Chris Bowen’s The Future of Financial Advice document contains reforms to conflicted remuneration structures, a fiduciary duty for financial advisers and an annual client agreement to advice fees. While these proposals are building blocks in improving the quality of advice, investor protection, trust and confidence, who in the industry actually stands to benefit?
Apart from clients, the proposed reforms provide significant opportunities for suppliers and participants right across the industry value chain.
Financial advisers who already have a model that complies with the proposed reforms have a two-year head start on those with trail commission-based models. These businesses are already more profitable than commission-based practices. These may be the businesses that acquire trail commission-based firms and convert them, achieving revenue increases that could exceed 40 per cent.
They will be especially well positioned if they have successfully completed acquisitions before – as the banks will readily fund the future acquisitions.
We are seeing more use of managed discretionary accounts (MDAs), and this will accelerate as a natural consequence of the proposed reforms.
Cooper’s review highlighted that 67 per cent of managed funds had underperformed the index over the past five years.
This has not gone unnoticed by financial advisers, and it is likely we will see more private wealth management models emerge, where asset management is conducted in-house on an MDA basis. Ownership by advice practices of investment management decisions, for which there is an asset fee, will be complemented by fixed-fee initial strategic advice. The ongoing service will be implicit in the investment management fee.
Because advice business models are changing, MDA providers could capture market share from managed fund providers. If there is more discretionary in-house investment management, research houses will play a more significant role in building approved lists and in monitoring investments. If there is more direct investment by advisers, and a fiduciary obligation to ensure the best interests of clients are met, it follows there is a bigger role for independent research to validate investment decision making.
Other winners are likely to be those licensees who can assist practices to migrate from a commission-based approach to a fee-based approach. There are several consulting firms that have experience and are working in this space currently.
Master trusts and wraps will be less attractive as practices look to add more value by owning and charging for direct asset management without the platform costs.
I also believe that practices that have traditionally focused on the wealth creation market will need to rethink their model. Clients are generally in the 30-to-45-years age bracket – gearing and regular contributions to small super account balances are common strategies.
With no asset fees on gearing, I believe that advisers will find it difficult to get clients to agree to pay a fee for a small rollover or super investment.
Another group to face some pressures will be boutique planning groups and licensees that rely on volume-based rebates. In some boutiques this is 10 to 15 per cent of annual revenue; in large dealers it’s 30 to 70 per cent. Unless, in implementing the reforms, there is some grandfathering of this revenue, it will all disappear in two years.
Chris Wrightson is a director of Centurion Market Makers.