In 1830, Massachusetts Supreme Court judge Samuel Putnam laid down the fundamentals for proper investment management.
Trustees, Putnam said, should act like a 'prudent man' when investing funds: don't speculate, ensure income and protect capital.
One hundred and forty years later, his ruling was made law when United States president Gerald Ford adopted the description in a law designed to establish minimum standards for pension plans. And, eventually, it found its way to Australia, where it has now been adopted by most states.
The ruling - which is commonly known as the prudent man rule, or, for the more politically correct, the prudent person rule - could be seen as a nineteenth century version of best practice. And some people argue it is time it is reinstated as a guiding principle.
"[The industry] has to get back to better planning models. You now have people who have 60-65 per cent of their money in equities. To me that is not balanced, but it gravitated towards those models when equity markets were the primary drivers," Cairns-based Gowdie Financial Planning principal Vern Gowdie says.
The blind belief in equities has led to big falls in clients' investments and this will trigger a rationalisation of the industry, Gowdie says.
"There is going to be a huge shake-out in the financial planning profession over the next two or three years as the markets continue to grind forward and results are hard to come by. I think those who adopted a product selling approach are going to be found wanting," he says.
Gowdie has a conservative approach to investing that is driven by yields rather than growth, ensuring income and protection of capital. He combines this with a good dose of commonsense.
"We went very defensive with our strategies about two years ago and were advising clients that the good times were not going to last. Our portfolios were much more defensive and that stood us in very good stead," he says.
As a result, the average client portfolio has lost only 4 per cent in the past six months, according to Gowdie, whose firm has about $180-200 million in funds under administration (FUA).
Feedback
The economic climate has not just impacted on clients' investments, but also growth rates of planning practices. Still, revenues have been fairly stable and in line with their long-term targets, say most firms interviewed for this article.
WB Financial's St Leonards branch, which has about $80 million in FUA, won last year's IFA Best Practice Award. The firm has a target of 15 per cent revenue growth a year and principal Paul Carroll is confident it will be able to reach this target, even in the current climate.
"We would be less than honest if we wouldn't say that the economic climate has presented a degree of challenge to this business," Carroll says.
"But we are still holding fast to that growth target."
As fear continues to spread among investors - which is most clearly illustrated by the heightened redemption rates in the mortgage trust industry - none of the firms report a drop in clients, and they attribute this to good relationships and, perhaps more importantly, client education.
Many firms do find themselves spending a lot more time communicating with clients, making sure they understand the effect of the economic climate on their investments and reassuring them about the sense of long-term strategies.
"In the current climate, we have made the decision to rev up that proactivity [of updating clients]," Carroll says.
"We are just over-contacting clients in both the written and personal contact form, simply to demonstrate to the clients that in good times we've always been here and adding value and in tough times we continue to add value."
The feedback firms get from clients is generally one of understanding.
"Most people understand now that when the market drops it's actually a good time to invest," Infocus Maroochydore managing director Jon Thomas says.
"It [also] probably heightens their attention to the fact that they probably don't understand everything that is going on and that they need to get some advice."
Infocus Maroochydore has about $206 million in FUA and is aiming to grow its revenue by a minimum of 10 per cent a year. Thomas says he expects to hit the target this year.
Continued expansion
The challenging economic climate has not deterred firms from looking for expansion.
"We see this period as a great buying opportunity of practices that aren't run very well and suffer at these times. We plan to take full advantage of that," Thomas says.
Infocus is in advanced takeover discussions with two financial planning practices in Queensland, and says it could double the size of the practice to 10 advisers by as early as November this year.
Cairns-based TFS Financial Planning, which has about $230 million in FUA, is also still growing its business; it has just employed two new financial advisers.
"That was always part of our strategic growth plan. We didn't see any reason to put that on hold. Clients are well positioned for the long term," TFS principal Danny Maher says.
And Maher is not planning to leave it at that.
"We are looking at some acquisition opportunities and that will bring with it some new advisers," he says.
Genesis Financial Partners managing director Phil Robbins is looking for organic growth. Robbins directs his attention to growing revenues by reviewing the company's client base, rather than adding more staff.
"We won't go out and buy any more practices as we have in the past," he says.
Genesis is a boutique financial planning firm in North Sydney and won the IFA Best Practice Award in 2006. It has about $160 million in FUA on its platforms and also derives income from insurance, superannuation and wills and estate activities.
Its revenue from advice fees dropped by 20-25 per cent in the period from April to September this year, compared to the same period last year, but Robbins says the firm's diversified income stream has enabled it to keep overall revenues on track.
"We are more than able to compensate for the drop in revenues from the advisement side," he says.
Genesis is looking to improve the quality of its income by reviewing its client base. Over the years, the firm has built up a large number of insurance clients, but now it direct its attention to clients who use several services with the company.
"We are looking at a number of clients, profile them and look at what we are going to do with them. We are looking to sell them to other advisers," Robbins says.
New customers
The biggest challenge in recent months has been the attraction of new customers. Traditionally, financial planners have relied heavily on referrals from existing clients, lawyers and accountants, and referrals still are the most important source for new inflows. In the current climate, it is crucial to contact these sources regularly and keep reminding them of the benefit planners can provide to customers.
But some firms have adopted a more creative approach to obtaining referrals. Infocus has scaled back its media advertising budget, Thomas says. Instead, more effort is made to directly interact with clients. His firm organises events to which it invites clients and their friends.
For example, it regularly holds a movie night, during which two or three clients are given a gift for the referrals they have brought in over the years. "We find that works fantastically. After the first one, one client rang us up and asked for a hundred referral cards to hand out," Thomas says.
The client handed out all 100 cards and managed to bring in quite a lot of new customers. "It's a relatively cheap exercise and the returns are just fantastic," Thomas says.
The inflow of money from existing clients will also be lower this year, because firms won't have the benefit of the lump sum superannuation contribution that boosted new business last year.
"Clearly there is not going to be these chunks of money around that people will put into super. They would have done that last year," Ward Financial Group founding principal Barry Ward says.
Ward estimates the firms' fund inflows were boosted last year by $10 million. "This year, we're projecting about $20 million, which is our standard position. We're not saying we had a downturn [in revenue]; we actually just have returned to normality," he says.
Melbourne-based Ward Financial Group has $170 million in FUA. Ward says the practice has not been immune to the economic turmoil, but doesn't expect a significant drop in revenues.
"Most of our client reviews up until a week ago have been showing downturns of 5-9 per cent. Clearly our income is going to show a similar pattern, but it depends on where the market is going over the next few months," he says.
Any growth is largely wiped out by the drop in FUA as a consequence of the falling markets. "To find potentially $200,000 in new revenues, [means] a $20 million increase in our FUM. We may find that the market might take a lot of that away," Ward says.
Treading water
Most of the practices in this article have weathered the storm well and this can largely be attributed to their conservative approach to handling clients' money. But there are also quite a few practices that have not followed such a careful approach to conserving their customers' money.
Some planners advised their clients to take large mortgages on their homes or even sell residential property in order to put the money into superannuation last year. These planners then continued to invest this money in equities, and due to the fall in stock prices a large part of the invested capital has been wiped out.
These planners, and their clients, are now left with a thumping headache.
Gowdie says there is an historical explanation for such behaviour. "Financial planning had its genesis in the early to mid-eighties, and so financial planning has only seen this long-term bull run," he says.
"But if you go back a hundred years in markets, there are extensive periods in which markets don't do anything. They just tread water."
Markets have been unpredictable throughout history, and it is likely they always will be. A good financial planner, therefore, should ask every time he allocates funds: what would a prudent man do?
