Adviser business models need shake-up

Financial advisers need to make some big changes to the way they operate if they want their businesses to survive and thrive in the next few years, a financial services veteran says.

Thursday, August 9th 2012, 7:17AM 4 Comments

by Niko Kloeten

Speaking at yesterday's Auckland IFA branch meeting, Heathcote Investment Partners director Clayton Coplestone warned that many advisers risk their businesses becoming worthless unless they adapt to the changing economic and regulatory environment.

He said many advisers are currently operating "proprietorships" and asked: "How would your business go if all the trails and everything you receive from third parties was turned off? Would it survive? If the answer is no then you don't have a business you have a proprietorship."

In Australia, where a client "opt-in" aspect has been added as part of the new FOFA (Future of Financial Advice) regulations, "all the clients the advice industry had have turned out to be transactional relationships."

Pricing pressure is coming on all parts of the financial services chain but advisers can continue to add value in the relationship aspect, according to Coplestone who put the "relationship premium" at about 100 basis points.

However, he warned that "very few people are willing to part with their hard-earned cash to buy relationships" and therefore advisers need to switch from proprietorships to businesses, which he said takes at least five years.

"If you are still of the belief you have a business I dare you not to go to work for six months from now on and if you have something left you have a business. If you don't have a business you'll get nothing."

Coplestone also said advisers could no longer get away with charging a premium for "mediocre" investment performance, particularly given the proliferation of cheap ETFs.

"If you're paying any more than 22 basis points for passive then you are doing your clients and yourself a disservice," he said.

"There's no magic bullet; consumers are getting more savvy and demanding more than just mediocrity. You can't go to a client and say, I'm going to take 3% a year to give you a single-digit return."

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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Comments from our readers

On 10 August 2012 at 3:30 am Collin said:

This article should be compulsory reading for financial advisers who want to be in business in 10 year's time. Current business models are unsustainable and adviser remuneration models contribute to the investment and savings shortfalls of clients. Particularly in the lower return world everyone is touting the level of 'trail' fees payable to advisers is nothing short of 'legalised theft'. Investment product fees are no exception. Lower fees must be part of the new paradigm. Investors in New Zealand need Vanguard to come into this market (like they have done in the UK) and enforce much needed competition on fees with built-in, high quality advice to individuals.

On 10 August 2012 at 9:31 am Dirty Harry said:

In this article:http://www.nzherald.co.nz/brent-sheather/news/article.cfm?a_id=34&objectid=10821808
Brent Sheather raises some great points about adviser behaviour and passive vs active investment; which would contribute well to this discussion.

I won’t say whether I am for or against the ideas in the article, because it gets a bit too generalized and becomes a one-size-fits-all argument, which is somewhat counter-productive.

I disagree with the returns having any part in the argument about fees/commissions. Copplestone's point about 3% fees and single digit returns only exacerbates the problems highlighted in Sheather's article - advisers chasing higher returns (to justify their fee?) - too often with disastrous results.

On 10 August 2012 at 8:07 pm you must be joking said:

In respect to having a business or a proprietorship ,is there any difference for an RFA risk adviser?
Mr Risk Adviser, how much time, how much thought have you given to becoming a business where you could take nil or reduced upfront commission and charge a fee that your client would pay annually?
Maybe now is the time to start thinking about running a business?

On 12 August 2012 at 7:03 pm Mr Risk Adviser said:

Thought about it for about five minutes. We actually add real value to the insurers in acquiring and servicing new clients 'you must be joking' - that's why they pay us commissions and I believe will continue to do so (touch wood).

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