The structure and composition of the advice industry is changing quickly, leading to positive changes to the advice proposition. Over the next few years, advice businesses and the services they offer will evolve significantly. This means service providers to advice businesses will need to evolve too.
If that seems like a bold statement, consider how much things have already changed in a relatively short period.
In 2018, the banks still dominated personal advice. Now, after a period of fragmentation and with the untangling of product and advice, the industry is being reassembled with the client firmly at the centre.
Capital is returning to the sector but it is being deployed differently. It is chasing profitable businesses that make money from delivering quality advice, not distributing product.
That said, as part of the advice process, products are almost always recommended.
When looking at the evolution of the advice proposition, product is an easy place to start because it is tangible and universal. Advisers need products like life insurance, managed funds and model portfolios to help their clients implement advice and achieve their goals.
This need is driving advice businesses to their build their own solutions, giving rise to a new form of vertical integration.
With vertical integration 2.0 (VI 2.0), the driving force is the client.
While the majority of advisers, both past and present, care deeply about their clients and give good advice, vertical integration 1.0’s product focus disadvantaged both consumers and advisers from the get-go. Many of those who operated under this model still managed to deliver strong client outcomes, but the industry’s structure and composition were originally designed to serve product manufacturers, not consumers.
As someone who ran bank-owned dealer groups in a previous life, I know people didn’t set out to do the wrong thing by the customer, but it was clear that the aim was to sell product. The architects of VI 1.0 had watched the movie Field of Dreams one too many times and adopted a “build it and they will come” mentality which said create the product, control the distribution and get it to the client. The focus was not on ensuring the right fit but making a product they could distribute to the masses.
But advice processes have evolved. There’s not only an obligation to act in the client’s best interest, there’s an obligation to document how this was done.
Advisers must prove that every piece of advice begins with the client. There’s no such thing as one-size fits all or one-size fits most because everyone’s situations, needs and goals are different.
The breakdown of VI 1.0 and the ensuing institutional exit has opened up access to a broad range of competitively priced, best-of-breed solutions and greater scope for customisation.
In this future of advice, large, sophisticated advice businesses are stepping up to build tailored solutions. They are being supported by a range of service providers including fund managers, asset consultants and their licensee.
As is often the case with innovation, this opportunity has come about during a challenging period.
Over the past five years, many advisers have been forced to change licensee, overhaul their value proposition and go back to school.
This reshaping has resulted in greater investment in systems, processes and technology, better governance, and enhanced performance.
Advice businesses and their service providers today try a lot harder.
They are bigger and smarter, and they’re using their capital, expertise and scale to grow and diversify their revenue.
Strangely, the idea of advice businesses offering ancillary products and services is often frowned upon, although not by clients.
Many advisers themselves are uncomfortable with the notion.
This could be due to a lack of confidence. Advisers have been conditioned to think they lack the skill and scale.
Whatever has held advisers back before, these shackles are coming off.
With the client firmly at the centre, advice businesses are being empowered to develop solutions for clients and make money from it too.
Profits can be used to reduce the cost to the client, reinvest back in the business and return value to shareholders.
The biggest problem with VI 1.0 was not that it generated profits for the institutions. Businesses are supposed to be profitable, in fact they must be. It was the intermingling of product and advice through a maze of cross subsidises and rebates that made the eco-system unsustainable if ever they unravelled.
It was the control product had over advice. With VI 2.0, advice shapes product, not vice versa. The industry’s reconfiguration is leading to new and better ways to deliver and implement advice and, in turn, achieve superior client outcomes. Crap products and businesses don’t get a free pass in this new era.
Thank you for sharing your insights Neil on the evolving structure and composition of the advice industry. Your observation that the industry is moving towards a client-centred approach is particularly resonant with our philosophy at Back Office Hero. We maintain that transitioning from a practice to a business through the development of a robust Business System is crucial for real traction. This includes creating comprehensive written procedures, checklists, and templates, alongside outsourcing repetitive tasks to increase efficiency. Moreover, measuring business data to produce actionable metrics aligns with the industry’s shift towards quality advice over product distribution. Your article underscores the importance of adapting to these changes, and we believe that by integrating efficient back-office systems, advice businesses can better focus on delivering client-centred services, ultimately supporting this positive evolution in the industry.