Financial planning practices that aren’t already doing so need to migrate away from commissions and platform rebates to help maintain sustainable cash flows, warns Tony McDonald, director of T&C Consulting Services.
This is particularly true for practice owners considering selling their business.
While McDonald believes smaller, more nimble non-institutionally aligned dealer groups are addressing this need to shift business models relatively easily, the bigger end of town is struggling.
“The large dealer groups would have to migrate a huge amount of clients, they’re probably getting a larger platform rebate so it’s more at risk, and migrating a truckload of clients is hard work, because it’s disruptive,” McDonald says.
“This dichotomy between advice and product sales will gather momentum.”
Another by-product of this shift can occur in the way financial planning practices in the midst of migration deal with clients who are engaged under two different fee structures.
“So all of a sudden, you’ve got these new customers coming in with this new you-beaut offer, at a decreased cost,” McDonald says.
“Then an old client, who’s grandfathered, comes into your office at review time, and you know that you’re giving another customer a different better offer – what are you going to say to that client?”
McDonald points to an unintended potential consequence that may actually lead to financial planners being less inclined to engage with clients who are part of a grandfathered commission arrangement.
“In some ways, grandfathering and non-migration is a disincentive to talk to your client, because you don’t want them coming in and meeting the guy in the corridor who’s got a better offer,” he says.
More than FoFA
McDonald says that viewing the changes taking place in the way financial advisers are remunerated can’t be viewed simply through the lens of Future of Financial Advice (FoFA) reforms.
“From a consumer point of view, over time consumers are going to be more aware of the limitations of commissions, platform rebates and the old way in which advisers shared in the product profit,” he says.
Looking at this from the perspective of a potential buyer of a financial planning business adds another dimension.
“A buyer is sitting there looking at all that, and will want to see that, notwithstanding grandfathering, you’re going to migrate those clients from the grandfathered offer to the new you-beaut offer over here,” McDonald says.
“And it’s absolutely in your interests [as a financial planning business owner] to do that because you’re giving the client a better offer, if you’ve done it properly with a proper new business model…you’re better off from a revenue point of view, even when you lose your grandfathering, and you don’t have that awkward situation of new and old clients comparing their deal.”
One way that this post-FoFA migration of clients is being handled within the context of practices being bought and sold is through what he refers to as the “rise and fall clause”.
This involves building a performance component into the deal structure, where the purchaser may be willing to pay the higher price, but will pay less up-front, on the understanding that if the business doesn’t transition, they won’t pay quite as much.
