What is the New Financial Planning Business Model?
Here is a quick thought experiment: is a financial planner more like…
A tax accountant - a cyclical discreet service for those with complex tax returns. A service provided once a year / a quarter, billed by task?
A law firm - an ad hoc service for a specific event (a will, a court case, a business contract, etc), billed in small quanta (minutes) of time?
A consultant - a service required to solve a specific problem, billed in large quanta (weeks) of time?
Whatever one you opted for means totally different ways in running a viable financial planning business: different ways to make money from delivering financial advice - different business models.
Let’s put this another way: do financial planners solve a specific problem at a point in time, or do they provide an ongoing ‘concierge’-like service made up of ongoing activities that the client could do for themselves, but would rather not?
Let’s expand on this:
Imagine a financial planner as problem solver. Let’s call it The Doctor Business Model
The client gets their Statement of Advice to set-up their retirement, superannuation, personal insurance etc which essentially “solves the problem” of how to attain their clients’ retirement, personal risk, wealth creation etc goals.
The financial planner charges for the Statement of Advice and implementation only. A one-off.
Now imagine the financial planner as a retained resource. Let’s call it The Corporate Lawyer (or Retainer) Business Model
The financial planner is paid an ongoing fee (a retainer) for essentially being at the client’s disposition: solving problems, making recommendations, coaching and keeping them on-track for their goals, educating them, keeping them abreast of any legislative changes, executing administrative tasks etc.
There are environmental drivers towards one or the other of these models:
The new legislative and regulatory regime (FOFA, The Hayne Royal Commission) seems to be pushing financial planners towards the Doctor Model. The client pays for a specific discreet service - no more trailing commissions or asset-based fees that continue indefinitely, linked to the products associated with the advice.
On the other hand, there is the advent of DIY financial technology (available online and through apps), which has been democratizing a lot of the personal financial research, strategies and tools that earlier had to be sourced through the intermediation of a planner. This development has been pushing financial planners towards The Retainer Model: that is to say, the planner being more of a coach/educator than a technical and product specialist.
These two business models do not necessarily contradict each other. A financial planner can include discreet problem-solving as just one component of his/her retained suite of services. This may transform the Statement of Advice into a Service Level Agreement, replacing the primacy of the traditional product-focus.
Both the DIY technology and regulatory trends have resulted in two major outcomes:
1. Financial planners can no longer base their business model on product sales or distribution.
2. Because financial planners need to take on more of a coaching role (to be effective and viable as a business), this will limit complex and face-to-face financial advice to the wealthier.
Whether this last point is a positive thing or not is a separate discussion.
There has been a palpable groundswell over the last decade for most people to wrest back their financial affairs from “expensive” financial planners and do most things (super, personal insurance, investments and savings) for themselves, better and cheaper - look at The Barefoot Investor phenomenon of Scott Pape.
And yes, perhaps Mr Pape is right - a lot of people can do most of these things themselves, thanks in large part to the advances in technology. Even the government is getting better at educating people about new personal financial legislation. And should anyone find themselves in a complex financial situation, then a simple one-off recommendation (Statement of Advice) would in most cases “solve the problem”.
So, where does that leave the financial planning business model?
If, as a financial planner, you can substantially decrease the costs of producing a compliant and useful Statement of Advice quickly (i.e. using technology), and in a user-friendly fashion (i.e. less than 10 pages), then you could possibly run a viable practice where you would not need to hire a lot of staff to scale up to producing enough $100 Statements of Advice per week to make it worthwhile. I won’t do the maths on that here, but you get the picture.
However, in this case, you may find yourself competing bloodily against the DIY option, or the “simple” financial advice option offered by product and platform providers.
Or, you can segment into a higher net worth bracket willing to pay a financial planning “retainer”. This substantially smaller pool of clients will also present its own competitive challenges. (This latter topic also merits a discussion of its own.)
With many financial planners leaving the financial advice industry in Australia, it looks like these stark choices are already beginning to produce a significant fallout.
If financial planning morphs wholly into “wealth coaching” (see the article “Is 'wealth coaching' the new financial planning?” here: https://bit.ly/34N0UXv), then the demand for this new type of financial planning would justifiably see a dramatic decline.
I think the financial planning business model will fragment, just as the industry is bound to continue fragmenting.
What will that mean for the single profession model of financial planning, and how FASEA will regulate and educate financial advisers, coaches etc?
George Manka, Greenhills Wealth Management