With institutions set to dominate the financial planning industry for the forseeable future, non-aligned firms face some significant challenges. Simon Hoyle reports on how some key players see the battle playing out.

National Australia Bank’s tilt at AXA Asia Pacific’s Australian business has highlighted, as if further proof were needed, just how powerful Australia’s major institutions have become. A “Big Four” financial services policy, sound regulation of the sector, and a flight to quality by consumers in times of uncertainty have combined to strengthen the institutions’ hands.

It throws up some significant challenges for the so-called “non-aligned” financial planning community. In this context, “non-aligned” refers to any planning business that is not part of an organisation that also manufactures financial products (although where the line is drawn on “manufacturing” is open to some debate).

Australia’s big financial institutions are formidable competitors. Our major institutions emerged from the global financial crisis (GFC) well-positioned to capitalise on weakness among domestic and global competitors alike. Just as consumers were looking for a safe haven, the Big Four financial institutions were ideally positioned to provide it.

This has led to an unprecedented concentration of ownership of financial planning in Australia. On some estimates, the percentage of financial planners operating under institutionally-owned Australian Financial Services Licences (AFSLs) is as high as 85 per cent.

How effectively non-aligned groups compete against the institutions over the next two to three years will determine, for much longer than that, the degree of choice that consumers enjoy in the financial planning sphere.  It will determine whether consumers can choose between planning firms that exist for the sole purpose of providing planning services, and planning businesses that exist as part of vertically-integrated organisations, controlling every link in the value chain from client to asset management.

Competition exists between Australia’s non-aligned groups; however, key players themselves agree that none on its own currently has the muscle to compete efficiently against the might and power of institutionally-owned planning groups.

Mergers are believed inevitable, probably involving at least three or four of the key players. There are an estimated 200,000 financial product providers in this country (essentially, individuals who comply with RG146); an estimated 16,000 people call themselves “financial planners”; the Financial Planning Association of Australia’s membership is approximately 12,000, of which about 9000 are practitioner members; and there are about 5300 CFPs.

However, exact figures on institutional control of financial planning are difficult to pin down. There’s not even firm agreement on how many financial planners there are in Australia.

One analysis of the make-up of the Australian financial planning industry, seen by Professional Planner, reveals that were NAB’s bid for AXA to succeed (the ACCC has delayed a decision on the bid until April 22), the big four banks would control 25 dealer groups and an estimated 6500 individual financial planners.

Throw AMP into the mix – with two licensees and 1500-plus planners – and it’s clear not only how institutions dominate the financial planning landscape, but how AXA’s ultimate resting place will affect the balance of power.

In some ways it makes no difference whether the rise of the institutions is cyclical – and in years to come we’ll see a move away from institutions by planners setting up non-aligned businesses – or whether it’s structural – and institutions will control the industry at current levels (or higher) forever more.

The fact is, institutions do currently dominate the landscape, and that’s the playing field on which non-aligned groups must play, for the foreseeable future.

Philip Kelly, chairman of Centric Wealth, says individual financial planners have always “owned” the relationships with clients, and that’s something – perhaps one of the few things – an institution can’t easily buy, even if they buy planning businesses.

“Financial planners have always owned the client relationship, just because that personality bonding between the planner and the client is so fundamentally important,” he says.

“In 1990 that was the only thing institutions didn’t own. So they solved that problem by buying the planners, as we went through the1990s and the 2000s.

“Then they threw their money at the platform industry that was created, independently, by people like Sealcorp and Navigator. Institutions bought that, as well, in order to increase their slice of the pie.

“But those of us who had the ability to still be non-aligned suddenly were empowered by this latest generation of technology. We do not have to play that institutional game any more. We are not dependent on them.”

The managing director of Snowball, Tony McDonald, says the institutions’ appetite for buying planning businesses makes sound commercial sense.

“Ask yourself the question: Why were they acquiring distribution?” McDonald says.

“If you are inherently a vertically-integrated business model, you’re acquiring distribution primarily to sell product.

“Also…where there’s [rationalisation] among those institutions, you are buying other businesses fully-priced, so you’ve got to get the synergy benefits out of it to justify the price. How do you get the synergy benefits out of it? You’re increasingly putting your product through the distribution.

“It must be; it is; it cannot be any other way. And that’s not a criticism of it; it’s just, that is the reality. I’m not having a shot at it. I’m saying, that is a perfectly legitimate strategy and it’s been followed by the banks, primarily, and why wouldn’t they?

“But the reality of that for the consumer is, necessarily, you are effectively in an environment where the product may drive the advice.

“When I say ‘vertically integrated’, I mean totally vertically integrated. This is a really important point. In that model, it is the total, 100 per cent of the supply chain. It’s the advice; it’s the portfolio management, which means putting the portfolio together; it’s the security management – in other words, what we call the asset management, buying and selling the stocks and running the funds; it’s the portfolio administration – the platform; and in many cases it’s also the insurance; and it will be the debt.

“It is the total, end-to-end part of the supply chain.”

The executive director of Industry Super Network, David Whiteley, says institutions have to figure out, in essence, how to make a quid out of selling advice, rather than making a quid out of selling product. “They’re pretty good at making money out of flogging underperforming products,” he says. “It’s about how the banks, in owning these big dealer groups, how they can construct those groups to be professional financial planning businesses.”

Ultimately, the institutional model is about scale and delivering as much advice to as many people as cheaply as possible.

“Why there is an inevitability about institu­tional ownership in the long term, a [company like] MLC or AMP, they have hundreds of thousands of clients, or members, who will need financial advice,” Whiteley says.

“So already they’re looking at how do they service the advice needs of their existing members.

“A lot of that will come through intra-fund advice; through call centres; a lot of it will come through the Web; but some of their clients will continue to need, or will need, some comprehensive financial advice and they’ll want to retain their funds under management and therefore service them.

“That to me is how the future looks to these big institutions.”

Kelly says institutional competition should hold no fears for non-aligned groups with a clear strategy, with the scale to provide services cost-effectively, and if they trade on their independence as a point of differentiation.

“There is a substantial point that it is easier to be a fully-professional adviser if you don’t have any ‘gravitational attraction’ to the products that your ultimate owner manufactures. It’s just easier,” Kelly says.

“And secondly, there’s how consumers perceive it. Over the last couple of years, consumers have been educated that the planning sector is full of bias and self-interest, and gee it’s hard to find an honest one – which I think is terrible. Every responsible person in the industry thinks it’s terrible that the public has been encouraged to think like that.

“So we think in the kind of environment we’ve got here, where we don’t have any institutional ownership. [Venture capital group and majority shareholder] CHAMP’s not an institution in that sense; it doesn’t sell anything retail to people like us or people like our clients, and never will.  And we don’t have partnership arrangements of any sort, we don’t have volume rebates on platforms, for example, in the way some other groups do. We’re free of all those things people think can bias the advice process.

“And our advisers love it. The biggest defenders of the idea of non-institutional alignment here are the advisers. They’re quite feral about it. They’re the keepers of the faith.

“We all believe it too, that it’s a really good, viable model. I think it will always be the smaller part of the industry. I don’t believe that cyclical idea too much, and I think the industry is going to be dominated by vertically-integrated institutions that use advice as a value-added sales tool.  And I haven’t got a problem with that. I think they’ll do a reasonable job, because most people are inevitably going to buy an advice package bundled with other things, because that’s really the only way they can afford it, and I think the institutions will do a reasonable job of that.”

Kelly says Centric, and other firms that tread the non-institutionally-owned path, cannot compete with the big brand names of the banks and other institutions. They are, so to speak, fishing in separate ponds.

“If we were fishing in the same pond I’d be strategically worried, because you’d be competing with the brand name,” Kelly says.

“And brand names are powerful. People spend vast amounts of money building them, and they’re not doing it without reason.  They know it works. I would not want to fish entirely in the same pond.

“I think it would suit us if consumers started to get it into their head that there comes a time in your life when you ‘graduate’ to coming to a firm like Centric. I hope that’s what they’ll come to feel. And that they will distinguish the value of what we do, and the professional way we do it, from what else is available – but without necessarily seeing what else is available as being bad. We don’t want them to think that; we just want what we do to be seen as materially different and more suitable if you fit a particular demographic profile, or socio-economic profile.

“And that profile isn’t kind of ultra high net worth.  In some circles Centric has been seen as a high net worth fit. It’s not wrong; it’s an exaggeration. The bulk of our clients are comfortably off, but not wealthy.”

ISN’s Whiteley says there will always be two business models for delivering financial planning services.

“There’s one model, around niche providers of financial planning advice, and there’s a model of the institutionally-owned,” he says.

“I think institutional ownership is going to continue, whatever the regulatory model. Now is that a good thing or a bad thing? The reality of it is that these major institutions are going to have to work out how they’re going to delineate being in the funds management/superannuation business, and being in the financial advice business.

“It’s not going to be appropriate for them to use their financial planners to sell or distribute their product. That’s not the role of financial planners. The planners’ role is going to be to provide financial advice. That’s the challenge.”

Whiteley says “institutional ownership itself isn’t necessarily a bad thing”.

“If we get in suitable and appropriate laws, which disaggregate advice from sales – and I wouldn’t want readers to misunderstand this: disaggregate sales from advice – then the next stage is what does the financial planning industry look like, or what does it need to look like, and how is it economically viable?” he says.

“And clearly, the institutions have got a role to play in that, because they employ closing on 50 per cent of the advisers, or have them tied to them. I don’t think that’s going to transform into an environment where you’ve got 15,000 or 16,000 independent advisers, privately licensed. Nor do I necessarily think you’re going to get an even more exotic outcome.

“The institutions are here, and here to stay, and that’s partly why the laws and the regulations do need to be comprehensive. But then I think you can rely on some of the institutions to adapt reasonable quickly, to make this new world of financial advice work, in an economic sense, for them. It’s a necessity for them. And equally, I think they will seek to brand themselves on the quality of advice.

“As other financial planners will, too. In all of this what I don’t see is the regulation necessarily leading to institutions having less planners tied to them.

The outgoing chief executive of the FPA, Jo-Anne Bloch, says institutional dominance of the planning market isn’t an impediment to the FPA’s desire to lift standards and drive financial planning towards true professional status.

“It has always been our objective that irrespective of who you are licensed with, you should undertake individual professional commitment, and put your client first,” Bloch says.

“We’ve seen the Corporations Law, as you know, as a barrier to that process. That barrier is now being knocked down. That divided loyalty between AFSL and client is being removed. So for us, the issue of the institution is less of a problem. But of course, you cannot guarantee that every institution and their dealer group is going to be on board.

“As I’ve said, this is a bottom-up [and] top-down process. Those planners in organisations that haven’t necessarily been on board will push these reforms through, irrespective – or they’ll go somewhere else.”

Whiteley agrees that institutional ownership won’t be an impediment to lifting standards.

“When you’ve got a fiduciary obligation, which will be placed upon the financial planers, it’s not going to be commercially viable for an institution, a publicly-listed company, to be imposing upon the financial planners conditions of employment which are going to require them to breach the law,” he says.

“They won’t be allowed to do that.

“If they were putting requirements upon [planners] which were requiring them to breach their professional code – which may not be the law – then that’s equally an untenable situation.

“But I don’t think it’s going to work that way. I think these big, large institutions, with large brands, are responsible companies, which will adapt to the changing regulations. They’re sophisticated, intelligent companies and they will adapt to the new regulations.

“And if they decide they want to be in the financial planning business then they will be, and they will seek to market themselves on the quality of that advice, and the quality of advisers that are associated with the companies.

“Once they’ve been dragged there, kicking and screaming, they’ll claim the moral high ground.”

Bloch says institutions play an important role in delivering financial planning services to the mass market.

“I’m not sure we’d be able to deliver advice under the current regulatory system, with the protected measures, at a cost people could afford, if we didn’t have some sort of support for delivering those services,” she says.

“If that cross-subsidisation could come from somewhere else, I suppose that would help, but some of that institutional ownership is about cross-subsidisation and supporting the cost of advice.

“If it didn’t happen from there, you’d have more rebates, you’d have more volume bonuses, you’d have all sorts of things like that. Plus, a lot of that brand is really important as well – the trust-confidence-brand issue goes hand-in-hand. My only concern is, would we be able to deliver as much advice to as many Australians with the opposite, a purely-independent model? Evolution will give us the answer to that. I’m not really sure. But that’s a question.”

Bloch believes the swing towards institutions is cyclical, and that non-aligned planning firms have a great chance to compete by differentiating themselves.

“I think they think it’s getting tougher, but I think they have a great opportunity, of differentiation, and of thriving on their boutique and special brand,” she says.

“I continue to say, Australians do not like to be told there is only one solution. They want to know there are other solutions out there. And I think there’s an enormous opportunity for small businesses, for independent brands, to go forward. I think they need to grasp the opportunity and run with it.

“I think the larger institutions will have you think [non-aligned groups being unable to compete] is a problem, because they want to mop up. We are in a bit of a cycle of consolidation, so you could be forgiven for thinking that being independent, being small and being out there is harder, but I think it’s a cycle. There will come a time when people will pop out of [institutions], as they have done, for many years.”

Snowball’s McDonald doesn’t believe institutional domination of the industry is cyclical. “It’s structural, we reckon,” he says.

“And this is the challenge to the non-aligned [groups], and it’s a challenge to Snowball – hands up, we’re sitting here agonising over it, and we know some of our peers are as well.

“In the non-aligned channel, there’s those that are already corporatised and have already got critical mass. Let’s name names: Barry [Lambert, chairman of Count Financial]; DKN; Snowball; Ficudian, probably. In the non-listed space: Shadforths; Centric.

“They’re in that non-aligned group. One or two or three of them are going to have to come together, and start being a major force. If that 15 per cent [of planners who are non-aligned] is going to survive and prosper, and maybe become 30 per cent of the market, we are going to have to be rationalised. It’s inevitable, because you’ve got to have the critical mass.

“Or they have to be an absolute rifle-shot niche business, which probably almost is a family office.

“Getting caught in no-man’s land is just suicide. Even the boys who’ve kind of half-arrived and have got critical mass as dealer groups now, are still going to have to have some rationalisation.”

Centric’s Kelly also isn’t sure the rise of the institutions is cyclical, and he sees a merger in Centric’s future (see Planner Profile, page 32).

Kelly says it’s very difficult for a planner to leave an institution once they’ve joined.

“I can’t quite imagine how that would happen, I have to say,” he says.

“I just don’t see how you go into an institutional network and then leave – I mean, you’re not of any significant scale.

“For starters, not many planners actually move, do they? How many planners do you know who have changed employers, as distinct from sold their practice? It’s not that many.

“Let’s say you’ve gone into the institutional world, sold your business in there, or your business has been sold in there, so you’re sitting there working for one of the big bank-owned networks, and then at age 45 you think conditions are a bit more congenial, so I might go out on my own again. What are you going to do? You can’t take your clients with you; you’ve got no capital; it takes 18 months to two years to build up a book of business again and you’ve got to support yourself in the meantime. That’s why to me it seems like a one-way street.

“I just don’t see that as being a big wave. I can’t imagine how there could be anything like the number of people coming back again to the independent space in comparison to the number who’ve moved into the institutional environment.

“But I’m very interested in the argument.”

McDonald says some non-aligned groups have an explicit strategy of targeting the better planners in the institutional networks.

“It’s going to be increasingly difficult to do it the old way, the cottage industry way, where you just went out and got a shingle and started almost from scratch,” he says.

“You’re going to have to go and join up with one of these larger non-aligned groups who have got there.

“I think the choice of who you align with is more critical than it used to be. Just going to any old dealer group doesn’t work any more. You’re going to have to make sure you go to the right dealer group, and there will be fewer ‘right’ dealer groups.

“I think you’ll see increasingly that the non-aligned dealer groups try to cherry-pick the best of the advisers inside the banks. [There will be a path out] for good ones. For the good ones, there will be a very strong path out.

“Snowball doesn’t [cherry-pick] at the moment; I know there are dealer groups out there who, if you asked them to give you their strategy, it would be going around and cherry-picking the best bank advisers, once they’ve been trained.”

Centric’s Kelly says non-aligned planning groups are better placed to compete with institutionally-owned networks than ever before, thanks in large part to technology. In some ways, it’s the institutions that have to defend themselves against the non-aligned groups.

“It’s the core of the institutions’ business – financial products – that are being disintermediated,” Kelly says.

“And that’s a big issue. I once said to a director of one of the larger institutions, ‘What’s the part of the business you would fight hardest to keep – which wouldn’t you shed?’. And he said, ‘The funds management operation.’ Interesting. That’s the one that’s under threat.”

Kelly says technology has empowered advisers – the “people at the coalface”.

“If you think about how the industry was in 1990, there was no such thing as a non-aligned adviser, because you couldn’t be one. It was impossible,” he says.

“The institutions had all the money, all the reputation, all the technology. They had all the back office. They had everything. And only they could afford it.

“The average planner in those days was lucky to have a very basic IBM computer, and certainly didn’t have connectivity. And therefore they didn’t have any knowledge, they didn’t have any information, either – because how were they going to get it?

“Fast forward 20 years, and as a young, switched-on investment manager said to me the other day, I can get access to all the information that an institution can get, just like that, on my computer, and really, really cheaply. He said, ‘I can outperform an institutional fund manager, no trouble at all now’.”

Non-aligned planning groups naturally argue that a vibrant, competitive independent sector is critical to a healthy and competitive financial planning industry. But they’re not underestimating the challenges. “

Can the non-aligned segment grow? God help us if it doesn’t,” Snowball’s McDonald says.

“That’s number one. God help the consumer if it doesn’t. And secondly, can it? It has to. If it wants to be relevant, it has to. Is that a huge challenge? Yes – too bloody right it is. But God help us if it doesn’t happen.”

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