Mat Walker, Praemium’s chief commercial officer for investment advice company, is the first to admit that all parties in the value chain are under increasing pressure.
What has changed in recent years, he says, is jostling that’s happening among value chain participants has become less about taking margins out, and more about taking costs out.
At a time when cost of advice is front and centre, as the wealth industry tries to solve the conundrum of how to get quality advice to more Australians, the whole wealth ecosystem is focused on what is a reasonable cost for advice and how much advice businesses need to be strong and sustainable.
Indeed, each participant in the value chain is realising that they can only be paid for the services they actually provide, and advisors are realising that they can take on some of the investment management function to increase their margins, Simon Hoyle, CoreData’s head of market insights highlights.
Hoyle joins Walker as part of Professional Planner’s latest podcast series, The Shape of Advice, to discuss the topic entitled ‘Reimagining the value chain.’
Hoyle has witnessed a fight for margin emerge over the years, with fund manager’s margins being squeezed as their traditional roles are taken over by other parties, such as platforms.
“It looks like it’s the investment manager that’s getting squeezed again,” Hoyle says, pointing to the implementation model that’s continuing to evolve.
This shift comes as the cost of advice rises due to an increased compliance and regulatory burden on the advisor post-Royal Commission, he says.
“I don’t think there’s many players across the industry who are still in big-fat, lazy margins anymore. They’re all working pretty hard for their money,” Hoyle says.
As new operational structures are developed and people work out where their areas of expertise lie, people are working out what resources they need to bring to the table, Hoyle says.
The trick, he says, is to understand how links in the service chain inter-relate, where some elements of the chain aren’t being transparent about taking margin and where this is being earned from. “Because ultimately the consumer that pays for all of this, and you don’t want to drive costs up too much and price advice out of the reach of the consumer,” Hoyle adds.
Value within budget
The broader industry is also grappling with whether there’s a legitimate way to cut compliance and regulatory burden costs and take some cost out of the advice delivery, which is yet to be seen.
Ultimately, margins are under pressure right through the supply chain, with the advice portion of the task providing most potential elasticity in what could ultimately be charged. The pair agree that future regulation will have an impact on costs of doing business, too, with product design and distribution obligations being introduced by the regulator in 2021.
Therefore, advisers need to look beyond the headline administration fee to calculate elements like trading costs and analysis work to ensure they’re getting the right outcome and efficiencies in their practice to reduce costs. While the pie needs to be divided between all parties, the lion’s share should go to the advisor because they are the greatest value in the value chain, Hoyle says.
Walker adds: “The reality is that the due diligence hurdles that businesses have to reach with platforms and super trustees is quite high to qualify as an investment manager and the ability for advice businesses to do both will only rise.”
But advisers need to keep up their end of the bargain, too. Hoyle was concerned to discover during recent research that two-thirds of advices practices don’t have external resources they call on for making investment decisions. This makes him question whether they are properly resourced to take on the role of investment manager.
“But this is not a finished story yet. This still has some way to run,” Hoyle says.
Tracing the evolution
Walker and Hoyle trace back through their time in the industry the evolution of the value chain during the discussing.
Walker recalls his experience in every part of the value chain at one time or another, starting out in the industry in the mid-1990s in those early pioneering days of financial advice. He worked as a financial adviser as a partner of his own business, Financial Focus, recruiting around 50 financial advisers before selling the business in what become one of the largest dealer groups in Australia.
Walker went on to build an early investment platform, Ventura Investment Management. He now is a commercial lead at Praemium, the technology provider that recently did a deal to acquire rival platform, Powerwrap.
The landscape was very different when Walker started out, he reflects. There were no fee-for-service or even recurring trial commissions in those days. The industry survived on upfront commissions and product selling, rather than comprehensive advice and regular reviews.
“In those days, it was very different to what we see today. Interest rates were double digits and it was more about selling growth products like unit trusts and investment bonds to reduce tax and have a hedge against high inflation of those days,” Walker says.
A change blew through the industry in the 1990s when technology platforms to support advisers started hitting the market, enabling advisers to outsource administration tasks.
Advisers were then paid trial commissions by platforms from the admin fee, which progressed to advisors dialling up advisor service fees as a percentage of assets.
By 2013, perceived or real conflicts were removed from the process and the industry shifted to more advice-driven than product selling. Many progressive advice firms have moved to ongoing fees for service, outsourcing as much of the back office as possible to reduce costs and increase profitability.
Outsourcing back office tasks to reduce costs and increase profitability have stripped out inherent cost layers in managed funds to bring the overall cost of the value chain down to the investor.
The highly regulated nature of the industry means the cost of doing business has been increasing overt time.
And while some of the costs have been absorbed by technology, the fact is that the financial advice value chain composition is under the spotlight as the broader finance industry contemplates just how it can achieve better efficiencies, Walker points out.