As the wild winds of change  buffet our industry, I’ve been reflecting on what this means for financial advisers and dealer groups.

Will today’s advisers be tomorrow’s? If not, where will tomorrow’s advisers come from?

Will we have advisers at all, or will the robots take charge?

What will the future structure of the industry look like?

And what will be the role of advisers and dealer groups in this structure?

To answer some of these key questions, let’s first take a look at the changing competitive landscape. By this, I don’t mean between competitors themselves, but the key forces that are affecting and shaping what the industry will look like in future.

Hidden impact of sudden change

With sudden and significant regulatory change, the focus of those affected is often on the immediate effects of the change in terms of a business’ need to adjust its practices to remain compliant, to continue to deliver client service and to preserve profitability. However, there is a deeper and more subtle issue here that has not been overtly acknowledged by industry participants, particularly at the advice end of the value chain.

For example, one of the key changes that has already taken place is the shift of emphasis in the value chain from product to advice. Historically, remuneration was paid through product, meaning those who distributed products had a high degree of influence over the sales process and outcomes, as they effectively delivered the manufacturers’ profit and loss. This was a wonderful position for advisers to be in – feted by large institutions as a result of selling their products as part of the advice process.

What we’ve seen with the Future of Financial Advice (FoFA) reforms’ grandfathering of existing, and removal of new, product-based revenues is a rapid, significant and permanent shift in this model. An outcome of the majority of financial advice recommendations is some form of product recommendation to meet a client’s goals and objectives.

However, these products are now available and competing on the basis of an adviser needing to ensure the best interests duty is met. This is empowering consumers, encouraging substitutes and driving cost (and intermediaries) out of the value chain, which is a great outcome for clients. I

t is fundamentally changing the nature of the relationship between manufacturing and distribution, and opening the value chain to new and different competitive forces.

More effective monitoring and supervision

Overlaying this significant structural shift is a requirement for more effective monitoring and supervision across the industry. Community standards have moved rapidly, in the face of numerous well-documented product, advice and governance failures. Added to this, consumers are more empowered through technology to understand their wealth.

In short, consumers are more knowledgeable, have more purchasing power, and thus have higher expectations of their adviser than ever before. As technology continues to evolve, and more information is available anywhere, anytime, to inform consumer decision making, once again the ground is shifting.

Another factor is the value of advice. Specifically, what is financial advice and how are the benefits of advice quantified? There is a paucity of literature on this topic, particularly in Australia. This suggests it has not traditionally been an area where the industry has focused, to its detriment. If the product being sold is commoditised, there can be little surprise that experts in delivering similar commodities start to aggressively participate in the value chain, competing often on price, but also on accessibility/utility of solution for consumers, to obtain market share.

In terms of big picture trends, does this mean institutions will perhaps no longer be the logical buyers of wealth management firms? With rising costs of holding regulatory capital and hence a need for greater ROI from their wealth businesses, perhaps the banks, AMP and IOOF will no longer focus on ‘bolting on’ new distribution, focussing on great client engagement and satisfaction as their drivers of future success? Perhaps we may even see some divestments of distribution businesses, with an institutional focus on manufacturing instead to generate the required returns.

At a high level, and most visibly, these factors when each looked at in isolation tell a story of an industry rapidly transforming to a profession, driven primarily by regulatory change. But what is really happening is the structure of the industry is fundamentally changing before our very eyes, and only those businesses that can adapt will thrive in future.

This is Part 1 of a two-part analysis by Infocus managing director Rod Bristow. On Monday: Part 2 – Now we get to the key question: So what?

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