“Many in the industry are currently distracted by ‘IPO-envy’.”
Alan Logan – GM Practice Management, MLC
Alan Logan has long been a great commentator of the market. I believe his recent comment is spot on. Bankers and their deals are flocking to our booming industry cycle as seagulls chase a hot chip.
Reflecting on his comments creates two questions for me.
- Are we entering into another stage of industry maturity?
- Is there more money in trading financial planning businesses than in the business of financial planning?
The signs are visible.
Focus on listing and aggregation
There are a number of prominent firms publicly focusing on listing (e.g. Plan B, PIS, Centric Wealth, Storm Financial). I also believe there are a number of larger groups considering the advantages of a listing. Not since the days of Stockfords and Harts have we seen such activity in aggregations (East-West Group, WHK, Challenger).
The intent of both the potential stock market listers and aggregators (which include many respected brand names) is obviously to fast-track the advantages of scale, and enjoy the benefits of a nicely packaged liquidity event in the process.
Their objectives have precedents too. I am amazed at Count Financial’s price/earnings ratio (currently 37.3 at time of my writing). It must be a testament of the market’s irrational exuberance. The potential listers and aggregators must reckon that if they can even get half that, they’re doing well. Good luck to Count: they are enjoying significant ‘first to market’ advantages, and are riding the near-perfect market conditions.
Commissions from product sales are more profitable than advisory services
Another sign of a potential new era dawning is the fact that a majority of product distributors’ profits are built upon the payments (call them commissions or platform overrides) from the firms who make the financial products, rather than from the profits made from the services their advisers sell their clients.
Some might say that the purpose of dealerships isn’t to make a profit, but to be a distribution mechanism for product manufacturers. Like any artificial structure that exists solely for the benefit of someone other than the end client, these dealerships must be doomed. I still have the scars from a similar era in the 1980s, when most computer hardware firms were being propped up by the financial kickbacks from the hardware component manufacturers. It didn’t last then and it won’t last now.
Garry Weaven has supposedly become one of the most influential talking heads in our industry because of his single-dimensional focus on exposing the gap between a manufacturer’s superannuation product cost price and the consumer’s buy price. (Garry Weaven is Chair of Industry Funds Management, Director of Pacific Hydro and Member’s Equity Group and former ACTU Assistant Secretary. Review his 23/5/2007 National Press Club speech “Superannuation and the National Interest”.) He will be the first; many will follow him.
Clients are charged premium fees for services they rarely use
But the nail in the coffin of my conviction of a new era was hammered in by a recent conversation I had with a respected name in the industry. He admitted that his firm would happily (and compliantly) charge up to $2,000 each year in fees from clients who never called, never needed their services and who received an annual newsletter. His theory was that these were the most profitable of clients, and he wondered why any firm would ever get rid of them.
I accept the argument that there are consumers who pay top dollar for services that they rarely use (e.g. membership of golf clubs, boats that never move from their moorings). However, I only accept that fact if the client knowingly makes the decision every year (not just upfront), based upon clear understanding of the amount of money, in dollar terms, they are paying every year.
No wonder financial planning businesses are earning a higher multiple (6x plus EBITDA or 3x plus renewal income) than most accounting and legal businesses. The purchasers believe they can extract even more growth from these overcharged and underserviced client bases. I don’t believe consumers in the new era will willingly pay premium prices just for their advisers to “be there when I need you”.
In this hotbed of industry maturation, we seem to have forgotten the client.
Remember them, the ones who are paying for the party we’re enjoying?
The forthcoming era will be one where we are forced to focus on the client rather than just their money. Advisers, dealerships, and product manufacturers who can’t prove they are truly client-driven rather than product driven will be dead. As Tony Freckleton says:
“The future is about really being there for the client, helping them achieve financial objectives they’d find very difficult to attain without us. We give them the appropriate choices and options built for them not for our product range. We know we must build an ongoing relationship to earn their year by year fees, not just take them for granted each year.”
Freckleton runs a great client-centred advisory firm in multiple Sydney-based offices: Strategic Wealth Solutions. He recently remarked how satisfying it is attracting new clients by simply adding value and correcting the excesses made by our industry’s product grabbers.
What Tony and I are really looking forward to is the inevitable rocky market tightening that will highlight the client offerings of the future and the product offerings of the past. Those firms who have only used the best of times we are currently enjoying to continue to do more of the same they have always done won’t be ready for those times. Those firms that are using these best of times to build a more client-focused proposition won’t escape the rocky times, but will be prepared for the future prosperity of their firms and their clients.
Let’s not forget the client.
These are the best of times to be building a client-centred advisory business.