The evolution of financial advice in Australia from a transactional sales process to a true profession servicing clients is now widely seen as representing an enormous opportunity, not only for clients, but for advisers themselves.
Just ask Dave Butler, the US-based head of the financial adviser business of global asset management firm Dimensional. After working with advisers for nearly a quarter of a century in the world’s biggest economy, he has seen a major transformation.
“When I got into the business in 1991, there was no such thing as an independent advice movement,” Butler (pictured) says.
“There were really just a handful of brave souls moving out of the commission model. These days, we really are seeing the idea of independent advice gaining traction globally.”
A former professional basketballer, who at more than two metres towers over everyone in a room, Butler played for the University of California, Berkeley, while studying marketing and finance there in the late 1980s.
Later, in New York, and early in his financial career with a US investment bank, Butler saw first-hand the commission-driven conflicts in which advice was treated as a sale and where products were marked up at inflated prices to retail investors.
“My feeling at that stage was to get out of the business completely and go back to basketball as a coach,” Butler says. “I got to the point where I had zero energy.”
Energy recovered
It was energy he later recovered when he came to Dimensional in the mid-1990s to join what was then a fledgling business working with the still nascent movement of independent advisers untied to financial institutions. Back then, Dimensional worked with about 100 US advisers and had about $2 billion under management. Now, two decades later, the firm manages about $240 billion from about 5000 advisers* around the world.
“A big research house in the US recently forecast that the independent advice channel will be the fastest growing channel for advice within five years,” Butler says. “If you had told me that 20 years ago, I wouldn’t have believed you.”
These days, Butler talks to advice businesses about the benefits of a model built around transparency, independence and alignment with the goals of the client – or in the words of a former colleague, “sitting on the same side of the table” as the client.
This marks a distinct change from the old model of “advice”, a sales-driven process riddled with conflicts of interest, little transparency, high fees and a disregard for the needs and circumstances of each individual.
Butler’s message is that the new model energises advice businesses through the embrace of independence and a consistent investment philosophy that involves a repeatable, transparent and robust approach to capital markets.
The philosophy is key, he says, because otherwise advisers risk being mere facilitators – picking stocks, selecting managers, trying to time markets and selling clients what they think they want rather than what they need.
The consequence of advisers being facilitators is that they spend a lot of time apologising for calls they got wrong or for picking stocks that didn’t perform as the analysts had predicted.
“So if your value proposition is an ability to forecast the future, you are really setting yourself up for a tough time,” Butler says.
“These are energy-taking activities and they are not the foundation for a sustainable business.”
Butler lists as energy-giving activities those factors that advisers can control, such as diversification, expenses, minimising taxes and truly understanding the circumstances and goals of each client.
“David Booth (Dimensional’s founder and co-CEO) says the important thing about an investment philosophy is that you have one you can stick with over time,” Butler says.
“There are always going to be traumatic times in the market. But if you can find a philosophy that works for you and your clients, you are giving yourself a shot to build a great business that will last.”
Consistent, repeatable
Another strength of advice businesses adopting a consistent, repeatable philosophy is that it can make them attractive to the next generation of advisers when the founding principals decide to retire.
“If your proposition is based on picking stocks, your knowledge walks with you when you walk out the door,” Butler says. “But if you have a repeatable, transparent and portable investment philosophy, the second generation does have a chance to extend the business beyond your time there.”
But independence and a consistent philosophy are not enough on their own to drive business growth, Butler says. Rather, they are necessary prerequisites to free up advisers to think imaginatively about their businesses.
On this score, Butler cited regular benchmarking surveys that Dimensional carries out in the US, the UK and Australia to identify the best practices of independent advice firms. The last survey in the US found seven key drivers of growth.
The first was that successful businesses tend to have value propositions that can be easily communicated by every member of the firm. Those firms had higher profits, increased growth in new clients and lower client turnover.
The second driver was effective use of time, with the better-performing firms moving away from commoditised tasks such as research, asset allocation and compliance, and towards spending more time with existing clients and in finding new business.
“We’re seeing an interest in ‘robo advisers’ in the US and a commoditisation of investment advice,” Butler says.
“Therefore the human element is going to be an even more important driver for successful businesses in the future.”
Other success drivers identified were having a well-defined target client profile, establishing a program for asking for referrals, staging client events, conducting client surveys and working with the next generation of wealth holders.
Butler believes all these factors will be important in the future as Australia’s independent advice market develops.
And they are factors that Dimensional and its local team will be focusing on in their partnerships with businesses here.
* This article was amended on August 10, 2015, to correct the number of advisers from 500 to 5000, an error introduced during production.
