The original version of this paper was written in August 2018 – however, we have included new content to reflect likely impacts from the Hayne Royal Commission Final Report (RC Report).
Post RC, financial services firms will continually need to look at the long game to ‘future proof’ their businesses and continue to deliver trusted advice through a system free of product and conflicted purpose; and one founded on three foundations of trust:
- Capability - do I trust the capability of the adviser across the desk? Do they have a process and approach that I can easily understand? Does the system that accredits and monitors them look like a profession?
- Character – is the adviser on my side of the desk? Do they understand me and my needs? Does the fiduciary system they operate in support that cause?
- Communication – can I see consistency in everything I see and read to reinforce my faith in the adviser and the advice experience? Do they take action in my ‘best interests’ that puts me ‘in control’ of my financial situation?
The industry has found it difficult to achieve these components of trust; however, they represent the long-term future of the adviser, the practice they operate in and the Advice Group (currently called a licensee) supporting them at a client and operational level.
The RC Report and it’s explanatory content made this very clear. Industry participants now have a choice: they can get involved in the “injustice debate” or use the valuable time left to adjust their business model for long term sustainability and success.
At Encore, we have an unwavering belief in the value of advice and our purpose is to help and inspire the advice community to deliver trusted advice to more Australians, more often. There are a number of core tenets that advisers, practices and advice groups need in order to achieve long-term sustainability and success:
1. CLIENT DRIVEN, ACTIVE REVENUE
The practice should make 100 per cent of its revenue from professional services and advice. For that to happen the client needs to completely trust the professional system. This means adviser’s must remove all conflicted remuneration and embrace an active, valuable relationship with the client.
Under the RC Report it seems clear that revenue coming from the client and within an active, valuable relationship will attract a premium. Other forms of revenue will be discounted or completely removed (i.e. removal of grandfathering, annual opt in, insurance commissions, broking commissions).
Fee for no service refunds will be the biggest compliance theme of 2019. It’s now front and centre for the practice and licensee well beyond the largest 6 players.
2. DATA COHESION AND EFFICIENCY
Practices should strive for enablement of the professional, integrated financial services model through one advice platform and multiple data sources (i.e. financial planning, cash flow advice, banking, lending, accounting, insurance). This will enable one view of the client and transform the client experience and reduce the cost base for providing professional services. For mortgage brokers this is now a matter of survival vs. discretion; and an opportunity to seize the initiative and grow if approached in the right way.
Let’s hope the introduction of the annual opt in process will simplify the current “mess” regarding FDS, Opt in and ongoing service agreements. The cost and complexity of running a practice now makes it essential to avoid waste such as multiple data entry and re-work.
3. PROFESSIONAL OWNERSHIP STRUCTURES
The days of owning large businesses as a sole operator to preserve Buyer of Last Resort arrangements will come to an end post RC. Having a good quality succession and liquidity plan will now attract a premium with institutional money departing the market. It’s imperative any partnerships in this area have cultural and commercial alignment. We favour long-term capital partners who seek to establish win-win outcomes based only on growth in the practice’s long-term profit from fee revenue, not associated product outcomes.
The RC Final Report recommended a dual system between individual accountability and the existing AFSL structure. This starts to make financial planning look like a profession. In time, the AFSL (licensing) system structure will become a redundant layer and excessive cost in the process.
The RC Final Report didn’t enforce structural separation between product and advice – however, enforcement of the Best Interests Duty will make this model challenging for independent minded advisers. It’s unknown how extensive and intrusive the “written warning” will be if you don’t comply with the definition of independence under S.923A. I’m expecting something quite “heavy handed” and it’s a worthwhile exercise for practices to at least read the section and do some scenario analysis.
4. PROPER STRATEGY, GOVERNANCE AND ACCOUNABILITY
Flowing from a shift in professional ownership structures comes a proper board and governance process. Larger practices should typically have an independent chair and independent directors; smaller practices will need some form of accountability to plan each month. This structure drives proper strategy formation, governance and accountability to execute on plans. According to Business Health only 5% of practices have documented strategic and operation plans covering 15 plus items, reviewed at least 6 monthly and monthly progress to plan meetings; however, when implemented well this makes a 209% difference to profit.
The operating environment has become more complex and stakes are higher. Many have sought to control their own destiny and applied for their own license coming out of the institutional environment. It’s very dangerous to think ASIC won’t stretch this far, therefore, no matter what the size of the practice/licensee it’s worth making the business look, feel and be strong and robust.
5. LICENSEES BECOME VALUE ADDED ADVICE GROUPS
Practices will need to believe in paying licensees a fair price for valuable professional support services. The removal of conflicted remuneration (current and grandfathered) will leave the licensee to achieve true economics vs. product subsidisation. I’m observing a sigh of relief regarding managed accounts structures and suggestions margins will not be impacted. That’s a dangerous assumption, but watch some fights for survival on this battlefront.
Professionals should choose to be part of an advice group, peer group or professional body because it provides a professional network of peers, adds value to clients and helps run a more profitable, efficient business. The advice group supports the adviser discharge their obligations as an individually certified professional and deliver efficient, effective and trusted advice to their clients.
We have never seen more noise and instability. It’s easy to get distracted; however, the long-term business thinker will form their view of the long game and invest scarce resources wisely. Our view comes from three driving forces:
- What will the consumer value and genuinely trust?
- What’s real and what’s a function of anchoring bias of the past?
- What’s the most efficient and effective business process/model to provide value to consumers?
The timing of change is always hard to predict; however, if you look back the long game it’s more obvious. Form your own view of the “long game”, have a clear strategy and then work out the gap between your current vs. desired reality. The rest is change management, governance, action, discipline and dedication.
This goes beyond financial planning; the integrated financial services model across accounting, mortgage broking, and insurance can come together to form one, integrated financial services profession. It’s never happened, however, threats to transactional accounting, best interests and commission removal in mortgage broking and insurance commission potentially becoming “zero” provide an unprecedented case for change.
Whether it’s a big opportunity or “Armageddon” depends on your mindset. In the post FOFA period I recall the various sub groups, committees, and lobby groups seeking changes and concessions. The RC Final Report has left plenty of questions; however, the tone of the report is best described by the underlying principles outlined on page 8.
- Obey the law;
- Do not mislead or deceive;
- Act fairly;
- Provide services that are fit for purpose;
- Deliver services with reasonable care and skill; and
- When acting for another, act in the best interests of that other.
2019 is the year of making choices for the long term. Success will come to those who see through the noise and build their own long term, sustainable vision.
Tom Reddacliff, CEO, Encore Advisory Group
About Encore: Encore is a consulting and investment firm inspiring the Australian Financial Services Industry to play the long game successfully and bring trusted advice to everyday Australians’. We believe a better advice business means a better industry and a better community. New world challenges mean new world thinking and skills to realise today's growth opportunities. Clients call on Encore when they are ready to put great ideas into action.