The market downturn is forcing firms to find better long-term revenue models. Kristen Paech reports on how to protect your business from a marketing mauling.
Anecdotal evidence suggests some financial planning practices have suffered falls in revenue of up to 20 per cent since the Australian sharemarket took a hammering in January.The colossal 26 per cent plunge in the stockmarket, a knock-on effect from the subprime crisis and the consequence of Australia’s heavy weighting towards financials, dealt a heavy blow to practices whose revenues are directly linked to market performance via product sales and volume bonuses.
And in a double whammy, as markets fell, so too did investor confidence.
New clients, who not too long ago were clambering to hand over their cash, are today opting for the safety of the bank, where they are reaping the benefits of a tidy cash rate.
“As a US investor, your alternative to being in the market is a 2 per cent cash rate – in Australia the alternative to being in the market is a 7 or 8 per cent cash rate,” says Andrew Pease, investment strategist at Russell Investment Group.
But for those planning firms that are charging a flat dollar fee for advice, the market’s fall from grace has had little bearing on business revenues.
Income is derived from the fees charged for the initial statement of advice and the ongoing reviews – neither of which is affected by market movements.
Alex Cook, principal at Arcadian Private Wealth, believes the value of fee-for-service financial planning comes to the fore in a bear market
“A flat dollar fee in this market is not impacted at all by a drop in assets,” he says. “There is no downturn in revenue, and every time you bring on a new client you’re adding straight to the bottom line. [This model] has a lot of merit in the current environment.”
NAB Financial Planning is in the process of transitioning all new clients to a fee-for-service approach, having adopted a business model focused on advice five years ago.
The bank’s decision in January to phase out trail
commissions by the end of 2008 will put NAB in good standing in the face of future market volatility.
In fact Geoff Rogers, general manager of NAB Financial Planning, says the bank is already attracting new clients – and interest from planners – as a result of the change in strategy.
“A fee-for-advice model is a better long-term model,” Rogers says.
“Day-to-day market movements become less relevant, and what becomes more relevant is the long-term strategy and the advice, and that’s what clients are interested in. For our planners it means they’re operating in a licensee that isn’t dependent on shelf space fees, but is focusing on how it builds a business that is transparent to clients and a good environment for our planners to operate in.”
The market downturn could well be the trigger for practices that rely on commissions to review their business models and move to fee-based advice.
Brett Walker, director of FSI Consulting in Brisbane, says practices have two options: “You are probably faced with the need to grin and bear it, or construct a different business model. It’s a great opportunity to attempt to cut the umbilical cord.” Cutting the umbilical cord, or halting the reliance on commission-based income, is significantly
easier today than it was 10 years ago, Walker adds. Practices and dealer groups are increasingly selling the value of advice, as opposed to their ability to outperform the markets, and basing advice models around this value proposition.
“The industry is slowly moving into an arena where advisers are confident to sell the quality of advice,” Walker says.
“Now that people are focusing on advice as the unique selling proposition (USP), the quality of the advice and the ongoing service, all they need do now is start to consider ways to make that mature and de-link from remuneration models that are based on portfolio value, even partially.”
Wayne Wilson, general manager, distribution and sales, Asgard Wealth Solutions, says few practices have been spared by the bear, regardless of remuneration models.
The majority of so-called fee-based planners still have an inherent link to funds under advice, he argues.
“Most of the fee-for-service models are actually funds under advice-based models that are applied against either master trusts or wrap accounts, or some underlying fund value-based approach, so their practices have lost between 10 and 20 per cent of their revenue compared with six months ago,” he says.
According to Walker, the key benefit of direct remuneration via a flat dollar fee is that you’re no longer reliant on that portfolio value.
“[Fee-based planners] have certainty of income, subject to them being able to offer a reliable service to their clients,” he says.
But consistency of income is not the only benefit of fee-based advice in a bear market.
Charging a fee gives clients extra reassurance in volatile times that the advice they are receiving is tailored to their specific needs, heightening the degree of trust in the relationship.
“If my client is 100 per cent cash or 100 per cent shares there is no difference in what I earn and that’s usually attractive to the client because they know that the advice that I’m giving them is based on what I genuinely believe,” Cook says. This fee structure leads to a natural conversation around the strategic advice needs of the client, says Greg Miller, general manager of MLC Advice Solutions.
“They can have a clear and open discussion with the client about what’s happening, why it’s happening and what it means for them,” he says.
“Their remuneration’s not affected and the client can see that they’re being given objective advice around what is the right strategy for them, advice which is not linked to what’s going on in the market.”
Without a high level of trust in a market downturn, there is a risk that clients will be unable to see past the falling value of their portfolios and inevitably choose to take their business elsewhere.
Walker believes people will look more closely at their ongoing costs to decipher whether they can find a lower-cost alternative.
“That will create more pressure for advisers whose books are built around trails where there is no reciprocal service,” Walker says.
“This move to more cost-conscious consumers will raise people’s awareness of that and drive them to look for other service relationships where they might get something in return for that payment.”
According to The Financial Industry Complaints Service (FICS), clients have indeed been scrutinising the advice they’re receiving and the aggrieved are taking action.
FICS received 269 complaints against stock- brokers, financial planners and fund managers in the first four months of the year – double the number received in the same period last year.
Excluding the Westpoint collapse, 140 complaints were made against financial planners during the volatile months of January to April, while only 72 were made in the first four months of 2007. Of the financial planning complaints lodged in 2008, about 70 per cent relate to inappropriate advice, and a further 20 per cent concern standard of service.
Ross Curulli, director financial planning at Hall Chadwick, says clients are more likely to switch advisers during this period.
“In a bear market clients start to become more aware of fees and they will dig deeper to identify what fee is actually coming out of their account, and may question that,” he says.
“Most commission-based models don’t articulate what they’re doing or how they’re doing things with their clients, so it puts at risk the relationship between the client and the adviser and the questioning of that client may [result in them] leaving that adviser.”
But while this is a risk for poorly-run practices, Curulli believes it equally provides a chance for robust firms to poach disgruntled clients.
“There is a potential for well-run businesses to identify and seek out new clients by promoting a better value proposition to these clients; so as a business we see it as a great opportunity to potentially take on new clients,” he says.
Walker says the onus is on advisers to nurture client relationships to ensure they endure through the good times and bad.
“I would assume that when markets fall it becomes extremely important for advisers to illustrate to their clients that there’s more to life than simply producing consistent double digit returns,” he says.
“Fostering that long-term relationship with the client is never as difficult as it becomes in a bear market.”
Recognising this threat to their client bases, dealer groups are working hard to provide their advisers with the support they need to instil confidence in clients and help them ride out the market turbulence.
Most of this licensee support involves supplying advisers with educational information, research and compliance to put the current market turmoil into a historical perspective for clients and keep both clients and advisers abreast of changing market conditions.
“We’re encouraging our practices to continue to grow their new business, to make sure their existing clients are getting that reassurance they need about the normality of what’s happening in the market, and that it’s not time to panic, and largely from what we can see that’s what’s going on,” Wilson says.
Robert Thomas, head of research and technical at Axa, says more advisers are seeking advice themselves as the markets continue their volatile ride in 2008.
“Periods of market volatility can be unsettling for clients as well as advisers, so it is especially crucial that research teams are experienced and, more importantly, accessible to advisers,” he says.
AMP Financial Planning provides full access to a dedicated research team as part of its core offering to planners.
The team’s role is to work with external research houses in reviewing market conditions, the various products available and the underlying fund managers. “We make a lot of that information available to our planners so they can be regularly kept informed of what’s going on and the views of the various research houses in terms of the markets,” says Michael Guggenheimer, managing director of AMP Financial Planning.
“In the short term, whilst there is some volatility, the planners have engaged with their clients over the strategic objectives, not short-term asset allocation. If a client is concerned about the volatility I would suspect that their risk profile will indicate that they want certain classes of assets, rather than those that may be subject to volatility.”
Robbie Bennetts, group chief executive officer at Professional Investment Services (PIS), believes advisers must place more focus on clients’ risk appetite in a bear market.
“It becomes increasingly important to make sure we’re looking at the cash flow of a client versus their debt levels – the whole risk profiling exercise goes up to an even higher priority,” he says. PIS will also run more than 1500 client
updates in the six-month period from January 1 to June 30.
“We provide a lot of our own speakers, as well as fund manager speakers, and we work vigorously at getting our advisers to get their clients in to keep them informed and up-to-date with everything that’s happening,” Bennetts says.
Much of the support MLC is providing for planners within its network is par for the course. However, Miller says lately the group has been digging deeper to identify the value drivers behind clients’ goals.
Recent workshops have aimed to help advisers understand those value drivers and therefore prioritise the clients’ financial goals.
“One of the value drivers could be that [a client’s] parents passed away and never had a chance for retirement; therefore if you’ve gone through all of the goals and said ‘I don’t think I can achieve them all’, you can see that retirement goal is very strong because of the driver behind it,” Miller explains.
“They’re the type of things we’re going through now to make sure that advisers in their conversations are engaging the client in what’s important to them.”
While those conversations continue to focus on the long-term strategic goals of the client, the bear market does have implications for asset allocation, particularly for new money being deployed.
Dealer group heads point to rising interest in cash vehicles, such as term deposits and cash management funds, as clients reassess their investment options. “Some clients are holding their investments in cash whilst they’re determining when they may change their asset allocation,” says Guggenheimer.
“But for those that have already put their plan in place, we’re not seeing a lot of movement in the short term.”
Securitor recently introduced term deposits to its master trust and eWRAP platform in response to the trend.
“While the advisers have been watching this volatile market movement which is trending up and down 100 points week in and week out, they’re moving to cash and fixed interest investments, so we’ve seen a significant increase in the use of term deposits,” Wilson says.
He says advisers need to ask themselves whether their client’s risk profile and investment time horizon has changed, and if neither has, then there’s no need to change investment profile.
“What often happens in periods of bear markets is that people follow a flight to conservative and known investments, so in terms of fund manager selection, although we won’t be changing our directions, it wouldn’t surprise me if advisers take a more conservative approach over the next 12 to 18 months and tend to select fund managers that have a long track record within them, and certainly try to seek out fund managers with consistency of performance and consistency of sticking to their style,” he adds.
Pease says the big issue now for advisers when structuring portfolios is Australia versus global.
While Australia was the best performer of the developed sharemarkets between 2003 and 2007, the subprime crisis has moved the goal posts.
“The problem for advisers, and what’s left clients scratching their heads, is why when Australia is so far away from the centre of the subprime storm, did our sharemarket get smacked so hard? If you can understand that then it tells you a bit about what the outlook might be going forward,” Pease says.
Going forward, he says it’s hard to be pessimistic about the Australian sharemarket.
For one, the Australian market’s price/earnings ratio is the lowest it’s been since the mid-1990s, so in absolute terms it appears to be good value.
Secondly, with about $30 billion pouring into the equity market annually from superannuation, and the Future Fund building up its equities exposure, there is a decent supply/demand imbalance, Pease says, not to mention the continuing commodities boom.
However, when compared with global markets, particularly the US, the picture is not so rosy.
“The US has a lot of pessimism priced in, an exchange rate that’s fallen 25 per cent from its peak, and a Fed that’s committed to boosting growth,” Pease says.
“The Australian market is still trading relatively high compared to global markets, it’s got an exchange rate at 20-year highs and a central bank that’s committed to slowing down the domestic economy, so you’d have to think that in the next equity market upswing, having been one of the best performers, Australia could lag the global rebound.”
He adds: “Advisers should be looking at their clients’ portfolios and saying ‘Have they got too much exposure to local shares and not enough to global?’ and if the answer is yes, if they don’t think their portfolios are properly diversified, this is a very good valuation entry point to restructure their portfolios to be more diversified and to build up a good long-term global equity market exposure.”
