Bailey Roberts Group director, Leith Thomas, is sick and tired of reading articles proclaiming Future of Financial Advice (FoFA) reform as the end of independent adviser groups.
Rounding out the best year our independent group has ever experienced, I find this perspective interesting, to say the least.
For our dealer group, we have looked at the reforms as an opportunity. We identified some time ago that what clients are really seeking is a relationship with a trusted adviser that is actively involved with the management of their financial assets.
We took the view that to really differentiate our advisers we needed to ensure that clients and potential clients understood the factors that made our practice unique. For us there was a combination of factors, which we believe are available to all unaligned dealer groups.
For too long, product manufacturers have been informing advisers of what they believe clients want; in reality from the angle of what the adviser can do to sell their product. I constantly hear that the main adviser value-add is strategic advice.
This is an important part of the equation; however, my experience is that what clients really want is a relationship where not only the strategic advice is of a high standard but where the adviser is the trusted manager of the client’s portfolio.
Whilst many advisers claim independence from an ownership prospective, many use wrap accounts owned by product producers, use the same research houses as most, use the same managed products and use the same risk profiling programs. In reality, many become sellers of a commoditised product, exposing themselves to the risk that as clients become more educated the major selling point will be based on price.
What is the real value in placing client’s money in managed funds? When neither the client nor their adviser can control tax, know exactly where their money is invested or control investment decisions or if is there is a sustainable value proposition for charging a fee?
We have always aimed to avoid our advisers being seen as mere commodities who claim their value-add is in just providing strategic advice and doing client reviews. We see differentiating ourselves on the basis of being positioned as the manager of client’s portfolio as a key way forward.
This mode of operation allows one to build a value around how they manage money and in turn create a sustainable value proposition that can justifiably be charged for. Having a system that allows clients to have total control by knowing exactly – and by this I mean exactly, not hidden in a managed fund or held by a custodian – where their wealth is invested real-time, see the companies they own and importantly see their adviser as the controller and manager of their wealth, is a sustainable post-FoFA model.
Not using bank or institution investment products can also be an important advantage. Not only has this avoided us being seen as merely the seller of someone else’s product, it has meant we are able to produce results for clients that are substantially different to the masses, especially index investors.
There is a critical mass in terms of FUM that a fund manager gets to where the sheer size of the money they manage forces them to buy only large market cap shares to avoid materially moving share prices. This seems to be a major reason why most fund managers track the index. Involving ourselves in this space would only serve to damage our adviser’s value proposition.
Selling out to a larger firm for reasons of avoiding the future advising world is unpalatable with this much opportunity. With the amount of money already moving to direct equities, I cannot think of a better time for independents than right now.
So that’s your Australian shares asset allocation approach explained. What about the other asset classes? How do you invest for your clients?
Leith (Thomas) can you confirm that you are in fact an independent financial adviser. There aren’t many us around; less than 20 at last count.
To call yourself independent you must have no alignment to a financial institution, rebate all commissions on insurance and not charge your clients a % of FUM as a fee. If you are please let me know because there is a select group of advisers that are members of the IFAAA (independent financial advisers association of Australia) and we’d love to have more people join our group.
Unfortunately there are a lot of firms out there saying that they are independent when in fact they mean that they are “independently owned”. The upfront and trail commissions on insurance are just too much to say no too, or they prefer to charge their clients on a % of FUM. Both introduce conflicts of interest which compromise the integrity of independence.
David M, if you’re independent please look up the IFAAA.
So to clarify, there are THREE distinct groups, not two.
80% of financial planners are aligned to financial institutions (we really need to push for a definition to be legislated so that these planners can be redefined as salesman – apologies if anyone is offended).
The majority of the remaining 20% are “independently owned”.
Then there are the true independents which are as rare as hens teeth.
I’m not offended by your sweeping generalisation that people aligned to financial institutions should be defined as “salesmen”.
Some of us provide high quality strategic advice.
Products merely support a strategy, they are not THE strategy. Whilst the system allows product manufacturers to own distribution, there is no escaping the questionability of adviser/product conflict.
My preference is to see SOA’s split into two distinct sections.
One section detailing Strategic Advice, the other detailing Product Recommendations.
Clients will then see strategic advice value if it exists and further, can shop other products if they feel uncomfortable with potential bias.
It would be a better time for independent financial planners if the licencing system made a clear distinction between those Advisers who are tied, by reason of ownership or other obligation, to financial product providers and those advisers who are genuinely independent. The blurring of these two forms of advice does not serve independent advisers interests at all. Let the two kinds of advisers compete on their respective strengths and let the consumer know which type of adviser they are consulting.
Each phase of regulatory reform causes both fragmentation and consolidation. Some individuals leave large groups to pursue opportunities and autonomy; others sell to, or join, institutionally owned groups to gain security and support. Good advisers and good practices will be largely unaffected by FoFA but some advisers – and some groups – will be driven to make more significant changes. Hopefully, the industry will retain its diversity so that consumers will be able to exercise real choices and properly contemplate alternatives.
I too am independant and see the value by the number of people seeking trusted advice..BUT this doesnt mean I need to take the role of being an investment manager..It’s easy to sell this story – but only time will tell..there are many groups who hang their hat on producing better investment returns..good luck with that!
If the client’s real goal is to achieve alpha – then your model is definitely the model for them. But I am yet to meet anyone ever who, that when properly asked through deep questioning, has told me that their real goal was to achieve “alpha” or “tailored tax minimisation” or some other boring term.
The people I’ve met have dreams and aspirations much more beautiful and meaningful than that. The first step of a true adviser is to understand what those are for each individual person. If I can then provide strategic advice which, when combined with an average boring return, achieves all of their dreams and more – I am happy to pay a small fee and outsource that investment management function to a professional institution to get that boring return – because at the end of the day my client achieves their true aspirations (after fees and tax) and I can charge well for that.
The strategic advice model at its core assumes that everyone is different and therefore every piece of advice (or strategy) needs to be different.
The stock picking model, at its core, assumes that everyone is the same and therefore everyone needs the same advice or strategy – good stock picking and tax minimisation.
The society and people I interact with in our community are anything but the same. And as our GDP and wealth as a nation grows – the more and more different peoples’ aspirations and dreams are becoming. And therefore the moredifferent their strategies will need to be.
Sean , good for you if you only charge for strategic advice and that is your model. I just can’t see how you would earn a living if it is just advice ? I understand from your replay you take no fees for outsourcing your clients investments, after all you don’t do anything on the investment side do you ?
It would seem that our industry is being split into two distinct groups, those tied to an institution and those that have made the decision to remain licensed by privately owned groups. Obvioulsy there are pros and cons for both sides, but I know which side suits both me and my clients…..I agree 100% with the article, a great time for the independants.