As I write this, the Dow Jones Industrial Average is bumping up against a new record high. It looks like another good Christmas for investment advisers. What has happened to our industry since the last Dow Jones record in January 2000?
Obviously the world has changed significantly, as has our financial planning industry. But for the better?
There’s no doubt that our industry has been adaptable. Soft-dollar incentives, financial services reform, financial literacy initiatives, superannuation reform, and increased competition from previously docile industry super funds and savvy marketing groups like Branson are all examples of significant developments since January 2000. There’s also little doubt that the current Parliamentary Joint Committee Review on Corporations and Financial Services, headed by Senator Grant Chapman, will have a similar effect on how we do business.
But are Australians making smarter decisions regarding their money now, compared to five years ago? Are we now providing better leadership that sets our clients on a financial direction that ensures their goals are more efficiently met? Are we now providing better expertise to bridge the financial capability gaps of our clients? Do our clients trust us more than they used to, for the important financial decision in their lives? Have we convinced more Australians of the value that we can add to their financial decisions?
Probably not.
I believe the strongest leadership our clients have witnessed in the last five years hasn’t come from champions of advice.
- Legislation. Leadership, if you can call it that, has come from the well-intended but dim corner of pushing paperwork processes over client outcomes, based on misguided financial services reform legislation.
- Media. The media ‘leadership’ have increasingly confused our clients with pointed and sensational descriptions of our growing pains, while providing little analysis of solutions. As with the climate change debate, it’s easier to shock the consumer than try to explain the complications of possible solutions. As a result, they’ve denounced the term “financial planner” and happily pushed it to the lowest possible professional rung. This has cast great aspersions on the majority of financial planners, often for being nothing more than financial planners.
- Superannuation Funds. Industry superannuation funds have burst from obscurity, offering a new form of leadership – everyone else is a crook charging you too much; trust us. It’s the lowest form of attention grabbing possible – i.e. heckling the lowest prices, and seemingly promising a continuance of better performing funds. Great leadership stuff, isn’t it?
- ASIC. ASIC has also started enforcing another brand of leadership. The directors of AMPFP are probably only the first of many to understand the implications of an enforceable undertaking.
Why is this the case? Why haven’t we had the opposing argument or public debate?
It’s the phase we’re in, of our industry’s lifecycle, the phase where:
- Demand still exceeds supply. Thanks to our superannuation guarantee we have an additional $46 billion of pension monies per year tipping into our accounts (even before we consider the personal and business wealth our clients also generate). This has generated the ‘client-squatter’ type of financial planner who gets paid well for compliantly ‘servicing’ a fairly docile client base. Witness the current overwhelming number of client-base buyers for every seller. We hear and complain about the noise outside the walls of our ‘gated community’ but we aren’t sufficiently worried about our livelihood to do anything about it just yet.
- Automatic renewals. Once we get the client’s money, we don’t have to re-sell our services in year two, three, and onwards, but we do automatically get their renewals, fees, trails, commissions (call it whatever you like – all these terms still confuse our clients) for being there in the first place. Because of this, many so-called leaders among us are focusing on their own imminent ‘liquidity event’ to fill the pockets of shareholders, rather than on filling the current and future pockets of their clients.
- Pricing issues. The price we charge for our advice isn’t determined by the seller, but by the product provider or manufacturer. We’ll find the road to greater professionalism tough whilst we can’t even determine the price of our advice. The product sellers among us don’t see the problem, nor should they – yet. As products become inevitably commoditised, trails will diminish.
Financial planners rightly challenge me, saying they’ve heard these criticisms for ages, but still the valuations of planning client bases are high, still the clients are willing to pay commissions (even the inactive ones we never see), and still the fund/product manufacturers promote the status quo. So why haven’t these things changed yet?
That’s simple – we haven’t separated separate product cost from advice cost in terms clients understand. Fat margins on products and platforms are hidden in weasel percentages that the majority of consumers don’t understand. Watch the Chapman Review very intently. In this parliamentary review, or the next one, or the one after that, the price charged and disclosure methods will be made even more transparent than they are today. The ramifications will be widespread.
When consumers start understanding the dollar costs that make up their 150bps (or whatever their total charge is), new questions will need answers. If we haven’t stood up as leaders to outline the value we are adding (not just the taxes we are saving, or the investment alphas we are making, or the costly mistakes we help them avoid), then we won’t have a sustainable business.
Then we all will be much worse off. Who will they turn to, to help them make smart decisions about their money? Their accountants. That poor industry is already overworked, and they can’t find any new staff. We’ll be left where the British industry was in the late 1980s – without trusted financial advice for our consumers. A quick trip over there will convince us we don’t want to go down that path.
These are the best of times to be a leader among our clients and the greater industry, exulting the true value and role of financial advice.