Author: Duncan Hughes
The revolution reshaping financial services has already produced 10 major takeovers worth more than $14.5 billion, involving thousands of financial advisers and hundreds of billions in funds under management. Reform critics claim it has abandoned more than 30 years of improved consumer choice by sacrificing advisers, created barriers to entry and surrendered more power to the big banks and other powerful conglomerates.
Supporters welcome improved disclosure by product providers and advisers, rising professional standards and new regulatory powers intended to provide more protection for investors.
Shane Nicholas, director of RetireCare Personal Wealth Management, an independent adviser group based in Melbourne’s west, claims the reforms will build public confidence and boost business.
“Independence will become more popular and valuable in time,” says Nicholas, whose practice has about 10 advisers. “The huge consolidation in the industry is making the independent space more valuable.”
Nicholas has rejected the cajolery and cheques offered by major product manufacturers to turn his business into a sales force for the wealth management divisions of one of the bigger players. He won’t comment on how much he has been offered from whom, other than that his unrequited suitors keep coming back with bigger offers.
Typically, medium-sized practices are being sold for about three times their annual earnings to larger groups, or two-year contracts of about $1 million with an option to quit at the end of the term.
But for Jim Minto, managing director of TAL – formerly Tower Australia Limited – the reforms have handcuffed business, hamstrung investors and will eventually be rejected.
“The whole exercise was created to avoid conflicted advice,” Minto says. “The funny thing is we will end up with more conflicted advice than we ever had.”
He believes the federal government and the Australian Securities and Investments Commission, the industry’s primary regulator, are relaxed about a major consolidation, particularly among adviser networks.
“Independent dealerships are no longer viable,” he says. “Their numbers are shrinking. Anyone not owned by a major financial provider is under severe financial pressure.”
Minto fears that the changes have miscalculated the public’s growing appetite for unaligned, independent advice, which has been cultivated by the ability to shop around for the best deal on the internet.
“What the product and policy designers have not got their head around is that it will be rejected by consumers,” Minto says. “It fails to meet consumer demand and those wanting choice and open architecture.”
Collapse exposes weakness
It’s just over four years since Townsville-based Storm Financial collapsed, destroying thousands of investors’ dreams of having comfortable retirements and dramatically exposing weaknesses in financial advice and regulation.
Investors were promised undreamt-of wealth by leveraging the equity in their homes and investing in white-labelled equity funds. They were urged to make additional investments, called “steps”, with instalments using any extra capital, such as superannuation, savings or inheritances.
Storm was the latest in a string of high-profile disasters, many involving tax minimisation and managed investment schemes, that had plagued the industry’s already-tarnished reputation.
Two parliamentary inquiries, hundreds of submissions and thousands of pages of legislation, regulations and ASIC guidance notes later, the industry is bracing for a July 1 deadline. The underlying principles of the future of financial advice (FoFA) reforms are to boost accountability and transparency and raise the educational levels and ongoing professional training of those offering advice.
According to Bill Shorten, Minister for Financial Services and Superannuation, and the third minister to handle the portfolio in the past five years, only about one-in-five Australians use a financial adviser.
“It will improve trust in the industry and remove structural impediments to the broader provision of advice by accountants and financial planners,” he says.
In short, the key reforms are:
Imposing an obligation for advisers to consider the best interests of clients and banning conflicted remuneration, such as commissions and bonuses.
Delivering greater transparency through an annual fee disclosure regime and a requirement for clients to opt-in to ongoing fee arrangements.
Expanding the provision of single-issue advice, which is called scaled advice, rather than comprehensive “holistic” plans.
Broadening the advice that accountants – and others – may provide under a new, limited financial services licence, replacing the existing narrower accountants’ licensing exemption.
Dennis Bashford, managing director of Futuro Financial Services, a dealer group with about 90 advisers, says he remains “in complete control of our destiny” despite having sold a 10 per cent stake to AMP, which is expected to increase to 100 per cent over the next five years.
Bashford, a 40-year industry veteran, says: “Nothing has changed very much at all other than we now have access to resources and support you could only dream of as an independent because of the sheer size of these guys.” But he admits “you’d have to have rocks in your head” not to believe AMP will gradually increase its influence on his group’s products and processes as its equity stake increases.
AMP, AXA and most of the big banks are on a billion-dollar spending spree to plug gaps in their product range and distribution networks and boost funds under management.
What’s driving the massive regulatory and corporate interest is about $1.5 trillion in superannuation savings, the world’s fourth largest pool of managed savings, which will swell quickly when the government raises mandated contributions from 9 per cent to 12 per cent.
Financial services is the largest sector of the Australian economy. It accounts for more than 10 per cent of Australia’s gross domestic product, making it a bigger employer and revenue generator than mining, manufacturing or agriculture.
The bulk of this money – plus another $500 billion in managed funds and trillions in residential property – is owned by baby boomers, the term that describes the generation born between 1946 and 1964.
They are entering retirement with the expectation of living about 20 years longer than their grandparents, and have unprecedented levels of savings, courtesy of mandated superannuation and property booms.
There are estimated to be 18,000 financial advisers working for about 750 advisory groups operating around 8000 practices. The largest 20 dealer groups comprise about half, with about eight-in-10 advisers directly linked with a product manufacturer, either as advisers working within the group and using the dealer’s support services, or as a directly employed authorised representative under the company’s Australian Financial Services Licence.
There have been a variety of business models. Medium to large-size dealer groups can operate like a franchise where the licensee provides back office support. The licensee is paid a share of the remuneration made by the authorised representative.
Advisers in bank-owned financial adviser firms are generally employed by the bank and are paid a proportion of the commissions, salaries, or both.
There are smaller groups, typically up to 10 advisers, who have their own licence and might outsource compliance to specialist providers, such as Paragem.
The managing director of Shadforth Financial Services, Tony Fenning, says: “One of the biggest things coming out of FoFA is the destruction of the independent sector. The speed of destruction has been accelerating.”
The big banks – National Australia Bank, Westpac Banking Corporation, Commonwealth Bank of Australia and ANZ – are leading the chase for greater market share of distribution through investment platforms and advisers.
Their combined market capitalisation is more than $260 billion, which is equivalent to the gross domestic product of Norway, one of the world’s top 50 economies.
In addition to overhauling their extensive branch networks for selling higher margin wealth management products they are also shopping around for advisory networks.
Barry Lambert, founder and chairman of Count Financial, conceded the banks’ advantages when he announced the sale of his company to the CBA for about $373 million and golden handcuffs for its 700 advisers.
AMP, the historical heavyweight in financial advice, is taking them head-on by expanding market reach and funds under management through the $14 billion merger with its traditional rival AXA, having beaten off a last-minute challenge from NAB.
Other major players include IOOF, a mid-sized group with an insatiable appetite for mergers and acquisitions. Perpetual, while best known as a fund manager, has also been shopping for advisers that have traditionally focused on professional groups.
The usual explanation for the banks’ interest is that wealth products offer bigger margins than traditional savings products and that their scale and profile in the nation’s main streets and shopping malls are a natural fit.
They emerged from the global financial crisis cashed-up and among the world’s strongest financial organisations compared with local financial advisers whose reputations were as battered as their balance sheets from scandal and nervous clients looking for the security of fixed income.
“Independents retained and attracted advisers because of the desire not to be aligned,” says Steve Prendeville, director of Forte Asset Solutions, a financial planning broker company.
“Yet the only apparent buyers in the market are institutions. They are a very attractive option because they offer discounted services, in some cases access to capital and buyer-of-last resort for their businesses and certainly services that an independent non-product manager could not hope to deliver at similar prices.”
MLC, the wealth advisory division of NAB, licked its wounds from the doomed AXA bid by picking up Meritum Financial, a Melbourne-based financial services group with more than 110 financial advisers. But the recent departure of MLC chief Steve Tucker, who consistently claimed its market readiness for the changes was a competitive advantage, is a clear sign that it has been tough building market share.
It is more than three years since ANZ foreshadowed a new direction following the buyout of the entire ING joint venture, which had historically stymied its capacity to act swiftly and independently.
ANZ chief executive Mike Smith has said it would consider an acquisition to jump-start its latest attempt to become a regional power in the sector. IOOF and Perpetual are looking for deals and major overseas companies could take out a medium-sized company for more exposure to the nation’s highly coveted superannuation pool.
IOOF’s recent acquisitions include Plan B at a 33 per cent premium to its July 2012 share price of 45¢ and DKN Financial Group for 80¢, or a 57 per cent premium to its 51¢ closing price in July 2011. DKN had 700 advisers while Plan B came with funds management and operations in New Zealand.
Also busy has been AMP, with its acquisitions of Hillross Group, which had 37 advisers, 12 practices and more than $2 billion in funds under management, and Cavendish, the nation’s largest self-managed superannuation administrator.
The independent future of dealer group Australian Financial Services also appears to be in the balance. It flagged its interest in a buyer, as did Matrix Planning Solutions, although that group says it is no longer for sale, claiming it will instead focus on meeting the increased adviser demand for non-institutional dealer services.
Shadforth’s Fenning says: “Most of the independent groups are either up for sale or have been sold. It is really hard yakka in that space against competitors like banks and AMP.” He says his group is spending about $1 million for compliance costs this year and large players like AMP are expected to pay between $65 million and $70 million.
“Barriers to entry have been built around the incumbents,” he says. “This is not healthy for an industry that needs entrepreneurs and a competitive spirit.”
Shadforth, whose clients typically have portfolios just shy of $1 million, is surviving as an independent by offering its own low-cost products in addition to an alternative product offered by traditional suppliers. It has developed a model that can clip the ticket along the value chain – from advice and product manufacturing through to investment platforms.
“We package for our clients’ products en masse that we can offer at market, or below market price,” Fenning says.
Forte’s Prendeville believes vertical integration, where the dealer group seeks to boost revenue by taking greater control of product, platforms and distribution has its drawbacks. “While vertical integration may translate to an increased notional or perceived value, the ability for these groups to identify suitable buyers may decrease, as some buyers who do not wish to take on an integrated model may only want part of the business,” he says.
Of the top 20 dealer groups only four are independent, according to research by Money Management. Alternatively, the number of platforms being used by the bulk of advisers has nearly halved in six years to eight, another measure of the consolidation under the big four banks, AMP, IOOF, Macquarie Group and Perpetual.
AMP Financial Services managing director Craig Meller claims adviser numbers are likely to halve and that up to 25,000 jobs will be lost from the financial services industry.
TAL’s Minto adds: “Anyone not owned by a major financial provider is under severe financial pressure. That has not been seen as a bad thing. They want larger vertical pressures that can exert more pressure over advice.”
He claims the soaring number of customers cancelling or letting their insurance policies lapse is the “market rebelling against market change”.
“Australians want independent advice,” he says. “FoFA favours big silos that provide end-to-end advice and that is not what Aussies want because it does not provide across-the-market comparison that is required.”
Meanwhile the rise of low-cost, exchange-traded funds, which account for about $7 billion, a 37 per cent increase in the past 12 months, and increasing use of index funds at the expense of the traditional actively managed funds have also chipped away at thinning margins in advice businesses.
By contrast, Matthew Ross, an adviser for Melbourne-based Roskow Independent Advisory, is enthusiastic about prospects and convinced the independent sector will rebound in a different, but stronger, form.
“Those that are lazy and who think it is too hard will exit,” Ross says. “Commission-driven advisers have been getting money for doing little work. Their world is changing.”
Mark Rantall, the chief executive of the Financial Planning Association of Australia, is also convinced the sector will prosper with higher standards and greater transparency.
“Clients will become the focus of the transactions,” he says. “There has already been a big growth in demand for certified [financial] planners. That does not indicate a long-term contractual problem; that suggests a long-term contractual opportunity.”
Another layer of complexity is added by MySuper, a low-cost, simple superannuation product type, to be launched on July 1.
Australian Institute of Superannuation Trustees chief executive Tom Garcia says all 80 members of the institute will have advisers to provide general financial guidance on the funds and investing through the scalable advice provisions. The funds will hold assets for about two-thirds of the workforce and manage about $500 billion.
According to research house CoreData, the most common source of financial information for about a third of people is their superannuation fund, followed by financial advisers and accountants.
A large number of industry funds are expected to follow the lead of sector giant AustralianSuper, which has about $55 billion under management, and combines its in-house teams with panels of advisers to which it can forward-on members who have more complex issues.
An ageing population and mandated super contributions underwrite the need for a growing, independent and transparent advisory sector.
Optimists believe improved professional education for advisers and tougher regulations will improve standards, trust and business for a new generation of advisers taking their place alongside the other professions.
They hope that a prosperous, rapidly expanding new generation of advisers will take their place in shopping strips and malls around the nation as trusted and respected purveyors of expert advice.
But fears linger that years of regulatory change – and the prospect of even more under a new federal government – have increased barriers to entry, strengthened the banks’ grip on the sector and reduced competition.
The jury is out on the verdict.