When Phil Butterworth set out his planning group’s strategy, simple commercial considerations led to a structure that seems exactly right for the times. Simon Hoyle reports.
With the benefit of hindsight, the strategic plan set out about six years ago by DKN Financial Group looks incredibly prescient. In fact, it was driven by simple commercial considerations: how to help the financial planning practices it works with to maximise their own profit – in turn, enriching DKN shareholders.
Not surprisingly, Phil Butterworth, the chief executive of DKN, views recent industry changes positively, and welcomes much of the change likely to come, as set out in the Government’s Future of Financial Advice (FoFA) proposals.
Butterworth argues that significant regulatory change had to happen. And if change wasn’t driven by government, then it would have been effected by the industry itself, in response to consumer demands – though it may not have happened as quickly as is has, and will, had the industry been left to its own devices.
Butterworth says regulatory change has to take place simply to take into account how the industry has already changed over a number of years. “Through all these small and seemingly insignificant changes, you can see why the industry has had to have a bit of a hard look at itself, because it’s actually grown up quite quickly, but the framework it’s growing up in hasn’t changed a lot,” Butterworth says.
“Sure, we’ve had FSR, but you’ve gone from sole practitioners to, now, firms; it’s a much larger part of the economy; superannuation is a much larger piece of the pie and it’s got a lot more presence; yet the framework in which it’s been guided hasn’t really evolved.
“The industry had to make it evolve. It had to be either industry- or consumer-driven; I think what’s happened … is the industry has been driving the changes – and the consumer had a fair bit to say around that as well, in regard to pricing and getting rid of commissions – but with the GFC and Ripoll and everything else that came through, and the Storm issues, it’s absolutely accelerated the requirement for change.
“Whether or not it’s legislation, because it’s so transparent about what has to happen, it will be industry-led anyway. I think the majority of what’s been proposed in the reforms, most of it’s going to be embraced by the industry. There are a couple of areas of debate, but I think on the whole it’s going to be addressed.
“To put it back into context, the way we established DKN in the early days – this is going back six years ago to when we listed it – we made some fundamental decisions which in hindsight have stood us in pretty good stead through what is now pending as changes.
“We wanted to act as a buying group, and as a buying group what you’re delivering are better-priced services to the underlying investor. And so our target market was fee-for-service advisers.
“If you have the philosophy of wanting to use the buying power of associated firms to access better-priced services for those firms and their clients, that was the fundamental co-operative vision DKN had six years ago when we were listing.”
Butterworth says it’s a misconception that the planners who are shareholders in DKN will become wealthy through that investment. They might, but that’s not the aim, he says.
“The value-add was never going to be about ‘Here’s a big paycheck’; it was all about if you want to be associated with the group, you’re going to get most of the value through help for your business to become more profitable in its own right,” he says.
“Our primary focus was, use us to help you become more efficient and profitable in your own business. If you can do that, we win; if you’re a shareholder in us, that’s a nice value-add, but your retirement [plan] isn’t building value in DKN, it’s building value in your own practice.
“When you look at that as a framework of how we’ve grown DKN, then if you have a look at FoFA and what they’re proposing, and they’re saying one of the big ones is the banning of commissions, well the impact of that [on DKN-aligned planning firms] is marginal. In fact, we’re seeing that as a significant opportunity, because we have the framework around how to convert those guys who wish to convert to be fee for service. We can help them do that.
“We see the next three years as the biggest land-grab opportunity for DKN that’s ever presented itself. We’ve been growing nicely organically, but we see this growth can be escalated, because our model is well-aligned to where the reforms are going.”
That’s not to say Butterworth agrees with all aspects of the FoFA proposals – far from it – but the general direction that the industry is headed was anticipated, if not predicted, by the co-operative, buying-group structure the group adopted; and therefore, with a couple of specific exceptions, holds no great concerns.
“A fee-for-service model, the banning of commissions, a fiduciary obligation – we have no issues with any of that,” Butterworth says.
“We see the biggest challenge for advisers in the marketplace probably isn’t the reforms; it’s really being able to articulate clearly what their value proposition is, and getting back their own confidence and also investors’ confidence to invest back in the market.”
Butterworth says there are three elements to how DKN aims to help its practices articulate a value proposition to clients.
“The first one is our administration service, or platform, which we’ve fundamentally aligned with BT,” he says.
“What we’re aiming to do there is deliver a very low-cost, efficient platform for them to operate their business as a fee-for-service model.
“They can access a well-priced platform, so they can retain their own margin in their own practice, rather than relying on rebates.
“The next part is through Lonsdale, and the associated services we’re building out of Lonsdale; there’s a whole range of practice management skills and compliance and licensing offerings that we can offer to firms. We’re licence-agnostic: you can run your own licence, or if you wish to rent a licence you can take it from Lonsdale; that licensing regime to us is moot.
“Resolve that problem or question, and what you’ve got to resolve then is what do you need in your business then to run your business as efficiently as possible. First of all you have to protect your business, so compliance is a significant offering that we have. The compliance framework around how you run you business, the ongoing training and development of staff and your personnel; and we’ve got a range of practice management programs, such as your standard ones like business planning and succession planning and the like.
“Another one we’re rolling out is your value proposition. We do have a specific module that we run a firm through, which is them defining their value proposition, defining their pricing model, and defining the way they price on their client segments. That’s a big tool that we’re rolling out at the moment.
“The final plank in our offer is that we will use our own capital to invest into financial planning firms. That capital can be used to help internal succession, or to help a firm grow through acquisition. And we’re looking at expanding that area of our business. It went on hold a bit over the last couple of years, through the GFC where it was difficult to invest; but now you can see where the skeletons are, and now’s the time to expand that area again.
“And our target market is the boutique fee-for-service firm.”
As the CEO of a listed wealth management business, Butterworth always has one eye on the share price. He’s responsible for maximising the profit of the listed entity, but he says too close a focus on just one measure of the company’s performance can be counter-productive.
“You can get yourself caught up on the share price, particularly as the CEO and wanting to add value to your shareholders,” Butterworth says.
“But there are some points in the market where you’ve got to stop worrying about the share price and you’ve just got to focus back on the underlying drivers of your business. And if you get those right, when the time is right the market will re-rate your share price.
“The reason why it’s difficult to address that at this point is, it’s not a DKN issue, it’s a sector issue. Our share price went up 23 per cent from last year; our share price really hasn’t changed and we’re back into growth mode from a profit point of view. We’ve got a very strong balance sheet – we’ve got over $8 million cash in the bank – and we’ve got no risks. We’re pretty well reform-ready.
“Why isn’t our share price growing again? I think it’s fairly simple. I think everyone knows that wealth management stocks have two issues circling them at the moment. One is markets – everyone knows we’re leveraged to the markets, so if markets are moving again we’re going to move again quite rapidly – and the other one is reforms. It’s a bit like with the mining tax: if a sector has an overhang of legislation, it is going to be run away from. You’ve got to take it back to basics: Why would [a] broker recommend a sector that’s going through reform? There’s an easier sell for that broker in regards to positioning another stock with their clients, which maybe is not going through a sector reform.
