Knowledgeable industry commentators are saying the values of planning businesses have dropped considerably for three key reasons.
The first reason they give is that the burden of proof in the due diligence process, prior to the sale of a planning business, is now much tougher. A robust due diligence must now prove that the business had appropriate systems in place to eliminate the risk of any rogue planners compromising the business (as in the recent Financial Wisdom case). This will, of course, be difficult to do in any business that has had a number of planners through its doors and/or where no centralised client record keeping exists.
Secondly there are clients who do not receive a regular review but whose trails are accepted by the planner/licensee. The argument is that acceptance of the trail is a de facto recommendation to the client to continue holding those investments. This ‘hold’ is, of course, advice; but it is being made without a Statement of Advice (SOA).
Purchasers will want to see proof that there is a current and completed needs analysis for all clients and that there is a robust review process that is backed up by appropriate documentation.
Finally, many advisers have taken a strong paternalistic role in their client relationships, telling clients what to do and what level of financial risk they should accept. This results in the adviser/dealer group taking the full responsibility for the advice given. Potential buyers would have significant anxiety that, with no liability shifting and no properly informed client commitment, they may end up facing the legal response of unhappy clients if the purchase was to proceed.
So here is the drum for those who want to tidy up their files and make the sale of their planning practice easier and a lot more profitable.
Know your client
First of all, although planning processes vary from adviser to adviser, all have some essential elements in common: knowing the client, developing recommendations and obtaining informed consent and commitment.
Understanding your client’s goals, needs and priorities is the first and most critical step in the planning process. Where there is no review system in place, the new FSR obligations can be used as the trigger to invite clients to come in for a review.
If you and your client are comfortable using the Internet, a web-based pre-meeting process can speed up the collection of current data from the client and at the same time they can take a web-based risk tolerance assessment. Getting both done early in a convenient and inexpensive way means the key components of any review have been completed before the client comes in.
Remember, with couples, each should do their own risk profile. To ensure objectivity they should do the assessment individually, neither coaching each other, nor being coached by you.
Risks and trade-offs
The process of personal financial planning is based upon obtaining your client’s properly informed commitment to a set of trade-offs between conflicting alternatives.
Effective trade-off decisions can only be made when the elements of the trade-off have been separated, and can be clearly understood and compared.
The risk profile report does not replace discussion with your client, but rather provides an objective, information-rich starting point for a more in-depth interaction. Having the report before they speak with you will condition your client to expect to discuss the report with you, allow them to make notes before and during that discussion and for you both to then sign off on the report and notes.
The sign-off should constitute your client’s instructions to you about the level of risk they would normally choose to take and an agreement to vary that level if required.
Resolve the risk ‘gap’
A key trade-off decision, commonly confronted by clients, is between risk tolerance and the risk required to achieve their goals. There is often a ‘gap’ between the level of risk your client would normally choose to take and the risk associated with the return required to achieve their goals.
To identify that such a gap exists and to then assist your client to resolve it, requires an ‘apples-to-apples’ comparison between risk tolerance and investment risk.
The methodology for such a comparison is a risk tolerance assessment that is capable of linking risk tolerance scores to a range of outcomes, including growth and defensive asset allocations, volatility and future performance expectations so that trade-offs can be illuminated (see table).
Make use of the web
By using contemporary web-based technology — for risk tolerance assessment, client data collection and to illustrate the iterative and collaborative lifestyle goal trade-offs — you should be able to meet your compliance requirements quickly and simply.
How long should this take? Depending on your access to a comprehensive industry product hub to pre-populate the investment data and quality investment research, you will have an updated needs analysis, records of the process and your client’s properly informed commitment to the investment strategy in as little as a few hours.
Developing an SOA should be almost automatic, even for those clients you have not reviewed before.
Review clients
For existing clients, the review process allows advisers/dealer groups to reassess previous advice and make changes.
You may never know what previous planners, who abused your goodwill as they passed through, may have said and done to clients. There may not even be a record of it. However, in the review process, mis-advice can be rectified and clients put back on track to achieve their goals.
But then again you might be hoping that you no longer own the business when disgruntled clients’ lawyers come a knocking. And fixing up now what you can may enable you to sell your business at its maximum value.
Many of you will be aware that not only do I commentate and consult to the industry on strategic issues, whenever I see the opportunity I invest in what I believe and generate commercial solutions. So I need to declare my interest in the client-focused planning tools, CARM and FinaMetrica that are used to illustrate this story.
Paul Resnik is principal of The Paul Resnik Consulting Group. Contact him at paul@prcg.com.au.
