There are many criticisms of the Future of Financial Advice reforms. The biggest one is that the ban on commissions and other forms of conflicted remuneration fails to address the sales culture inherent within the banks and AMP.
Those of us who work in the financial services industry have always been aware of the systemic biases towards inhouse product in the vertically-integrated institutions. Now, thanks to a Senate inquiry, a couple of whistleblowers and the ensuing media storm, the government and the broader public know about them too.
But is the vertically-integrated model and dodgy advice mutually exclusive?
An advice business can build its own investment and administration business, and provide quality services and solutions to clients.
However, the first and most important driver must be holistic advice. Advice that flows from a deep understanding of clients’ lifestyle and financial goals, and lump sum and cashflow requirements, should be the only foundation on which products and portfolios are designed and built.
Yet the main reason why the institutions own and control advice businesses is not because they want more Australians to have access to quality advice. Advice is an afterthought. The starting point is product. That is why the outcome of the advice process is almost always to place a client on an institutionally-owned administration platform and/or in an institutionally-owned investment product. They don’t even make money providing advice or dealer services.
The institutions use the margins they earn from product sales to grow their ‘distribution footprint’ and incentivise advisers to sell more inhouse products. The best interests’ of clients barely register on their radar.
This is why they will never get financial planning right and will ultimately lose their best advisers to well-run, independently-owned licensees.
The horizontally-aligned model
A number of small, independently-owned licensees including Fortnum may appear to replicate the vertically-integrated model.
Fortnum, for example, has built a managed account business, e-Clipse Online, and an investment management arm, Innova Asset Management.
Both businesses were established only after an extensive review of the marketplace. The review concluded that no existing platform or investment process completely focused on the client’s needs and wants. In the end, we developed a “horizontally-aligned system” designed to deliver optimum client outcomes.
A licensee should only pursue a horizontally-aligned model if it meets four criteria. It must complement a firm’s strategic advice, add value, deliver operational efficiencies and cost savings. A small licensee won’t be able to own all parts of the process. It will need to partner with best-of-breed suppliers and collaborate with advisers to customise market-leading solutions and ensure clients’ needs are met.
Advice must be the most important part of the value proposition, and it must be completely separate to implementation and administration. The client must be at the epicenter of all a dealer group’s decisions and activities.
Even if the Coalition unwinds elements of FoFA, the vertically-integrated model will only become more prevalent.
Licensees are under pressure to curb their dependency on platform rebates, boost existing sources of revenue and find new ones.
The most logical answer is to raise licensing fees and get advisers to pay a fair price for dealer services. However, many have chosen to go down the vertically-integrated route instead, replacing rebates with product margins.
A licensee should be able to participate in each part of the value chain provided their main motivation is to better meet the needs of their clients. Any product-based solution must be borne out of the advice process.
Licensees that are motived by money will ultimately become product-pushers.
While the large and unwieldy institutions will struggle to change and will continue to attract the regulators’ ire, small and nimble players are in the best position to transform the advice process and ultimately the perception of financial planners.
