There were few who missed the significance of the 2009 Securitor National Convention being held in Darwin. This year marks the 200th anniversary of the birth of the man who wrote one of the most important scientific books of all time – in fact, one of the most important books, full stop: Charles Darwin.
Darwin’s book, On the Origin of Species by Means of Natural Selection, proposed the then-radical notion that life on earth evolved through an endless, ruthless and inevitable cycle of mutation, adaptation and survival.
It’s been described as “the most important idea in human history”, but even so, it’s sometimes misrepresented as meaning “survival of the fittest” – fittest in the sense of the biggest, strongest, fastest, and so on.
But what Darwin actually meant was “fittest” as in “most suitable”. In other words, a species need not necessarily be the biggest, fastest or strongest, so long as it is, in whatever way it needs to be, the one best suited to doing whatever it does.
The theory of evolution recognises that no species has an open-ended right to dominate, nor even exist.
For financial planning, the endless, ruthless and inevitable forces at work include consumerism, greater scrutiny by regulators and policymakers and an internal drive for greater professionalism, all set against a backdrop of the global financial crisis, which has shifted the relationship between financial planners and clients, possibly forever.
Recognising how tough the environment has been over the past year and a half, the former Prime Minister Paul Keating suggested that when financial planners “leave this earth, you lot will go straight to the pearly gates – because you’ve done your purgatory over the past 18 months”.
Keating described the responsibilities that financial planners have to the wider community as “heavy”.
“The wealth management business and advice business is a very important one,” Keating said.
“It’s a kind of solemn one; it has to be an earnest one, to give people the advice they need, and give it to them at a price they can afford.“That’s all well and good. But the problem is that we have … seen so much wealth destroyed, and … as these great bodies of wealth have gone up in flames, this is very debilitating for people who are in the wealth management business.”
The convention heard that winning back the confidence of consumers and clients, and putting financial planning businesses on a sustainable economic footing for the future, should be the over-riding preoccupations of all firms and dealer groups.
Geoff Lloyd, general manager of advice and private banking for BT, said a key step in achieving both those aims is to unbundle advice and product. Anticipating the release of the recent FPA consultation paper, Financial Planner Remuneration, Lloyd said product commissions are a thing of the past.
The three characteristics of a successful and sustainable remuneration structure were unbundling – that is, separating product from advice; transparency – making sure clients fully understand what they are paying and what they get in return; and giving clients the ability to “switch off” the fees they pay if, for example, they want to move to another adviser, or if their current adviser is not providing adequate care and attention.
Lloyd said a lot of care would have to be paid to how contracts between clients and advisers were structured, because “a contract has to protect the planner as much as the client”. For example, if a client agreed to a planner preparing a Statement of Advice (SoA), then a contract would have to make sure the client paid for that SoA, and that they could not simply have an SoA prepared, renege on payment and implement the recommendations themselves (or via another planner).
Lloyd said the changing nature of the business meant that “there won’t be a lot of part-time planners” around any longer. It would require complete commitment to the business.
In turn, this would require planners to closely examine their businesses, decide what services they both want and are equipped to offer to clients, ensure the structure of the business is right to do that, and then make sure those services can be delivered profitably.
For example, Lloyd highlighted the opportunities that lie in incorporating life insurance into a financial planning offering. He said research of the industry generally and of Securitor firms specifically indicated there was ample opportunity in making sure existing clients had adequate levels of cover, let alone attracting new clients to the group’s member firms with a compelling risk offering.
“Our customers have a need around protection,” Lloyd said.
One of the key reasons it is important for practices to evolve and adapt is because the old way of doing business is likely to lead to lower valuations, and this may have significant consequences for the succession plans of retiring planners.
The head of dealer groups and Licensee Select, advice and private banking for BT, Neil Younger, said that, simply, traditional business models “need to evolve”.
He said that otherwise, there may be “a disconnect between what your clients perceive as your service, and what you are delivering”.
Younger said that as asset values plunged over the past 12 to 18 months, where there was a perception among clients that the “value of the advice being delivered [is] tied to the [value of] the assets they have…there’s a growing perception of advice as being poor”.
“I do not think they blame advisers for the global financial crisis,” Younger said. “But if all that’s being [offered] in the conversation is to grow asset wealth, then [in a market where asset values are falling], that’s where you lose the trust.”
Value, therefore, must be perceived by clients as being pegged to something other than the value of assets, over which no one has complete control anyway, Younger said. Yet less than a third of all planning businesses formally surveyed their clients to learn what their clients’ perceptions were, and what services clients actually wanted to have delivered.
In such an environment, there was a grave danger of planning practices missing the mark, and failing to forge meaningful, long-lasting and profitable relationships with clients.
Younger said that commissions would disappear from the landscape “within five to 10 years”, that commissions would almost certainly disappear from Superannuation Guarantee (SG) contributions, and there would be a move to a structure under which clients were free to turn off the flow of revenue to planners if service was not up to scratch.
In short, planners should aim to deliver high-quality services, targeted at the needs of their clients, and should be paid according to the quality of the advice and service provided.
“I’m not saying asset-based fees are wrong,” Younger said. “[But] they may have contributed, in some circumstances, to that disconnect around what is the true value of advice.”
Younger said that not all financial planning firms are set up to deliver all of the services that clients demand. In those circumstances, it made sense to forge partnerships with firms and businesses that could provide the missing elements. It was preferable to take this approach than to leave a client’s needs unsatisfied, he said.
Before the current economic downturn came to an end there would doubtless be a reduction in planner numbers, and some businesses would fail, Younger said.
The keys to success included using these tougher times to actively seek out new clients, and offering sensible, sustainable new services to existing clients.
“There will be fallout from this cycle, no doubt,” Younger said.
The convention wasn’t all about business, however. Keynote speakers included indigenous welfare reform campaigner Noel Pearson, “The Biggest Loser” contestant John Morrall, and trans-Tasman kayakers James Castrisson and Justin Jones.
Their successful 3318-kilometre, 62-day crossing of the Tasman Sea was preceded by three-and-a-half years of planning, research and preparation. Risk management also played a big part – but, despite the best preparation possible, unexpected issues still arose.
For example, their journey ended up being 800km further than planned, due to unpredictable ocean currents. They likened a “whirlpool” they encountered en-route, which saw them literally paddling around in a circle for two weeks, to the GFC.
Their progress was slowed dramatically by the growth of barnacles on the bottom of the kayak, which had to be manually scrubbed off. In addition, a critical piece of equipment (a water desalinator) failed early in the trip (they had intelligently designed back-ups and redundancies into the system), and they attracted the unwanted attention of several very large sharks.
Castrisson and Jones stressed how important planning is to success, particularly when venturing into uncharted territory; how important it is to call on the advice and experience of experts; and how plans have to be flexible enough to adapt to changing circumstances.
While the headline theme of the Securitor convention was “Make your own history”, it could just as easily have been “Adapt or perish”. The over-riding message was that the financial planning industry’s circumstances are changing, and businesses must evolve to survive.
Charles Darwin would have understood.
