Back to the future – a glimpse of July 2, 2012

Imagine it’s Monday, July 2nd, 2012 – the first working day of Chris Bowen’s proposed changes for financial planners.

What’s different from today?

I’m betting the biggest change won’t be that obvious.

The same financial planning brand names may be around, but amalgamated among fewer and bigger financial giants. Ramifications for retail financial planning firms will be significant.


Thanks to years of great profits (probably an average of $6 billion in this banking year alone for most of the majors), the big giants will continue their dominance of Australia’s wealth management market. They will drive down cost of delivery by:

  • making better use of technology;
  • outsourcing non-core functions to cheaper geographies; and
  • ongoing efficiency initiatives to reduce headcounts and duplicated processes.

This is new territory for Australia’s financial giants. It’s easy to make profits by cutting costs, but harder to make profits from financial products that are becoming increasingly commoditised, similar, and widely available. Think of the steel, farming, or drug industries – that’s their future.

The strategy for the giants is clear – increase wealth management contributions to group net profit, whilst retaining costs, culture, and net promoter scores (i.e. client satisfaction ratings). They understand clearly that the growing pool of superannuation monies (currently $1.1t – $1.2t) represents one of the best ticket-clipping opportunities in this century, and none of them can afford to miss that bus.

No-man’s land

The no-man’s land of financial planning practices will be those unlisted firms or dealer groups with more than 15 years’ experience and 50-250 advisers. The founders of these firms made their careers in a different era, when margins were higher, compliance was thinner, competition wasn’t as organised (or bombarding adverts during our Sunday night TV show), and consumers weren’t as educated (i.e. burnt by GFCs).

In two years’ time, these no-mans land dwellers, if still unlisted, will have been amalgamated into a ‘division’ of one of the giants. If not amalgamated, I bet they’ll lose key resources – i.e. their second and third tier of advisers – that actually do the foot-work and bulk of the delivery effort promised by the first tier of advice.  Look around at the mid-tier accounting and legal firms today, and try finding one that isn’t desperate for good quality advisers.

The sweet spot (or the sweat spot?)

I predict that, although it won’t feel like it, the sweet spot for retail financial planning firms will be for those with 5 to 50 advisers.

Firms in the sweet spot will be headed by younger advisers (the average age of the owners of our private clients today is 38 years old) who have either (a) jumped from institutions, wanting greater control of their destiny and to own a piece of business real estate, or (b) bought out founders at slightly too high multiples.

These owners will mostly be different because they have been educated in business as well as in accounting, financial planning, law, or insurance.

More retail financial planning firms will implement profit share schemes and/or offer equity options to key team members on completion of probation periods. More firms will have working alliances with like-minded accounting groups, legal groups, and other experts in their professional network.

By 1/7/2012, valuations of retail financial planning firms will have dropped.

I predict the current average multiples of 3.5x recurring revenue will be more in the order of 2.25x.  Thanks to the opt in/opt out, canny new owners will have waited until roundabout 1/7/2012 to move on the firms that have potential talent but old-world value propositions, to make an offer the founder can’t refuse. There will be high merger and takeover activity leading up to 2012.

In the same way that most Australians buy reliable Toyotas, most Australians in 1/7/2012 will buy a reliable financial services brand name. Therefore most retail financial planning firms in the sweet spot will want to avoid the ‘Toyota marketplace’, with their widespread dealer/branch network. Firms in the sweet spot will focus more on niches of potential clients, rather than on trying to be everything to every client.

Having to earn the ‘tick of endorsement’ year in year out, and at the same time prevail against the giants’ marketing onslaughts of trying to lure their loyal niche clients away (e.g. with special honeymoon and product deals that will give them ‘peace of mind of doing business with a giant’), will require a proposition that the giants can’t match.

Back to the future

By 1/7/2012, prosperous retail financial planning firms will have applied the same professional rigour to defining and delivering the value in their proposition, as they have in maintaining compliance. The majority’s prosperity will be based upon quality of the execution of their value proposition, rather than performances of the products they deliver.  They’ll be working harder than today on being paid for the quality of the advisory relationship, rather than the quantity of products in that relationship.

Back in the ‘old days’, success depended on an advisory firm’s relationship building and maintenance skills, rather than the headlines they grabbed in the media, the rockstars they had working for them, the unique IPOs they could offer, or the ‘sexy’ products they had limited access to.

Firms in the sweet spot in 1/7/2012 will have greater awareness than today of what is value to their selected clients, and they will price on that value – not on the assets, the insurance premiums, or the hours worked. They will be confident (but not cocky) that when commissions are inevitably removed from insurance products, they will still get well paid for the quality of their advice.

Scalable advice

Scalable advice will be the next big term (think holistic advice) to be thrown around the marketplace. The giants will offer it, but specialist scalable groups will dominate it.  Consider firms like Bill Danaher’s QInvest, which learned how to effectively scale advice, working alongside monsters like QSuper.

Firms in the sweet spot in 1/7/2012 will have referral relationships to pass their non-ideal clients to these emerging specialist scalable advice firms, which will successfully serve and provide advice to those supposedly who were ‘unable to afford advice’ back in June 2010.  No one thought the four-minute mile would be achieved either.

Further change

Platforms or their emerging replacements will have more options and more transparency, and will cost less. There will be a three-fold increase in the number of organisations provided ‘back-office’ services. This area will boom as will the number of applications that align with the core offerings from the financial giants to make advisers’ lives easier in areas of para-planning, investment vehicles, specialist research houses, and coaching groups.

There will be more private equity firms hovering over the emerging advice profession of 1/7/2012 giving the owners more options as to how to inorganically grow. Seeing average profitability of circa 40% per annum will provide good returns on investment for working and non-working stakeholders, particularly as niches for advice are effectively developed.

Owners of the 2012 financial planning firms will, I believe, see themselves increasingly in the business of building advisory firms (to quote an 1999 Undiscovered Managers report), rather than in the business of advice.

Who knows really what will happen on that Monday 2nd July 2012?

One thing is for sure, we are part of the most exciting, constantly evolving, always challenging profession – these are the best of times to be building great advice firms.

Image: Filomena Scalise /

WordPress Image Lightbox Plugin