A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be - Wayne Gretzky
There is a major shift underway in the financial planning industry.
The largest one I believe in over twenty years.
The business model of the new adviser in the 2020s and maybe 2030s is here. This will be the future of advice as we know it and what I believe the industry is heading towards.
Our role as planners is to do just that, plan. Great planners are naturally skilled in problem solving, interpersonal communication, are visionaries and rational thinkers. These skills help advisers to cut through the noise and focus on understanding what is truly important to you. Simply they put the best plan in place to get you to where you want to go while doing their best to control any risks that lie ahead.
As a business owner, I have taken this approach to Canopy Private as well.
Where do I want the business to go. What are the changes and challenges that lie ahead.
I believe if you are growing a financial planning practice you need to be thinking along these lines and starting to do all you can to become the financial planner of the 2020s.
Part one of this article contains a brief history of the life as a financial planner to date. It will hopefully give you some context to why I think it is all changing and why i believe it will be for the better of everyone.
In part two, I will share my beliefs of what the future looks like for planners after reviewing models all over the world. I decided to break this up in the interest of time and would love to hear your thoughts along the way.
Lets get going.
In the 1980s the financial advice industry was a life insurance and investment sales business. New clients were found by direct marketing, door knocking and through corporate retirement schemes. Each "Agent" job was to sell high commission investment and insurance products. They played on fear, underinsurance, little retirement planning and ones with slick skills earned a top living. In general, they sold with little care for the consumer or best in market independent advice.
After the 1987 stock market crash, the industry had to reinvent itself as their old products no longer made a lot of sense. It was when the financial planner or wealth manager as we know it today was born.
The 1990s was filled with unbelievable worldwide stock market growth. Markets were driven by the rise of the USA and technology advancement.
By the late 1990s, life as a financial planner was great. Business was easy and very profitable.
Advisers were clipping the ticket on every investment and superannuation contribution. They sometimes would take as much as high as 5-8% of the initial investment. If you speak to older financial planners, they call this the “good old days”.For example if they invested $300,000, they would make $15,000 upfront and $3,000 every year.
As their clients balances grew, so did their revenue. Their lovely 1% ongoing commission on their assets grew with stock markets each year. What a business it was. A growth of 25% in markets would lead to a 25% growth in revenue without the need to find any new customers.
New customers however were easy to find as clients were happy to refer as their investments grew. Society thought they “needed” a financial planner to help them.
Those $3,000 per year clients were now paying $5,000 per year.
In the 90s, clients did not have access to the information we have today. They had little knowledge on investing and were not concerned. They were not aware of the impact very high fees and commissions have, nor did they really care. I mean why would you? Their investments were doing very well they thought.
I am happy to pay your commission if you make me 15% each year through your wise investing
The financial planner was seen as the guy who knew how to invest your money and make you even more money. Somehow people believed that they knew the hidden secrets on how to invest. Secrets that would make you a lot of money and ones you need to pay the advisers a lot of money for.
On reflection did they actually know how? Not at all but boy were they getting paid for it.
If you are building a business on the back of 9% guaranteed superannuation contributions it was bound to be a financial success for financial planners. The never ending gravy boat would provide consistent revenue and growth.
Why has the image of a financial planner failed when the pot continued to grow and grow?
Superannuation is now the fourth largest pension pot in the world at nearly 2 trillion dollars. That’s 2,000 billion or 2 million millions.
Where did it all go so wrong for the financial planners you might be asking?
How did they stuff it up so badly that they are now one of the most untrusted professions and frowned upon by most of society? It’s a harsh reality but it’s true.
Do all financial planners love to tell people that they work as a financial planner? A lot do not from fear of judgement. Not good, but also true.
In my mind it all started to go wrong in the early 2000’s after the first dotcom stock market crash in the US. Most financial planning businesses in the US and UK had their clients heavily invested in the stock markets. Like here due to charging a fee of usually 1% of funds under management, their revenue halved in value overnight when markets did.
In Australia however it was not really felt. Even though the USA stock market collapsed and wars begun in the early 2000s, Australian planners and investments survived as they had limited amounts invested overseas and Australian economy continued to stay strong. Investment returns while flat were not a concern and in the early 2000s Sydney property price doubled in four or so years to compensate.
The world did not learn however from the crash and what followed was a period of unbelievable prosperity. With low interest rates investors could pull out their equity and throw it in to the stock market or spend it. Money poured in to world stock markets.
The Australian stock market between 2003-2007 doubled in price. The $300,000 you invested is now $600,000. The advisers fee also doubled as it 1% of $300,000 is now 1% of $600,000.
China grew astronomically and therefore so did the money from our resources boom across Australia. Another fantastic time for financial planners and the $3,000 a year client may be paying $10,000 a year now.
So with stock markets high; financial planners all charging a commission on new investments and 1% ongoing trail books they were loving life.
If you fast forward eight years to today, things are very, very different.
What the GFC identified is a massive hole in what financial planners actually do. Planners are still seen as investment managers who know how to make clients money by beating the investment market.
The GFC however exposed that they do not. When markets collapsed 50%, so did financial planning businesses. The lie financial planners were telling clients through their client value propositions also came under threat.
Clients were asking questions and freaking out that their retirement is now looking like it has been pushed back 10 years or they now will only be doing half the things they were planning on.
“Why didn’t you know it was coming and why didn’t you protect me" - Clients were respectfully asking.
Only when the tide goes out do you figure out who has been swimming naked - Warren Buffett
During this period I was a financial planner in the UK. The UK financial advice industry went through a horrible time. Many banks went under and it was a very scary time for every single person across the country.
By 2009, nobody knew what was going to happen. RBS had just been taken over by the government due to making the biggest loss in UK history at close to 50 billion dollars. Five times the profit of CBA today. This was just one bank as well. I saw clients who had lost everything and I mean everything.
Financial planning scandals like they do here today came out almost daily. Barclays, a big four bank, decided after four years to sack their whole adviser force over night due to poor advice.
All the other banks models were taken to the cleaners and the regulator stepped in.
All over the UK Independent Financial Advice (IFA) firms were going under and getting snapped up for cheap prices by the bigger IFA firms who were able to borrow at bargain rates.
Like in Australian, their businesses had been built around selling investment products and moving clients money from cash deposits to share based investments. They were getting commissions and charging 1% ongoing.
Five years on and it has now started to sink in that fund managers and financial planners do not know how to beat the market consistently. No one has a crystal ball or the skills, knowledge and systems to consistently win.
Some do at times but the vast majority do not.
What it has also highlighted is that due to all the fees for advisers, investment platforms and fund managers they can do more damage than good for clients at times.
The industry fund network has performed so well by managing money just as bad as everyone else but not running the ridiculous fees of every else.
So what does this mean for financial advice?
If a financial planner does not manage money to outperform the market, what do they do?
After five years of the government and industry arguing over new “future of financial advice - FOFA” it has finally been implemented. FOFA however has only added additional compliance around what financial planners can and can not do. In reality, it should have been like this in the first place.
It does not solve the real problem financial planners have.
The real issue is that financial planners do not know what the future of financial advice (FOFA) is.
They know it’s a broken industry, they cannot add a lot of value around beating the market and importantly they do not have any trust from society.
They are questioning their careers and I argue that they have been dealing with a personality complexity for years.
Do they now realise that the lies they have had to tell themselves and clients for years are no longer working?
While they were trying to figure out their futures, a lot of advisers begun to focus on selling insurance and making large commissions from it. It was easy money they thought and many believed that their job was to sell insurance and manage money now.
Years on most planners are starting to get that society still does not trust them and they are now struggling to even sell insurance. The ones who managed to keep their clients invested through the GFC have had their ongoing revenues flying again. They are loving life again but the same issues i argue will come up again.
The forgotten dotcom bubble and GFC will not last forever. It will all fail again one day, their revenue will halve and investors will figure out they do not know what they are doing again. I think a lot of investors have already figured it out before they waste their time and money with planners who pretend that they can beat the market.
What they are struggling with is the following questions.
What does a financial adviser really do?
Why should I go to a financial adviser?
What can they do to help me?
Do I need one?
Who can I trust?
The financial planning “industry” has struggled with this problem for far too long.
I argue however that the future of advice is already here. The new financial planner of the 2020s is here and they are changing the face of advice one client at a time.
There are 100s of young planners looking at things differently. They are building models, pricing, templates, systems, software and new ways of advice.
The future of financial advice I believe will coincidently become one of the most sort after careers by 2030. A rapid turnaround from where we are today and it will not be taken over by robots as many suggest.
I argue it will be a honest, highly valuable, emotionally challenging and financially rewarding job in the eyes of society.