Two decades’ worth of persistent regulatory change may have been a “shock to the system” for the Australian financial advice industry, but it has also made the market ripe for backing by foreign private capital.
That’s the conclusion that Marc Spilker, the executive chairman of wealth-specialist investor Merchant Investment Management, and Matt Brinker, the firm’s managing partner, have reached 12 months after entering the Australian market.
Spilker, a Wall Street veteran who worked for Goldman Sachs for 20 years, says Australia is a shining example of a financial planning market that has benefitted from an at-times painful but lucrative push towards professionalism and removal of conflicts of interest.
“Normally, people want to run away from regulation,” Spilker tells Professional Planner on his first visit down under since Merchant established a local partnership last year. “But regulation is what really makes our industry so solid, safe and stable.
“I’ve [managed transactions] all around the world, Europe and Asia, and we’ve had wealth businesses all over the place. But I look at Australia and the US as substantially similar and in some ways the Australian market is probably a better market.”
Brinker, who was part of the team that built and sold famed US wealth franchise United Capital and sold it to Goldman Sachs in 2019, acknowledges the local industry suffered a “shock to the system” from the waves of regulatory reform including FoFA, the Life Insurance Framework, the FASEA education regime and post-royal commission laws.
But he says the pace and scope of change in Australia is now a comparative advantage for those firms and business owners who chose to remain.
“In the States, the movement towards independence has been slow and deliberate and incremental [whereas] it seems like the Australian market had a bit of a shock to the system … with the regulatory situation and [key] constituents outright leaving the market over a 24- or 36-month period of time,” he says. “From our perspective, it opened up an interesting catalyst of our sort of global macro idea of the movement towards independence and value for clients. It just made Australia that much more interesting [to us].”
‘Families factoring intimacy’
The abolition of commissions in Australia (and organic movement away from them in the US) has not only resulted in a less conflicted model, Spilker adds, but it has driven real enterprise value. “It makes the business safer and empowers the client, but [also] the market really likes stable, recurring revenues,” he says.
Merchant takes minority stakes in growth-focused wealth firms and has active partnerships with more than 80 around the world, including Australian firm MBS Insurance, which Professional Planner reported last month was the first inked by its local team helmed by David Haintz and Rebecca Wells.
Asked what the best financial advice firms around the world are doing, Spilker says they are moving beyond asset management/allocation to a broader range of services, including tax strategy and estate planning. At the same time, they are accessing best of breed technology and broad menu of investment options.
“Families are favouring intimacy,” he says. “They want to be closer to their advisers, they want to be closer to their capital, they want to be closer to the decisions. The more things are centralised and the more things that are controlled by somebody that’s away from the client, the less likely the advisor is going to be able to deliver the bespoke model. Families want to deal with somebody local that they trust yet they want the resources of everything going on in the world.”
‘Short-term memory loss’
The Merchant leaders’ visit to Australia comes as Goldman Sachs sells the United Capital business, to Creative Planning LLC, an independent wealth firm headquartered in Kansas, for an undisclosed sum.
It purchased the storied firm, which it rebranded as Goldman Sachs Personal Financial Management (GSPFM) in 2020, for US$750 million ($1.18 billion) and is offloading it as part of a strategic re-focus on high-net-worth clients in its wealth management offering, akin to the moves made by the Australian big four banks to divest financial planning and limit their footprint to private wealth/banking.
Brinker, who held senior roles at United Capital over 14 years including head of acquisitions and business development, says Goldman Sachs’ divestment shows how ill-suited big banks can be as strategic partners to wealth management firms.
He says there is a track record of US banks buying up independent wealth firms only to get rid of the asset just a few years later, pointing to Boston Private and First Republic as examples. “This [Goldman’s sale of GSPFM] is just a much bigger example of that really,” he says.
“The core sort of thesis around why a bank buys an independent wealth management firm really just doesn’t ever sort of seemed to be well-executed or thought-through because fundamentally, I don’t think that these banks understand the personalities, the DNA of independent wealth management firms … “[Banks] have a short term memory issue. We will see another bank acquisition of a large [independent wealth firm] in three to five years.”
Haintz, Merchant’s Australian-based partner, says the move also demonstrates the problems associated with deals to acquire 100 per cent of an asset, instead of more strategic minority, non-controlling capital.
“We love the dynamic of a collaborative partnership, where contractually, we don’t have control, but we have alignment,” says Spilker. “When you buy control, then all of a sudden the decision making shifts. And if you’re buying a good company, many times you’re undermined the things that they do.”