In the financial planning industry there is an ongoing cycle of consolidation - networks to breakaway groups and back again - with planners often wondering what life would be like under another model.
But the big factor playing on planners' minds, and one which as a consequence is maintaining the status quo, is the commencement of the Future of Financial Advice (FOFA) reforms from July next year.
Will breakaway groups be able to survive in this environment or will mid-sized and well-capitalised networks be in a better position than the larger dealer groups?
"Rebates are a big value proposition for dealer groups, so how will planners cope?" Colonial First State advice business general manager Marianne Perkovic asks.
Such unknowns have planners sitting on their hands. And according to Paragem managing director Ian Knox, the only businesses that are truly considering consolidation and selling are those who believe they won't survive post-FOFA.
"Behind the scenes, superannuation is the fastest growing in the world, we are the fourth largest superannuation market, we have a government committed to raising contributions and who regards advice as important," Knox says.
"Well-run practices can make 40 per cent EBIT (earnings before interest and tax). Why would you sell?"
Current levels of consolidation activity
The AMP takeover of Axa in March is evidence the desire to consolidate is alive and well.
This amalgamated group reportedly now accounts for almost 3000 of the industry's financial planners, with its funds management business representing $130 billion in funds under management.
But aside from this significant deal, are we seeing much other movement in the market?
Certainly consolidation activity was foreshadowed to occur prior to the regulatory changes involved in FOFA. Reportedly this has not come to fruition.
"There is a lot of activity with discussions, but not a lot of moving," Perkovic says.
While the details of the FOFA reforms have now been released by Treasury, it is still early days and this uncertainty gives planning businesses enough reason to consider delaying any consolidation plans they may have.
"A lot of licensees are waiting to see," MLC advice and marketing executive general manager Richard Nunn says.
"There has been a lot of consolidation over the past decade, but a lot of people are sitting to see the powder dry."
Fortnum Financial Advisers executive director Ray Miles agrees: "There are a bunch of practices looking to see what happens with FOFA and deciding whether they need to be inside or outside."
The last major consolidation period in the industry was between 2002 and 2004 when the Financial Services Reform Act was being implemented. Since that time, the market has been fairly static. "We have not seen a lot [of consolidation] since then. ING has been buying a lot of businesses through Millennium3, which has increased its headcount. We have seen the arrival of Shadforths and Centric as aggregators and more recently growth with Wealthsure," Knox says.
While consolidation is a characteristic of the Australian distribution market, the corporate regulator has revealed it has some concerns over the possible impacts it could have on the industry, particularly given the domino effect that was evident during the global financial crisis.
Knox says ASIC has announced in a regulation that it will be monitoring the behaviour of consolidators.
ASIC's concern is consumer confidence following collapses such as Storm and Westpoint and fear that large dealer groups could be contaminated by much of the fallout.
Breaking up is hard to do
Leaving a network is a tough decision, but in the current environment, it is even harder.
"It is a tougher decision for a planner to make any decision to move when you have a lot of unknowns," Perkovic says.
But according to Miles, if businesses and planners are leaving dealer groups, it only reflects badly on the dealer group.
"A dealer has got to be doing something really bad. It is very painful for businesses to leave dealer groups. They shouldn't lose them if they care," he says.
The transition process when leaving a network is considerable work for planners, who will lose three to four months of activity in the process. Practices such as writing to every client telling them of the change, moving every client to a different platform, new letterhead and new signage all make leaving a larger network not much fun.
Adviser retention
In the absence of consolidation action, the larger networks are focusing on ways of keeping what they have got and making stronger businesses for the future.
MLC's approach over the past five years has been to 'future proof' its distribution businesses beyond the FOFA deadline. This has meant moving them to fee-for-service and "positioning businesses for success past that date", it says.
"Advisers are now extremely well positioned for anything the government can throw up," Nunn says.
He says after the reforms the industry will be left with both institutional and vertically integrated business models.
This business landscape will include well-capitalised independent licensees, such as Count, together with a vibrant boutique market. Nunn says it will be up to the mid-sized licensees to do some thinking about how their business is set up.
Where advisers are looking to grow their businesses, MLC is working hard to provide growth opportunities. To do this, it is helping advisers to divest client bases such as lower client categories. This means advisers who have extra capacity can pay for client services rights and buy a parcel of clients.
Colonial First State's approach has not been dissimilar to MLC's, concentrating on making the businesses it does have in its network even better and stronger. Perkovic says for its independent financial adviser channel this has meant increasing adviser standards and competencies. Through its Institute of Advice, the business is enhancing the skills and capabilities of advisers and providing them with the tools to build more sustainable businesses.
Perkovic says such tools are valued by advisers and are regarded as big value propositions by planners because "planners can be rest assured we have a good compliance framework".
For its Financial Wisdom network, planners want to run their own business. It is CFS's role as its licensee to then look after the broader issues.
According to Knox, buyer-of-last-resort is still being used as a business retention strategy.
AMP and MLC like to use the facility, and offers can be up to four times recurring revenue subject to planners using their product.
Attracting new planners
There are always some planners on the move, keen to experience life under a different model. Newer businesses, such as Fortnum Financial Group and iPraxis, are having no problem attracting businesses and planners.
"A lot of advisers are throwing the towel in," iPraxis chief executive Dylan Mann says.
Mann says this is because of the lack of Australian financial services licence value-add and the fact a model such as iPraxis's allows the planner to own the client.
"Every customer you bring in is yours. The relationship with the client is the most important thing," he says.
Six months ago, iPraxis had 15 planners. Now it has 80 planners on its book and is attracting planners from Westpac, Commonwealth Bank of Australia and Wealthsure.
IPraxis is also currently conducting a prominent radio advertising campaign to attract new planners.
The campaign will be run to the end of the year and the group is looking to recruit 300 advisers by 2013. It is partnering with Pinnacle to get experienced people in the Philippines RG 146 compliant to help overcome the shortage of paraplanners here in Australia.
"We put an ad on seek.com for a salaried planner to join iPraxis with the income at $100,000 per annum, and only received two CVs," Mann says.
Meanwhile, since forming last year, Fortnum Financial Advisers has signed 21 practices with another 10 new businesses recently joining.
Miles says there are two groups of planners in the industry and there are just as many planners looking to rejoin a dealer group as there are breakaways getting their own licence.
"There are a lot of practices who don't want to be owned by Axa," he says.
Larger dealer groups are also having no problems attracting planners. This year, NAB Financial Planning has recruited about 75 new planners. Nunn says planners are attracted to joining groups like NAB Financial Planning because they provide salaries and guaranteed leads and client bases, and they follow a clear and articulated business model.
CFS is currently recruiting for Financial Wisdom, seeking planners who are fee-for-service and who like to use platforms because of their efficiencies. The group is definitely looking for planners motivated by fear.
"If someone is looking to move or consolidate because of FOFA, they're probably not who we want," Perkovic says.
She says post July 2012, planners will make some difficult decisions about where they want to be and she is confident CFS's model will be attractive to them because of its focus on professional development and standard practice rather than enforcing a culture of compliance.
"If dealerships shy away and their value propositions are around rebates and they can't articulate value, it's a catalyst for planners to think of going elsewhere," she says.
A boutique acquisition
Meritum Financial Group
MLC's most recent acquisition was Meritum Financial, the Melbourne-based financial services group with more than 110 financial advisers and over $45 million of annual life insurance premiums.
It acquired the remaining equity in the business in December last year. After inheriting a 49 per cent stake in the business when it acquired Aviva in 2009, finishing the deal was reportedly not a fait accompli.
Rather, MLC decided to completely purchase Meritum because it made commercial sense and the provision of advice is viewed as a core business of MLC.
MLC advice and marketing executive general manager Richard Nunn says MLC has taken a "light touch" approach to the acquisition, allowing the managers to "pretty much run the business as usual". Nunn says this is important so that the advisers feel comfortable their business model is not changing.
Former Aviva group director in distribution and marketing Stephen Trist was, however, appointed general manager of Meritum. Co-founders Brian Dau and Theo Christopolous remained.
Analysis of consolidation market
Big end of town
1. Axa
Acquired by AMP in March, the amalgamation is certainly the most significant deal done so far this year.
But according to Paragem managing director Ian Knox, the deal represents a cultural mismatch.
"Axa is a distribution-based business and AMP is a manufacturing business that owns the client. When put together, it's a cultural mismatch. There is not a lot of evidence with AMP growing, but has been with Axa," Knox says.
He says planners are still waiting to see the outcome of the deal before they decide what to do.
"AMP does not pay people to stay, but Axa do with Genesys," he says.
2. Genesys
While Challenger sold Genesys to Axa almost two years ago, AMP's acquisition of Axa keeps this consolidation story evolving.
Ray Miles's former role as managing director of Genesys and current recruitment of planners for his new business, Fortnum Financial Advisers, allows him to see the planner movement. Miles says most of the financial planning businesses he has recruited for Fortnum are not surprisingly from Genesys and he estimates it has lost around 88 practices and around 168 planners.
"Most have come out of Genesys because they don't trust anyone there," he says.
"This is a relationship business. The guys are happy to pay a good dealer fee if they are serving their best interests.
"Axa will struggle with Genesys. It doesn't fit the model."
Breakaways
1. iPraxis
Formed in 2008 by three accountants who decided to put into action what they had learnt from their time at AMP.
Starting with the question - how would a client do it and structure things - iPraxis focused on independence as defined by not being owned by a product provider.
"We created a dealer group that is adviser focused and now we are getting recognition for our client focus," iPraxis chief executive officer Dylan Mann says.
The business provides a direct model that offers general advice. It is similar to the service provided by customer service at a bank. It also offers a full advice model where planners can use the best products and leads are provided.
The group is not finding it difficult to attract new planners because it is training experienced students overseas to complete the diploma of financial services and training them as paraplanners. This means unlike some banks where it can take three weeks to get the first draft of a statement of advice, iPraxis can get it in 24 hours.
Mann says already the business has been offered a buyout by three different providers.
2. Fortnum Financial Advisers
In March last year, Fortnum Financial Advisers recruited its first practice. One year later, it has recruited 21 practices, many of which are from Genesys.
"Most come out of Genesys because they don't trust anyone there," executive director Ray Miles says.
The group announced ING Australia would provide 20 per cent of the capital needed to fund the new dealer group. ING Australia-owned dealer group RI Advice Group provides the core dealer services.
"Our model has been pretty simple forever," Miles says.
"The thing that guys are looking for is someone who is looking after their best interests. They know they can trust us. We have the best interests of the client at heart, but instos are just flogging product."
Looking for a buyer
1. AFS Group
While a sale has not been confirmed or denied, in March AFS Group managing director Peter Daly told InvestorDaily the business was in deep talks with an institution and due diligence had been completed.
Further, since 31 December 2010, AFS has been in an exclusivity agreement with the undisclosed group, rumoured to be IOOF but not confirmed by it.
Interestingly, Daly confirmed that for a deal to be made, AFS would need to maintain its independent approved product list, its own management to oversee the group's compliance and that it maintains the relationship with its advisers.
2. Avenue Capital Management
In an interview with InvestorDaily in July last year, Avenue chairman Stephen Garrett confirmed the group was interested in consolidation.
"Avenue has emerged from the downturn strong, debt free and ready for a new phase of growth. As a result, we now believe the time is right to re-examine the possibility of finding a partner to purchase the business and have engaged professional advisers to assist in the process," Garrett said.
Ideally the business sought a partner that would support the growth and development of the group's member firms. It also wanted a partner that would assist the principals of the business in the management and development of their practices.
