By the end of June, 2011, Steve Walpole aims to have moved his financial planning business to 100 per cent fee-only advice. Not one cent will come from investment products. It won’t have been an easy journey, and that date is still almost two years away. But Walpole believes he’s got the right philosophy to get there, and a business plan to match.
Walpole’s firm, Keystone Partners Financial Services (KPFS), employs 15 people in four locations – in Sydney’s CBD, in the western suburb of Penrith and in the Blue Mountains towns of Blackheath and Leura.
But Keystone is also part of a network of some 10 independent licensees who have clubbed together to form a buying group, with the aim of passing on substantial savings to clients, and weaning the firm – all of the firms in the network – off product-related income.
Keystone has made a promising start. Walpole says that from a split of roughly 50/50 between fee- for-service and asset- or portfolio-linked fees not long ago, by June 30, 2010, it will only receive 15 per cent of its income from portfolio-based fees.
That final 15 per cent may prove to be the most difficult, however, as Keystone and the buying group grapple with pricing issues in wrap services, and how to deal with clients who are reluctant (or unable) to pay a fee from their own pockets for the advice provided.
Walpole’s journey started in the early 1990s when he joined insurance company Legal & General.
“I started there in group risk insurance, under an actuary, with a team [including] a couple of guys who did maths and finance, so they did massive spreadsheets on group risk analysis,” Walpole says.
“I moved around fairly quickly. I worked in the NSW business development office, compliance and training – three jobs in four years.
“I joined when things were just getting serious about making sure we had product manuals, and people actually got examined – they had to pass exams to sell those products.
“Before that, they used to come in and they’d just sign in on the [attendance] sheet and say they’d been there, walk back out and sell all these products that they didn’t really know about, apart from what was in the PDS [product disclosure statement], or whatever it was called back then.
“They got really tough on compliance; they were changing distribution at that time. And so I sat down and said product-based advisers might have a run for the next five to eight years, if you’re lucky. It could be longer, it could be less, and it’s turned out longer – it’s surprised me. The power of institutions.
“I said to myself, if I’m going to go out to join an advisory firm, I’m going to join one that can stand the test of time.”
The desire to join an advisory firm at all was driven by a couple of factors, first among them the experience of Walpole’s father.
“Seeing my father working in executive management at Woolworths, and the pressures of that type of management structure,” Walpole says.
“That made a big impact on me. He was 53 when he had a heart problem, and the doctor said[to him],‘Mate, unfortunately you’ve got six months up your sleeve unless you stop doing the work you’re doing’.
“That had a big impact. That happened in November 1997, and I went into business in February 1998.
“And the other thing was that I realised I thought I had an affinity or an ability in that area. I could run a practice and advise and I thought I’d enjoy that. But what I did was join a firm that only did self-managed super. That was the start of trying to align myself with what would be [relevant] in the future, rather than what was just then and there.
“Grant Abbott and Tony Negline were just starting to do roadshows in the mid-90s and all the way through, and then it got very popular.
“This firm had been doing self-managed [super] since the late 1970s. I just went there and I thought, wait on, if you’re really wanting to deal with clients that you can make a big difference for, it’s going to be in areas of complexity – medium-sized businesses, professionals and executives – and they will generally, especially the medium-sized-business owners, want to have their own self-managed super fund.
“I said, let’s go learn that – that’s an area I need to learn and be really good at, and that should put me in a position of more of a strategic adviser, rather than a product adviser. It worked out fairly well.
“I went out by myself about three years after that and I tried to just do fee-only, pay-by-the- month SOA [statement of advice] fees, and I found it pretty tough. That was about 2001. There was a lot of change in the industry then – FSR came in – so I tried to just purely do strategic advice only, not linked to the investment portfolio. It had its challenges.
“I don’t think there was enough centres of influence in my business structure that really supported that. I probably was a little bit immature at that point in time and didn’t [provide] enough education as to why I was different compared to the rest of the market.”
Competing against institutions who were giving away the advice component free was a challenge as well, Walpole says. He needed to find and exploit a niche, but he could not afford to start out as a fee-only concern. That meant the business had to be something of a hybrid to survive.
“It takes time to make a niche very successful,” he says. “I didn’t really understand that. So I blended it going forward: we did strategic advice, and then we did a pseudo – it’s not really a commission, but it’s a commission in my eyes – fee linked to their portfolio.
“That’s how we’ve carried on, all the way through to now. The major change that I made, though, was that five years ago we moved from Sydney to the Blue Mountains – my wife, daughter and I – and when we did that we decided to merge with an accounting firm, and we decided to get our own licence.
“To get our own licence we decided that we needed scale, if we wanted to still support the clients we had as a large part of our base as well as moving to a strategic-fee-only-type client base.
“We decided to see what wraps were available, and we decided to build a buying group, and that’s been supported by adviser firms in WA, adviser firms in Victoria, adviser firms in New South Wales and adviser firms in Queensland.
“There are 21 advisers who are coming along to a development day this Friday [September 11]. There are 14 others we’re in contact with at the moment, and I’d say about 10 of them at this stage will come along to our next function in November this year.
“So it’s starting to build very quickly in a short space of time.”
Keystone, at a practice level, positions itself at the centre of a hub of professional services and advisers, all of whom are available to the firm’s clients as and when needed. Referrals are made on a needs basis only; there’s no fee or kickback received by Keystone, when clients are referred by Keystone to other professional firms, the clients simply pay those firms for their respective services.
Walpole talks about “network theory”, and the idea that command-and-control structures do not necessarily deliver the best results on the ground. Control has, effectively, to be devolved to smaller units, which have the autonomy to make their own decisions and deliver better services.
“[We are] what is commonly referred to as an ‘all-channel’ network, or a hybrid of networks,” he says. When he draws it, it shows each member of the network – each “node” – connected to every other node.
“All links are working for change,” he says.
“We looked at it at two levels. We don’t want to be a command-and-control licence, but then we said what if we move to this all-channel-type technology, which seems to be working very well for companies like Apple, et cetera. It’s a hybrid of a hub. If we want true change…all we have to do is transition our businesses into being and behaving like a profession. And to do that we have to change the alignments of how we get paid.”
Walpole says the establishment of the buying group is a critical step in enabling small, independent licensees to make the step away from product commissions.
“You need scale at an individual licence level,” he says.
“The small boutique licences have the autonomy to decide what’s best for the client. They don’t have that autonomy in a larger licence structure that’s either building for a merger or acquisition, looking to sell out, looking to list – you can’t do it.
“ To cap it all off , we said the power of a great network is its narrative, its story. If our narrative is ‘value, innovation and choice’, and discovering what those values mean, I can’t think of anything better to give back to the client than a valuable experience – what they’re paying for; an innovative experience – we’re moving ahead of the competition; and choice. We’ve tried to do that at the network level and at a client level.
“It’s a bit utopian, but it’s happening, because we’ve already got the scale to go back and negotiate pretty much the same pricing as any of the big guys in the industry.”
But negotiating [the right] price is important, Walpole says, and the buying group is building the strength to do it more effectively.
“What it does is straight away give something back to the client,” Walpole says.
“This is the part that we’re proud of, and so too are our member firms in the KPFS Network. By reducing the platform expense for the client and being paid appropriately via a non-product-linked fee we are all moving in the right direction. Yet it is a bit-by-bit process as a lot of businesses have a legacy of product-linked fees, so this is a great ad- vantage when going back to the client to renegotiate a fee-only relationship moving forward.
Walpole maintains that planners have to be paid directly by their clients. Any part played by product manufacturers sullies the process.
“You’re linked in to being paid by them,” he says.
“The client benefits from the point of view that it might be more tax-effective for them to pay it out of their super, rather than charging them separately, but I still think you’re linked into a product, no matter what.
“An industry can’t call itself a profession until they stop being paid by the product.”
Keystone charges its medium-sized business clients $770 a month for strategic advice, Walpole says.
“That is acceptable to our business goals, but most importantly, our clients are happy with our service,” he says.
“Our clients are financial delegators and they value our time. We looked at all our expenses, staff salaries, the return we thought was fair for the risk we take as business people, and what everyone agreed to who are stakeholders in the business, and then we moved forward and priced the strategy advice.”