As the CEO and co-founder of wholesale advice outfit Koda Capital, Paul Heath always had “well-formed” views about the firm he wanted to create.
Independence and client centricity were at the heart of the vision he shared with co-founder Steve Tucker. But while the two concepts are “fantastic marketing terms”, Heath had another use for them.
“Independence actually allows us to run a really scalable model,” Heath said at the recent Professional Planner Best Practice Forum.
“If you remove the conflicts of interest and hire really good people who want to do the right thing, it’s actually hard for them to do anything other than the right thing.”
What Heath’s talking about is more than marketing guff. By empowering advisers to run their own show, Koda has built scale in a way that is fundamentally different to comparable advice businesses. Instead of a large corporatized group with heavily standardised processes and hierarchal decision-making, Koda has embraced the concept of empowerment.
In effect, the business is building scale by dint of its differences rather than its similarities.
“Independence itself is interesting from a marketing perspective but for me, it’s actually more interesting as a business model because it allows you to do two things,” Heath explained.
“It allows you to create a truly client centric firm and it also allows you to create scale, because there’s no need to remove bottlenecks in the organisation.”
The theme of personal ownership affords Koda the luxury of a remarkably flat organisational structure.
“There was a period of time where I stopped counting my direct reports at 35,” Heath recalled.
He and Tucker decided from the outset that they wanted every participant in the business to hold a personal stake in it. Half the firm’s equity was set aside at its formation and put into a unit trust, and everyone who comes onboard gets a piece, “even down to the desk assistants”.
While the move cost the founders a significant portion of their investment, Heath has no regrets. Shared ownership builds a culture where people make appropriate decisions, he explained, which means the people speaking to clients are the ones able to make those decisions. “That’s a really important part of how we build scale.”
Koda’s empowerment model requires a significant act of faith in the advisers themselves. They are making their own decisions in a firm that, by dint of its status as a wholesale advice provider, had looser regulatory settings than retail advice firms, with arguably more scope for things to go wrong.
Heath is clear that the group still has the appropriate governance processes in place, plus a “very robust” responsible management structure. Again, however, the real trick to compliance at Koda is to remove conflicts from the scope of operations.
“Removing conflicts of interest takes away a lot of problems that would typically be bucketed under compliance and management of compliance,” he said.
The Koda model is predicated on attracting the high-net-worth client sector, which gives the group a much easier ride in the cost-to-serve struggle much of the industry is mired in.
There are 28 partners in the Koda Capital now, Heath revealed, with four of those “in transition”. He estimates the remaining 24 are set to generate roughly “$40 to $42 million” in revenue for FY2022.
While the firm prefers not to set a minimum for clients in terms of investible funds, most typically pay at least $20,000 in annual fees and require about $5 million to effectively diversify in the group’s model portfolio.
Fee schedules for clients are largely scoped by the advisers themselves, in keeping with the firm’s thematic desire for independence and accountability.
About 96 per cent of Koda’s income is recurring fee-based revenue, with 30 per cent of that figure being in fixed fees. While high-end clients are trending towards fixed-fee solutions, Heath said, “there are still plenty of clients who like the idea that the fee is based off the value of their assets”, because it means the client and the adviser have tied purposes.
When charging, three factors go under consideration according to Heath; the hypothetical FUM-based fee (“because it’s relevant”), the amount of work the client requires and the prevailing market conditions.
“But typically, again, with the model of empowerment we feel that the best people to make that choice are the advisers who are working with the clients every day. We trust them to make decisions that are good as owners of the firm.”
While some believe the existence of any FUM-based calculation in a fee schedule presents a conflict, Heath is unapologetic about the firm’s stance.
“We do charge asset-based fees because it’s not our view that that’s a conflict of interest,” he said. “And nor, by the way, is it the regulator’s view that it’s a conflict of interest.”