The transition to fee-for-service income has led some financial planning practices to broaden their horizons, offering other types of service in an effort to stand out in an industry in the midst of reinventing itself.
The Future of Financial Advice (FOFA) reforms, proposed about four months ago by Financial Services and Superannuation Minister Bill Shorten, have been a catalyst, but only in conjunction with other regulatory changes, according to FPA policy and government relations general manager Dante De Gori.
"It's fair to say that, individually, planners are looking at their revenue stream and their profitability and also their costs," De Gori says.
"I wouldn't say it's a brand new trend and I wouldn't say it's an aggressively emerging trend.
"I would say it's a trend that has been ongoing already probably over the last five years, and the advent of regulatory changes, such as the Credit Act, like FOFA, like the Tax Agent Services Act, has been the impetus for more financial planning groups to look at other service offerings."
However, he says the loss of volume rebates and other types of commission is actually pushing advisers to work out exactly what it costs to provide their services and calculate the price of what they have to offer.
"That's the first big change. We're not going to have this constant supply of commission anymore; we're going to charge fee-for-service so what do we charge? How do we price it?"
Whatever that price is, it would need to compensate planners for the volume rebates likely to be legislated away under FOFA.
What's at stake?
Futuro Financial Services managing director Dennis Bashford says the abolition of rebates will reduce annual gross revenue by about 3 per cent.
"If you have an office with $100 million under management, it would probably be spread over three or four platforms," Bashford says.
"If it's over four platforms, we're talking about $25 million. Some of those platforms would be attracting volume overrides and some wouldn't.
"If we say two of them are attracting volume bonuses, overall we're talking about a 3 per cent reduction in the gross revenue to them.
"Someone with $100 million [under advice] would probably be generating about $1 million in gross revenue and that would mean they would be dropping that revenue by about $30,000."
Futuro has about 90 planners who look after $2.5 billion under advice.
Bashford says Futuro passes on its rebates.
"As it turns out, we pass ours onto our planners, so we're not dependent on volume bonuses, but a lot of the dealers are very dependent on the volume bonuses to stay in business", he says.
"If you've got a dealer that's got $1 billion under management, the earn to them is $200,000. That $200,000 is going to come straight off their bottom line. It's going to make it hard for some of them."
Massive investment
BT Financial Group (BTFG) advice general manager Mark Spiers says the group has invested heavily in broadening the capabilities of its planners.
"It's not so much about considering new revenue streams as it is about meeting customer needs," Spiers says.
"We have seen a shift, with the rise of the investor, in the demand for strategic advice."
As a result, BTFG's planners are moving to additional areas of advice, including cash-flow management, wealth protection, risk, estate planning, self-managed superannuation funds and tax planning.
Spiers heads dealer groups Securitor and Magnitude, as well as planners in the Westpac Group bank channels, which cover Westpac, St George, BankSA and Bank of Melbourne.
All in all, that's about 1200 planners with $27.5 billion under advice.
Training that many planners doesn't come cheap.
"As planners provide more advice on a broader range of personal wealth issues, there is training involved. We've invested heavily in this area to ensure our bank-channel planners are not only skilled up technically, but also able to take the client on a journey of discovery of their life goals," Spiers says.
"In addition to our ongoing training and development programs, we have invested approximately $3.75 million across BT Financial Group planners in the last financial year. If you look at that as a per-adviser figure, that's an average of approximately $3500 per planner."
He says the company believes in the comprehensive advice model because it increases the chances of keeping a client for longer, as well as providing scope for referrals.
"The benefit from providing truly holistic advice is the strength of the relationship between planner and adviser. The better you know your client, the more of their needs you can meet, thus creating more enduring relationships which provide a greater level of advocacy for the planner and, therefore, referrals and repeat business," he says.
Fight for survival?
Asked whether the additional services cannibalise the financial advice offering, AMP director of financial planning, advice and services Steven Helmich says no.
"They're not cannibalising it; they're enhancing it. I have not seen any evidence of cannibalisation. Rather I've seen that when they're offering a total financial service - financial coaching, financial planning, financial accounting - that enhances the relationship and the clients value that," Helmich says.
He says the advice industry is, by definition, multi-faceted.
"People misunderstand what financial planners do. Financial planners do four things," he says.
"The first is about strategy - your life goals, what you want to achieve for yourself, your family and issues like that.
"The next is structure - where your assets are held, your tax situation, have you got the best structure in place around family trusts.
"The next is around contingency. That is around insurance, insuring incomes, insuring against trauma, life insurance.
"The last one is around discipline and that's the coaching side. That's making sure people do what they say they're going to do. Think of a fitness coach who's yelling at you as you're running up and down the stairs. A financial coach isn't quite like that but that's the aim, to make sure you meet your goals."
He says AMP moved to fee-based advice from 1 July 2010 and invested heavily in ensuring it could operate in a world without commissions.
"We've been an early mover in this space. We went through a process with all of our advisers to make sure they could operate effectively in a fee-based world from the first of July last year," he says.
"For some, it wasn't a very long journey at all because they'd already made that transition, but for others, it was about working with them to make the transition.
"For all of them, it was about them understanding what their customer value proposition is and how they add a lot of value to their customers through the advice and service process, and also helping them understand what their cost per serve is so they get their model right."
Asked whether the fee-for-service model will force planners to offer other types of advice in order to survive, he says: "Absolutely not. The value of financial planning is clear. When clients understand the value planners can add, their decision to pay for that is never an issue because they really recognise the value they can bring."
Having said that, he says the 1800 or so planners in AMP Financial Planning and Hillross have a broad range of capabilities.
"We've got a broad church among our licensees as you can imagine, having more financial planners than others. Some are actual accountants, others have mortgage advisers and mortgage brokers attached to the practice," he says.
"It depends on the range of the offering that they're giving to clients. The hub is financial planning but there might be other offerings depending on the practice and how it's structured."
He says the decision to offer expanded services is a business decision, not a response to FOFA or any other type of change.
"Financial planning in its own right and the value-add from financial planning means there's no need to stretch further unless they want to," he says.
"It really is a business decision issue about what you want to offer to your clients. Do I want to be a complete financial and life coach, which would involve accounting and estate planning and everything like that?
"Others could well outsource. It depends on the structure."
Comprehensive benefits
De Gori says planners are well aware of the benefits of a comprehensive practice.
"They are looking at how they can assist small business clients, and you find that a lot more financial planning groups are perhaps becoming more like small business support services where they're offering a planner, an insurance broker, a mortgage broker, an accountant, maybe even a solicitor, maybe a stockbroker," he says.
"They've been able to do a one-stop-shop-style scenario where you maybe get your financial planning needs, your insurance needs, and your small business needs and you get your will kit. Some businesses are expanding from that perspective, becoming a real complete service offering for their clients.
"No one person can do everything, but if you employ specialists in those fields, then clients can stay within the one firm. And that helps because when you're speaking with an accountant and a financial planner and all your details are together, then obviously that can mean better advice can be provided because all the information is captured within one firm."
However, he says some firms are broadening their services piecemeal.
For example, the Credit Act, requiring sellers of credit products to be licensed, led some planners to add mortgage planning services.
"For some planners, because they cross over and deal with debt management and debt structures and things like that, they've got credit licensing as well [as financial advice qualifications]. For some of them, that's presented an opportunity to perhaps get more involved with mortgage broking more permanently or make it a bigger part of their business."
De Gori adds some planning groups are employing mortgage brokers to work in their firm.
Tax is another service some planners have added in the run-up to the tax agent services regime. The reform, also proposed by Shorten, would affect planners who extend tax advice as part of their regular planning services. However, planners are exempt until 30 June 2012, a date which dovetails with the expected implementation of the rest of Shorten's planned reform package.
"At the moment, we've got an exemption but some of our members have actually gone ahead and become registered tax agents," De Gori says.
"Some of them have an accounting background so that's why they have that interest. If they're going to be fully registered tax agents, they're going to be doing tax returns for their self-managed super funds, or they've employed a tax agent or an accountant as part of their business."
Accounting practices are going relatively cheap, priced at about 80 cents per $1 of recurring revenue versus the $2.40 to $3 per $1 of recurring revenue commanded by most financial planning practices, according to Strategic Consulting and Training managing director Jim Stackpool.
Stackpool says advisers who diversified were far more resilient in the aftermath of the global financial crisis.
"There's no question about it," he says.
"Those that had some risk income streams or those that had specialities in terms of setting up self-managed super funds or those that had some other line of business rather than a single revenue stream weather the storms better."
Matrix Planning Solutions managing director Rick di Cristoforo says quite a few practices within the dealer group offer services besides financial planning.
"Are our advisers providing a wider scale of advice? Most definitely. We find that's where a big demand exists for people to see beyond just one type of advice," di Cristoforo says.
"We've allowed for full-scale scaled advice as well as full-scale comprehensive strategic advice. There have been plenty of examples at Matrix where full-scale strategic advice hasn't included any product at all. It's been purely strategic. "
He says Matrix has a number of practices that offer accounting services either through joint ventures or internal business links.
"From a corporate perspective, you'd see them as two separate companies. Likewise with mortgages, you'd see the same thing. You don't actually find financial planning and mortgage within the same FSG (financial services guide), for argument's sake. That's the nature of the licensing regime, not the service," he says.
Asked whether he's seen more planners racing to add services in the run-up to FOFA, he says: "I'd say people who are scrambling because of legislation need to look at their strategy first. If you scramble to meet a law, maybe your business plan needs a little bit of looking into.
"The other side of this is that post-FOFA, there's a chance there will be a slow and steady stream of people diversifying their income streams and their services."
However, he says such a shift would not necessarily be because of FOFA.
"That's just people saying, 'Given the current market environment, what are the opportunities that exist?' If people do that as a result of conscious decision-making, that's a good thing. That's innovation. If they do it because they're trying to defend an income stream, that's not necessarily a smart thing. Maybe that's not the job they should be in," he says.
A trickle, not a flood
However, Stackpool says more needs to be done. He says the number of planners expanding their service offering has been a trickle, not a flood.
"I'm not seeing a lot of evidence of anyone generating alternative revenue streams in the marketplace," he says.
"The bulk of the industry, in my opinion, is not diversifying off their revenue streams enough or changing their proposition to what I call unattached revenue. It's not attached to a specific product. It's more attached to the client relationship they're trying to forge."
He says a small number of firms see the deep changes in the industry as an opportunity to sell down client books.
"That's more of a capitalisation or crystallisation strategy that some are taking," he says.
"Our advice to those sort of firms is that's not a bad idea strategically, but what's your alternative once you get rid of them? Where's your revenue going to come from?
"That's where we see a fundamental shift in the value proposition from people who are moving from the value of what they do as a traditional adviser. The value has been 'I'm good with investment, I'm really good at risk, I'm really good with tax'. So the focus has been on what they do on certain functions.
"The clients we have focus more on why they do things, not what they do. While they might still appear on the outside to be similar to firms that focus on a 'what' proposition, in that they can do super and they can do risk and they can do cash flow, their proposition is all around why they're doing it.
"These guys have fundamentally changed their value propositions and their engagement conversations from being 'I'm good with tax', which is the old way, to 'we're good at taking the complexities out of our clients' lives so they can better achieve what's important to them'.
"They're therefore forging relationships with retainer-based revenue streams that are paid based on the level of complexities the clients are facing to overcome what they want to achieve."
Helmich agrees the abolition of commissions is not the end of the world.
"I don't think the move to fee-based advice is a tremendous threat to the financial planning profession. To tell you the truth, clients don't mind working this way at all. The biggest change is in the mindset of the planners," he says. «
