Author: Janine Mace
While they might not be donning running shoes and doing sprint trials, many financial planners probably feel their life is almost as competitive as that of a professional athlete.
Increased commoditisation of advice, volatile investment markets, bad media coverage and declines in traditional sources of revenue are all making life very challenging.
Overlay that with the transformation being wrought by the regulatory change from the Future of Financial Advice (FoFA) and Stronger Super reforms and you have one very unsettled market.
It is just the type of environment that allows new entrants to emerge. Free from the costly legacy systems and processes holding back many existing players, they are able to capitalise on the situation and aggressively compete.
One expert who has identified a number of challenges for the advisory sector is Strategy Steps director, Assyat David, who believes it is important for planners to think carefully about how the financial services industry and their own business environment are changing.
“It is a ‘horse or cart’ situation, with a lot of change in the industry and also increased competition,” she says.
“Consumers are changing their attitudes and regulators are also changing things, with the combination leading to significant change. With this, greater competition can spring up everywhere.”
Changing attitudes to investing
The shift in consumer attitudes, in particular, represents a major competitive challenge for advisory businesses.
David argues clients are moving from the traditional, outsourced, ‘do-it-for-me’ approach to one where they seek involvement and control with a ‘do-it-with-me’ approach. This is illustrated by the increasing dominance of the SMSF market.
“Advisers are missing out on capturing these clients because the focus (perceived or real) on products, rather than strategy, has meant advisers have largely failed to satisfy the preferences and needs of SMSF clients,” she explains.
Those practices which still remain focused on managed funds or platform selection are missing the boat.
“Clients have a shifting preference for direct and low cost assets that are transparent and accessible by the retail investor. Managed funds may be considered expensive and in recent times, their average performance (relative to a benchmark) have not been sufficiently stellar to attract investors’ attention,” she notes.
Steve Prendeville, director of Forte Asset Solutions, agrees this is creating competitive pressure, particularly in a period of lower investment returns.
“We have seen the continued growth of SMSFs and self-directed investors and when the tide comes back in, I am not confident the consumer will come back to advisers in the same manner as before. It is more likely we will see the growth of specific or limited advice and not necessarily advice with ongoing monitoring,” he notes.
This shift away from full service advice to advice dealing with specific problems the client may be facing is significant.
“Clients at all levels along the wealth scale are increasingly looking for advice that deals with single issues that are currently at hand, rather than holistic advice. Dealer groups that predominantly offer holistic advice risk bucking this trend and marginalising their business and client advice,” David warns.
She believes clients seeking holistic services are likely to shrink as a proportion of the industry, with a growing number more likely to be self-directed and favouring direct assets and listed managed funds, such as ETFs.
Although changing client attitudes may be keeping planners awake at night, many experts also believe the advisory industry is competing against the community’s negative perceptions – due in part to both the GFC and a few bad apples.
Sue Viskovic CFP®, managing director of Elixir Consulting, agrees the market is increasingly competitive, but often in non-traditional areas. “For example, there is a competitive struggle around getting good returns after the GFC. Ironically, this is a time when clients benefit from advice but they are still very nervous. People are looking for trust and guidance towards smart decision-making,” she says.
“Planners are also competing with mainstream media horror stories about bad advisers and advice. People want to take advice, but the problem is who can they trust and is it tailored to them? Advisers are competing with their external environment.”
Long-time industry commentator and managing director of Paragem, Ian Knox, agrees the testing competitive environment is coming from several sources.
“The biggest issues over the past few years are the GFC’s arrival and the loss of assets, the lack of confidence in future growth of markets and the poor media image of planning as a result of product and business collapses,” he says.
“The challenges for practice heads are determined by a number of factors, of which FoFA is an influence, but not an overarching conundrum.”
Such a turbulent environment usually breeds enhanced competition.
“When there is disruptive change, it can be a lucrative time to enter a new market,” David notes. “Change will make it more competitive in the future.”
Caught between the majors
The fierce competition occurring within the wider financial services industry – particularly the banking sector – is spilling over into the advice space.
According to Prendeville, the big banks made noticeable attributions to the wealth management side of their businesses in the recent reporting season, highlighting the growing importance of this sector.
“It is a hyper-competitive environment for distribution in the institutional space at the moment and this is leading to significant merger and acquisition activity by AMP, MLC, IOOF and SFG Australia,” he explains.
“I expect to see more plays in the distribution area. Ninety per cent of the industry is institutionally owned, but we will still see more land-grabs occur.”
The battle for market share and distribution at the institutional end is making the market “quite ugly”, Knox says, with many medium and smaller dealerships pinned down in the relentless crossfire.
“Institutions are fighting among themselves and paying artificially high prices to keep the end consumer,” he says.
“The grab for distribution is leading an accelerated trend towards consolidation in practices. The majors are offering licensing services for nothing, so this is making it very difficult for other practices. For small dealers, they are up against it.”
Prendeville believes many institutions are keen to protect both their product distribution and margins in a post-GFC environment.
“There is a level of protectionism and a new business requirement behind many of the current developments,” he says.
This is seeing some dealerships struggle.
“In the past six to 12 months, a number of dealerships have closed down overnight – such as Morrison Carr and AAA Financial Intelligence – and it seems clear that other long-term business structural problems were causing the problem, not FoFA. For example, they may have attracted the wrong calibre of advisers or were not charging enough for support services,” explains Knox.
“The tailwind of regulation change is that many dealerships that are totally reliant on volume payments and shelf fees, will lose these under FoFA and be forced to charge a proper fee.”
Rising dealer fees will tighten the competitive screws further on some practices.
“FoFA is impacting the clarity on cash flow and this is a major change for the industry,” Knox says.
He believes another challenge is the age of some practice owners, with practice pricing issues further heightening the competition pressures being felt by many planners.
“The industry has a demographic problem with people expecting a value for their business as it was five years ago,” he says.
“Financial planners are faced with activating significant changes in their business, or stepping out now. This means practice heads are increasingly vulnerable to offers by the majors.”
Added to these issues, many planners are also feeling squeezed as new entrants eye off the growing asset base in the wealth management industry.
As David notes: “When you have competition and change, you never know who will be your competitors in the future. For financial planners, the key message is change will lead to competition, especially through regulatory change.”
She sees a number of fresh competitors sizing up the market. “The new competitors include mortgage companies, credit unions and even research houses who are trying to get involved and offer distribution. This means life is going to be tougher than in the past.”
The growing dollars within the superannuation and financial services sectors are generally drawing competitors like moths to a flame.
“You only need to look at the funds invested and the compulsory nature of superannuation to see it has become a beacon for people looking to make money. For example, we are already seeing Coles and Virgin tapping into their existing customer base – especially in single issue areas like insurance,” Viskovic notes.
Prendeville agrees companies with a large customer base – or a willingness to capitalise on changing markets – will look towards the advice market.
“There is a great opportunity for the ‘disturbers’. Mark Bouris’s Yellow Brick Road is a great example. This is what he did with Wizard and it’s exactly what John Symond did with Aussie Home Loans when he entered the mortgage market,” he explains.
“Those companies that have penetration through their access to a large customer base – like Coles’ new insurance offer – will have a greater opportunity.”
Lower barriers through new internet-based technologies are also encouraging fresh entrants. Social media platforms like Moneytribe allow clients to engage directly with financial product sellers for personalised product offers and advice in areas such as health insurance and mortgage products.
In the medium-term, one of the major sources of competition is the accounting profession, which under its new limited licence, will be able to more aggressively enter the advice space.
“In general, government and regulators view the accounting industry more favourably in terms of the way they price things and the trusted relationship they have with clients. Accountants are one of the main areas of competition,” David says.
The new rules will not allow accountants to recommend specific products, but clients will be able to get tailored strategic advice and then make their own decisions. “This leads to financial planners having a reduced ability to value add,” David notes.
But it’s not all bad news. Although the competitive environment for planners may be challenging, next month Financial Planning takes a look at the many causes for optimism and suggests some strategies that practices can consider in order to deal with the new world they find themselves operating within.
Key competitive challenges
• Volatile investment markets and returns.
• Changing client attitudes.
• Greater interest in self-directed investments.
• Reduced focus on product and platform selection.
• Media coverage of ‘bad apples’ in the advice market.
• Ageing demographics of the planning community.
• Reduced income streams due to regulatory change.
• New market entrants leveraging existing client bases.
• Technology lowering barriers to entry in some areas.
• Changes to the Accountants’ Exemption rules.
For a case study regarding a planner’s involvement in his local community, go to : http://www.financialplanningmagazine.com.au/analysis/case-study-local-values