International regulation forces industry rethink

Whether we would like to accept it or not, there are a number of key changes occurring in the business of advice internationally. Discussions with Australian and American financial advisers confirm that these changes will have a major impact on the way that advisers look for clients, deliver their service and how they are remunerated for the work they do.

Any of these changes are being led by the Generation X and Y financial advisers who are dealing with younger clients.

Asset management will be commoditized

The Generation X and Y advisers are building businesses in an environment where the asset management revenue model is not generating the sustainable revenues of years gone by.

Their younger clients do not need the type of investment advice the traditional wealth managers dispensed, and they also understand that they cannot outgain a bad savings habit. A very small portion of the increase in their asset growth may be attributed to investment returns. The real increase seems to be coming from savings and cutting expenditure and finding a balance between the two.

This has resulted in a greater focus on financial planning and client engagement. The on-going processes of investment, investment management and the rebalancing of portfolios is being outsourced. For advisers focused on the future, these assets-outsourced investment management businesses will by synergistic friends rather than enemies.

Advice will be charged for differently

The Funds under management model appears to have two weaknesses as the revenue model of choice. It excludes too many clients, and it places the focus on the wrong side of the relationship.

The planning centric approach truly puts the client first. Most clients do not wish to pay high up front planning fees and they do not have the assets to manage. Services are charged for by debit order at between $100 - $ 200 US and Australian Dollars per month. This works very similarly to paying for a monthly gym membership or a life policy premium.

Clients are paying all their other bills monthly and find it easier to pay their adviser the same way. This is being done more regularly because working couples in their 40s are making good money, but because they have large debt issues and find their financial lives out of sync with their goals, they would not be able to get to the planners in a traditional wealth management business.

Alternative approaches

Alternatively, advisers can charge between $3 000 and $5 000 for the work done, or break this fee down monthly, with a major review of the plan and the progress made every two years. What appears to be happening is that, by charging for planning, the adviser is placed at the centre of the relationship. The view being expressed by advisers is that the people are their clients, and not their money.

Another growing trend is that advisers have bundled their service packages. If the client wants work done and it will take 10 to 30 hours to complete, the cost will range from $1 500 to $20 000 per year depending on who will do the work.

Advisers have found that these fee arrangements eliminate numerous conflict of interest issues:

• Clients are free to have their assets managed anywhere, which removes the sales agenda in traditional prospect meetings where the hidden agenda is to transfer assets.
• The hourly package fee provide incentives for the adviser to continue to offer planning advice and services, rather than simply sending out relevant statement four times a year and schedule meetings to look at them with the client.

This is the first article in a two part series. The next article will focus on the role of technology in the industry and how you can use it to move forward to prosper.