In a recent survey, a significant number of planners expressed concerns about losing clients once the Future of Financial Advice (FoFA) changes are implemented. This comes as no surprise. Advisers that target bottom-end B- and C-class clients form the bulk of the market.
Unfortunately, these clients are price sensitive and
• do not place a great deal of value on the service since their needs are predominantly transaction based;
• are unwilling to pay fees because these are not ‘hidden’ unlike commissions that are not clearly visible; and
• do not have the ability to pay high fees.
Additionally, financial institutions and superannuation funds have positioned themselves appealingly in this space because they can offer lower prices due to economies of scale and often subsidise advice fees to secure funds. This further compresses the market.
The article clearly supports Estplan’s contention that advisers who are positioned correctly are more welcoming of the changes and are likely to survive in the long term. FOFA is driving a shift in adviser positioning from transactional, catering to B & C clients to relational focused on A and top-end B clients.
Estplan research indicates that many advisers are replacing commissions with a nominal fee. These are the advisers that are most concerned about the impact of FOFA because they will lose clients. In order to survive, it is becoming important to segment your client base and review your target market.
Some facts to consider when you are reviewing your target market:
The bottom end B and C market is made up of Australian families, already under financial stress because of rising living costs.
Pricing is more competitive at the bottom end B and C market. The market is shrinking as the clients move towards the superannuation funds and institutions.
FOFA changes might do you a favour (inadvertently) by encouraging you to realise that this market segment is unsustainable in the long term.
Ultimately targeting bottom end B’s and C’s is neither profitable not sustainable, unless you have a truly unique offering that is defendable.
My belief is that to ensure practice longevity you need to build defendable practice strategies. Quite simply, defendable strategies enable you to develop a practice where you can maintain growth and income even during difficult times. The dramatic downturn experienced by most planners during the GFC was an indication that their practices where not built on sound defendable strategies. Similarly the knee-jerk reaction to FOFA by many planners is another symptom of poor strategy.
I support a simple strategic 3 step framework: 1. Review and segment your target market. 2. Concentrate on clients that are top-end Bs and As. These will yield the highest returns. 3. Develop an approach backed up with a substantiated service offer that meets the needs of this market.
This is a logical progression for your practice. Top end B and A clients comprise an estimated 1 million families or 20% of the total population. I believe the core market is those families with $2 to $20 dollars in assets.
Estplan research indicates that this market has poorly serviced by the financial advice sector, particularly by small to medium size firms. Advisers have been pigeonholed, ignoring the client need for an effective “wealth project manager” because many clients are time poor. Planners have been FUM-focused; accountants, tax, compliance and legal advisers focus on their portion of the transaction without viewing the bigger picture.
There is a recognised gap in the market which provides an opportunity for a defendable practice strategy. By positioning the adviser as the lead, clients will value the service they receive because it is closely aligned to their requirements. This is a higher net worth market and hence there is a need for a higher level of service. Basically, substantiate the service offer, reposition yourself and you will see a substantial return in the short term.
I believe that true defendability going forward relies on the delivery of a highly professional service to a market that has the ability to pay for quality outcomes. Additionally because of the lower service levels historically, the opportunity within this market is limitless.
Vic Ruth is practice principal of Estplan
