were quick to step in. The firm has recently created a whole new division dedicated to SMSFs – AMP SMSF – which will bring together its admin businesses Multiport and the newly acquired Cavendish Group, with an initial focus on administration and advice.

The two businesses have $7 billion in funds under administration and about 7,000 being currently administered.

“The research is showing that 40 per cent of new SMSFs have some sort of financial advice attached to them, and that compares to only 14 per cent of existing SMSFs that have had some sort of financial advice,” head of AMP SMSF Paul Sainsbury told Money Management in a recent interview.

Tapping further into the SMSF market was also a natural step for the Commonwealth Bank.

Marianne Perkovic said it’s about getting the accounting clients of the Count advisers to move over to financial planning.

“The owners of the SMSFs are the accountants, so I think we’re in a position to be able to help self-managed super funds with the investment opportunities if we help the people who are the natural owners of them … help them have better solutions in administering and looking after the funds,” she said.

Scaled advice – making it official

Although the Government and the regulators started their push for scaled advice in the past 18 months, many groups have been offering it for years.

However, it looks like scaled advice as an offering would be a luxury afforded only by those with, well, scale.

In a recent roundtable conducted by Money Management, Premium Wealth Management managing director Paul Harding-Davis said offering such a service would not pay off, given the company’s scale and the type of clients it services.

However, Mercer's Jo-Anne Bloch said scaled advice remains one of the group’s major offerings after having identified the need for it some years ago.

Financial Wisdom was an early adopter of this type of offering, having offered scoped, one-off services through Commonwealth Bank’s phone advice service called Advice Essentials.

“We are already taking advantage of it, and it’s a useful component to add to your armoury when you’re trying to make sure you keep your client-base engaged,” Ballantyne said.

“These things take a while to build capabilities around, so I’m glad we started some time ago.”

Just over two years ago, AMP piloted its program, My Money Choices, and rolled it out to its financial planning base. Around 900 AMP-aligned advisers are trained to use this scaled advice service.

But some industry figures are concerned about some of the topics that scaled advice is meant to cover, which directly leads to liability concerns.

MyAdviser’s Philippa Sheehan said the current documentation the industry has around scaled advice was not a good thing.

“For example, a client comes in and says I just want you to renovate my kitchen. As an adviser, you ask the client whether they want to renovate the entire house, fix the front door, paint the back room; if the client says no … then it is up to the adviser to work out exactly what that kitchen must look like,” Sheehan explained, adding liability should just be limited to the scope, and that documentation should reflect this accordingly.