Financial planning: a business reinventing itself

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‘Where do investors go for help? To the press? To friends and family? Or do they turn online for robo-advice? I think what they need more than ever is a financial planner and this creates an opportunity for all advisers.’

That was the view of Brian Foster, author, co-founder of Beyond RDR and financial planning consultant. Foster was part of a panel discussion on financial planning practice at this year’s i3 Summit hosted by Sanlam Investments and Glacier by Sanlam.

RDR is a business model challenge, not a regulatory problem

Foster said, ‘Some of us may be looking at RDR and see a regulatory change and threat. But the FSB in SA has consistently said that it supports good financial advice. The FSB is on your side. And one of the outcomes of RDR is that financial advice businesses should be sustainable. At Beyond RDR we believe financial advisers have a business model problem, not a regulatory problem. And I think this provides the biggest opportunity in a lifetime for those firms that can get it right.’

‘RDR’ is about to hit the US too

The US doesn’t yet have RDR, but it does have a ‘DOL Rule’ coming up, requiring each adviser to become a fiduciary, Nico Marais explained. Marais, president of Wells Fargo Asset Management, was one of the speakers on the i3 Summit panel.

This rule has been delayed since President Trump’s election, but it will significantly influence the behaviour of advisers to avoid imprisonment. And from Marais’s experience the regulators are no fun to deal with in the US.

‘The regulator will ask you to explain the investments you’ve recommended. It will ask the adviser why his client is still in an investment after two years of underperformance? Why this specific investment if you can get a similar one for 30 basis points? Why are you taking a 2% advice fee on an income product delivering only 5% to pensioners? And all those questions are fair!’ said Marais.

RDR also has its failings

David Ferguson, founder of Nucleus Financial Group and the third speaker on the panel, pointed out that RDR also has its failings in the UK. An area in which the regulations run the risk of actually harming clients is in the scope and length of client documentation required. ‘When an adviser is forced to give the client 60-100 pages to comply, no client is every going to read that,’ said Ferguson. ‘And the UK regulator is now embracing advisers that come along and show the regulator that this can be done in three pages. There must be a way to communicate what you want to say more conscisely.’

The regulator has its eye on robo-advice

Marais observed that the UK regulator’s definition of advice is problematic. Within current regulation advice applies to a human financial adviser only, but what about a robo-adviser? According to Marais, the regulator is very keen to address this gap.

Ferguson viewed the advice component of robo-advice to be very small. ‘It’s mainly robo-distribution. For someone with a small amount to invest, it might make sense, but not once you’ve accummulated a significant amount of wealth.’ Ferguson agreed with Marais that the UK regulator is becoming interested in the role of execution-only businesses, such as investment platforms with so-called robo-advice.

However, SA’s regulator, the Financial Services Board (FSB), differs from the UK regulator, as the FSB will also require execution-only businesses to provide suitable investment products. That is not currently a requirement in the UK.

Business models are being turned upside down

Ferguson gave an example of how the financial planning business models are radically changing. At his firm, Nucleus, there are only four advisers, but a large technical staff constituent such as strong paraplanners and tax experts and a small in-house investment team. Only the four advisers meet with clients and provide a rich and immersive interaction with big screens showing the client’s cash flow plan and the financial journey Nucleus is taking the client on. The job of those advisers is to find new clients and meet with existing clients to review their financial plans, and then funnel all the work onto the technical staff in the back office. The advisers are no longer required to do the ‘number crunching’.

Foster observed that this is the opposite of traditional financial services providers where there are more sales people than technical support staff.

Marais commented that the US advice model is developing in two ways. The old model was to start with risk profiling clients and then allocate their money to a combination of, say, five managers, with the risk of all five managers losing money in a market correction. Now planners consider the cash flow needs of clients and their risk appetite, and then develop a more sophisticated financial plan than the old model. Because of the increase in technical knowledge and mathematical capability required with this new model, many advisers are now outsourcing the asset alloation and portfolio construction to free them up to focus on the client or, alternatively, they become very sophisticated money managers who construct their own portfolios according to their clients’ cash flow needs.

Knowing how much to charge clients is key

Foster asked the audience why more advisers are not getting paid for the advice they give upfront – particularly if it’s great financial planning work? ‘That is the fee model to be taking forward,’ said Foster.

‘Financial planning has three pieces: the life goals discussion; the number crunching; and then perhaps the execution in the form of a product. The most important part happens with the first two pieces. Why are we giving that away in the hope that there’s some form of contingent sale,’ asked Foster. ‘But do you actually know, as adviser, what it costs you to provide that advice?’

Ferguson expects different fee models to emerge that respect that not all clients need to see their financial adviser every year. ‘We as financial planners have been taught to force people down the 6-step financial planning process. But not everyone needs to necessarily go through the same process. Separating advice from intermediation is the first step; the next step is getting paid for advice.’