It’s ironic that many financial planners may have failed to financially plan for the most important future of all – their own.
Change is coming
It matters little which stance you take in the debates about commission. The greed behind the global financial crisis, the collapse of prominent advisory groups, the actions of consumer watchdogs, and the vote-chasing of politicians are all conspiring for change. Good or bad, it’s going to come.
Many of today’s leading financial planners and planning firms cut their teeth in the emerging superannuation markets of the late 1980s and early 1990s. They moved from corporate benefit programs, insurance, equities, (or some combination thereof), into a new market driven by compulsory superannuation. Remember the $3,000 tax deductibility of super in the late 1980s?
Back in those days, compliance was minuscule, back office support was provided by the product manufacturer, and disclosure was optional. The crankshaft driving the engines that built most of the personal and business wealth for those pioneers was made of solid commissions.
The overrides, the allowances, the bonuses, and even the valuations were all calculated and driven by commissions on products sold. It’s in the DNA of so many current business practices it is as hard to remove as the greenhouse gases from our atmosphere.
Regardless, for those firms purporting to provide advice, the question is not so much whether it can be removed, but when it will be removed.
Unfortunately for many of the industry pioneers still regaling audiences of their achievements from the old days, the changes on our doorstep today make their stories less relevant for the forward journey. Whilst we can always learn about the perennial wisdoms on which people have built their business lives, we need new business models and plans. Our future represents a new direction as dramatic as the introduction of compulsory superannuation, which heralded our current industry.
The industry pioneers and the copycat practices they inspired are themselves facing a less certain future. The emerging non-commission world is about to shake valuations of the businesses and client bases they have now given most of their lives towards, because they’ve been built upon the strength of their consistent ongoing commission-based income from clients who (knowingly or unknowingly) made regular contributions to financial planners whether there was service provided or not.
At a recent presentation, I heard from a prominent lender to financial planning firms that the average multiple of client bases sold in the last six months was 2.88 times recurring income. This is approximately 2.5 times the valuation of an average accounting firm – that commission crankshaft is still pumping strong.
Look no further for clues regarding our future than the recent statement from the Investment and Financial Services Association (IFSA) who represent the retail and wholesale funds telling us that they want to remove embedded commissions for financial planners in fund products.
Financial planners have been warned that in future, only manufacturers should collect charges from products. Any advice component should be charged and collected by the financial planner.
However, we have a generation of financial planners who don’t know how to properly value or price their advice.
They know too well that the implications for their business and client base valuations are potentially significant. The consistency of their ongoing revenues is under threat because the ongoing price has always been in the product.
Not for much longer.
In this environment, how can financial planners plan for their own financial future?
The answer lies in another irony.
Good financial planners have long known that their clients are not in fact buying products. The engines driving their business models may be built upon commissions, however the financial journey good financial planners take their clients on is fundamentally built upon strong relationships.
This is a hint of the best path forward.
Good financial planners already have a good chassis, gearbox, and driving experience. In the short term, they need to install a new hybrid commission/non-commission engine. In the long term, they need to be in a position where they can earn ongoing revenue based upon the quality of their advice, not dependent upon product manufacturers.
Like this …
Consider Brian Pert from Pert & Associates on the Gold Coast.
Brian’s firm charges advice fees each year to up-coming time-poor medical specialists. The fee isn’t based upon the quantity of assets under management, but on the level of financial complexity these clients face as they endeavour to maximise the probability of achieving their financial goals.
Brian’s firm manages the financial, project, and strategic plans required to produce the best financial outcomes for the medicos as they encounter constantly changing financial circumstances at age 35, 45, 55 and beyond.
His firm has gained a reputation of expertise for medicos transferring from public into private practice. These clients, like most, seek one firm to minimise threats to the best possible financial returns, as they build their medical careers.
Consider Mike Bennett from Sovereign in West Perth.
Coming from a resource industry background, Mike understands the financial complexities and opportunities that challenge the professionals and business owners servicing the resource industry.
Mike and his team bring their broad based knowledge to SME owners through Sovereign’s Financial Solutions Program. From ground up business and financial planning solutions, to creating and facilitating “Board of Advice” programs, the Sovereign team creates the framework that maximises the probability of their clients achieving the financial rewards they deserve.
For Mike to ensure his technically competent clients are building a robust wealth base commensurate for the lifestyle sacrifices they make requires a Fee based advice model that works.
Both Mike and Brian are highlighting where our future ongoing advice revenue streams will come from.
- They focus on specific market segments who they enjoy working with and to whom they can add ongoing value via their financial advice.
- Their specific market segments want and seek advice, not products. Even though advice firms of the future will be the biggest providers of financial products to Australians, their focus is the advice.
- Most importantly, they understand that their advice clients will only pay their fees year after year provided they are adding value year after year. This is the challenge for most self-labelled ‘fee-only’ financial planners – being able to clearly present the value added every year.
If you believe you are on this track simply because you are already ‘fee-based’, I don’t think you’re paying enough attention. Being ‘fee-based’ is only the ticket to the new game of advice. It’s one thing to dress up like a player, it’s entirely another to be able to turn up and play like one.
These are the best of times to be building a great advice business.