In Reflections on Advice – Part 1, we examined where the financial marketplace is heading following the latest release of details surrounding the proposed Future of Financial Advice (FOFA) legislation.
We’ll now look at the other two issues we said every Australian financial adviser should reflect upon.
Reflection 2: In light of the direction the industry is taking, what trends will most affect the delivery of advice?
For dealer groups seeking relevance, there seem to be a few good challenges ahead.
Deterioration of valuations
Some groups are seeing their valuations deteriorate quicker than the average age of their aligned-advisers is rising.
This is particularly unfortunate as the incumbents, having spent the best working years of their lives ‘loyal’ to the group, are now finding that their own retirement plans are founded on hope instead of the cheque they were anticipating. It’s ironic for planners who have spent most of their lives planning the future for others, but not themselves.
Problems with ‘white labelling’
Some dealer groups are seeing their future underpinned by their ‘white labelling’ of a service from one of the institutions.
A cursory look at the airline industry suggests that an airline’s long term prosperity requires much smarter thinking than simply painting a livery on a Boeing or an Airbus. Partnering with external suppliers (not just the big institutions) has gone from being a smart move to being a must, and many dealer groups are not strategically ready for life beyond ‘white labelling’.
Changing value propositions
Other dealer groups are pursuing an old proven path of lead generation. Interesting how everything old is new again. The recently announced ‘coup’ (see “Super giant swoops in financial advice coup”, Duncan Hughes, Australian Financial Review, 29th April 2011, p. 1) of six dealer groups gaining access to the 1.75 million members in our largest industry superannuation fund – Australian Super – is a case in point and indicative of a significant new trend in the ‘retail super’ versus ‘industry super’ sideshow.
I believe this sideshow between ‘retail super’ and ‘industry super’ is now moving from being a ‘cost differential’ issue (i.e. “we’re better because we are cheaper and we are not for profit”) to being a ‘quality of advice’ issue (i.e. “we’re better because we can offer the right advice at the right price to the right need”).
This is the next stage in a significant trend for the whole industry – the ‘commoditisation’ of advice.
Watch closely the progress made by the ‘successful’ bidders of Australian Super’s current trial. There will be interesting times ahead as they attempt to deliver ‘quality advice’ at the rates and conditions imposed upon them. Australian Super and all the gorillas in our industry super funds space will demand of any retail advice partner a proposition that consists of (at least) cost-efficient financial advice, flawless compliance, and pricing that is easily understood when marketed on the back of a moving bus.
Needing to know the cost of your advice
This commoditisation of advice movement will force all providers of advice to accurately know the cost of their advice.
The ‘SOA Unit Cost’ will become as crucial a business indicator for the deliverers of manufactured advice as ‘on-time departure rates’ are for the airline industry today. This will be a challenge because most don’t even have the systems to calculate their unit SOA cost, let alone an understanding of what the cost is and how to improve it.
Market sentiment demands opt-in
It also seems that the opt-in debate is over. Opt-in, like climate change and commissions, became sentiment once the competitive messages started emerging proclaiming ‘annual opt-in isn’t a benefit; it’s a right’. It doesn’t matter what the legislation eventually stipulates (currently two years between opt-ins). The market is already saying one year will be the standard.
Reflection 3: The decisions advisers need to make now to best achieve what they desire from their work
Most seem to be saying they won’t be affected by all this.
To them, I say good luck, as I very much doubt anyone will remain unaffected.
These changes are just the tips of the icebergs of consumer sentiment, industry competition, and the creative destruction principles of a fast-maturing advice marketplace (refer to Capitalism, Socialism and Democracy (1942) by Joseph Schumpeter).
Most importantly, you need to decide upon:
- your desired advice model; and
- how you are going to attract clients to it.
Don’t sit on the fence waiting for the dust to settle. Rather, get used to the haze floating around our industry, and despite it, make the decisions and the priorities that will enable you to grow a prosperous advice firm or group of firms.
Are you in the business of delivering advice or are you in the business of building a business that delivers great advice?
I believe you’ll need the talent to do both. These are still the best of times to be building great advisory groups.