Financial planning faces into changing commercial dynamic
Three issues arose earlier this month which paint a telling picture of the future of the financial advice sector in Australia.
- A Money Management survey confirmed that more than 30 per cent of advisers are very likely to exit the industry over the next two years
- Financial Planning business brokerage, Radar Results revealed a significant disparity between the value of ‘high quality’ financial planning practices and those ‘conventional’ practices still in some way reliant on grandfathered commissions and without consistently close client contact.
- Accountancy-based planning group, CountPlus released the results of research undertaken by CoreData which pointed to a continuing convergence of accounting and planning practices but, more importantly, highlighted the industry’s continuing search for more viable commercial models.
Arguably, these three separate elements must also be viewed against the background of the major banks substantially exiting wealth management and the reality that, with them, will go many of sector’s unacknowledged commercial underpinnings.
Those unacknowledged commercial underpinnings came in the form of the banks’ continued support for loss-making planning businesses – virtual subsidies - something which was rationalised on their balance sheets by their value in terms of cross-sell and product distribution.
The findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry combined with the multi-billion dollar burden of provisioning for customer remediation combined to signal to the bank boards that it was time to head for the exit and rule a line under their exposures. However, it could be more than two years’ before the costs disappear from their balance sheets.
As indicated by the CountPlus research, financial planning businesses must now adjust to the reality of an industry in which product will finally be separated from advice.
To quote from the CountPlus analysis; “A sales-based culture is no longer appropriate for a sector that seeks to be regarded as a true profession. In Q4 of 2018, 61.1 per cent of consumers believe ‘the problem with financial services is an industry-wide culture problem, not a few bad apples’, up from 49.0 per cent in Q1 of 2018.”
It said this increase was most likely attributable to the events played out in the Royal Commission and that the exposure of the financial services industry’s misconduct had significantly decreased trust in the industry.
“The value chain as it is now will evolve where the individual adviser becomes a more important player, as well as converged advice and accounting firms,” it said.
The CountPlus/CoreData analysis suggested that in these circumstances the winners would be “those nimble enough to adjust rapidly, create an environment where advisers can focus on advice as their ‘core’, as distinct from product sales and still meet the higher professional and educational standards expected of them”.
“Advisers and advice businesses unable to meet new regulations and higher professional, educational and ethical standards, face a very uncertain future,” it said.
All of which meshes with the real-time market experience of Radar Results which noted that the multiples which could be expected from those seeking to sell practices with grandfathered commissions and less than pristine paperwork were well below those for a high quality practice – 1.5 times recurring revenue, compared to up 3.2 times recurring revenue.
The Radar Results analysis should also be weighed against Money Management’s most recent survey which sought to determine whether the election of a Labor Government at the 18 May Federal Election campaign would prompt more planners to leave the financial planning industry.
The survey found that, rather than increasing the number of departing planners, the election of a Labor Government would simply reinforce the decisions of those planners who had already opted to depart.
It confirmed that just over 40 per cent of respondents intended leaving the industry with their minds having been substantially made up by factors such as the Financial Adviser Standards and Ethics Authority (FASEA) regime and the end to grandfathering being recommended by the Royal Commission.
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