With the Association of Financial Advisers (AFA) calling for planners to lobby their local MP, the Opposition withholding their support, and even some planners calling for legal challenges to the Future of Financial Advice reforms, it isn’t surprising that there is a certain segment of industry players that expect the FOFA reforms to never see the light of day.

However, as “FPA chief executive Mark Rantall said those within the industry relying on the coalition assuming power or blocking FOFA were operating a high-risk strategy”, it is one thing for FOFA to have its difficulties, another for it to be killed off entirely.

Firstly, let’s look at the claim that should the Coalition return to power, it will abolish the FOFA reforms. The fact is, and always has been, that once legislation has been put in place, it is very difficult to backtrack, and often takes years, if not decades, to be changed once again. Take for example Kim Beazley’s 2001 election promise to rollback GST. Ten years later, and we have already accepted GST as part and parcel of everyday life. To roll it back now would require political will and rationale that few Governments (regardless of persuasion) have ever had.

The second thrust of the anti-FOFA brigade is the expectation that the Coalition or one of the independents can be swayed sufficiently enough to block the FOFA legislation. While the Coalition has clearly put its position forward, by itself, it cannot block the passing of the legislation. And in the Senate, with the Greens holding the balance of power, the Senate is not expected to be hostile to FOFA.

As for the independents, all the reports to date would indicate that while the lobbying by financial planners, the AFA, and FPA have caught their ears, it would appear to be the case that the biggest source of contention is still the Opt-In provision.

Ironically, as we have stated before, within the whole FOFA legislation, Opt-In really only represents a small fraction of the entire impact when we compare it to the banning of commissions, volume payments and the such. And given political expediency, it wouldn’t be much of a stretch to expect that provision to be dropped in order to remove the independents concerns and get the FOFA legislation passed.

This all brings us back to still the outstanding issue which seems to be driving the biggest consternation of all – Opt-In. In my opinion, I still find it strange that the main objection seems to still be on Opt-In, when even the banning of commissions on risk within super represents, in some cases, a bigger impact than Opt-In.

And playing into the Government’s hands in favour of Opt-In are three main factors which are important for us to consider:

Firstly, it is already clear from the April FOFA update that the operational requirements of Opt-In aren’t actually that difficult to fulfil (for more information, view our discussion piece on Opt-In)

Secondly, Fee-For-Service, which forms the core of the FOFA reforms, will naturally result in the need for explicit client agreements where a regular renewal is required anyways. For example, if you have an advice package for $2,750 per annum, you would naturally need to renew every year anyways, since the fee is only for one year, and next year you might also need to increase it to say $2,900 to cover for inflation, rising costs, etc.

Third, with advisers calling for platform providers to support them with Opt-In, this removes one of the primary arguments underpinning the pushback against Opt-In – that it is costly to administer.

This leaves only the last argument in place, that the Government has no right to enforce conditions such as Opt-In on the client / planner relationship, and while from a commercial sense I can understand the sentiment, we need to remember that this would not be the first example of where a government has stepped in to create “exceptions to the rule” where it feels there is a need to do so.

Unfortunately, some of the complaints of whether it is constitutionally valid seem to forget that in our system of government we have Legislative, Executive, and Judicial branches of government for that reason – one to create new legislation, one to enact it, and one to administer the law – keeping in mind that “The Australian courts cannot give advisory opinions on the constitutionality of laws.”

While FOFA’s final state may not look the same as we have seen to date, it would definitely be naive to think that FOFA is dead in the water. Given the many industry players that have already been involved to date, it’s very unlikely to go away anytime soon.

Until next time,

Lap-Tin

During my time working for Macquarie Bank it was well-known, although never publicly acknowledged, that every year around April there would be a statistically-improbable peak of Macquarie resumes hitting recruitment agents, followed by a host of farewell parties, handsomely paid for by someone’s bonus packet.

Financial planners typically follow more of the July-June financial year calendar, and so, as the financial year comes to a close, profits are locked in, and bonuses are calculated, we can also start to expect the annual migration of planners again over the next several weeks as people use the opportunity to cash out and take stock of their careers.

This is all well and good, and we should always be encouraging people to take an active approach to their career, however, in such a people-intensive industry such as financial planning, and with the average practice consisting of just 4-5 people, the loss of even one person can have a major impact on the ability of your business to operate and service your customers properly.

Of course, the most common response to such staff movements usually consists of, “Well, it just happens. Nothing we can do about.”

But let’s be honest and frank here. I know this. You know this. Anyone who has ever been an employee knows this. Of course we put on a congenial face when, as an employee, we part ways with a company. Even people who have gone through a forced redundancy will, on their parting day, find some nice words to say. We are civilised people after all. And only pyromaniacs like to burn bridges.

But we’d be lying to ourselves if we 1) took it at face value, and 2) told ourselves that there’s no way to prevent or improve the situation. A copout that means we are constantly losing vital skills and talent and in-built organisational knowledge every time an employee walks out the door. (Of course, if you want them to leave, that’s a different story.)

Let’s look at it a different way. If you think through all the possible reasons that someone ‘moves on’ from a role, they all come back to two fundamental themes:

Circumstance

• “I’m moving to a different country.”
• “I won the lotto.”
• “I want to try something different.”

Or, Dissatisfaction

• “I’m not earning enough / I need to earn more.”
• “I don’t agree with where the company is heading.”
• “I don’t feel that I make a difference / that my opinion is being heard”

When it reasons of circumstance, like a career change or a planner looking to start their own practice, of course, stopping it is near impossible. But that doesn’t mean you can’t 1) be forewarned about it, and 2) slow or ease the transition and minimise the impact to your practice.

Because, shy of sudden ill health or unexpected accidents and the lucky lotto scenario, most circumstantial reasons build up over a period of time. Meaning that, if you are a good manager that active listens to your staff, and is someone whom they trust, you should be able to pick up on hints early on that will allow you to manage the relationship beneficially for both parties.

The important thing is that the intent isn’t in itself to stop it from happening. If a planner does indeed want to start their own practice one day, putting roadblocks in their way is about as likely to engender goodwill as running over your next door neighbour’s dog is going to get you invited to the Christmas bbq.

But by paying attention and knowing your staff’s plans beforehand, you can plan accordingly, and even support them in their development, and in doing so, probably find that they will be much more accommodating later on when it comes time for them to ‘give back’ the assistance you gave them. This could mean them putting their plans aside an extra three months to help train up a replacement or similar, which, when you are a small business, every little bit helps.

Of course, when it comes to reasons of dissatisfaction, that’s a topic for another day, suffice to say that 1) you will rarely get the real reason voluntarily given to you, and 2) you can actually do something about it, whether it be through reward and recognition, greater say and input, work flexibility, etc.

So with that in mind, enjoy our last newsletter for this financial year, and look forward to our next one in the new year.

Until next time,

Lap-Tin

Lately there have been a number of planners that have expressed their concerns that the shift from commissions to fee-for-service will result in an increase in the cost of advice for their clients. Whether it be from the renewal requirements or changing the form of remuneration, the opinions of these planners are that these changes will nevertheless result in additional costs to their business which will ultimately be passed on to their clients in the form of fee hikes.

But are those really the true causes behind an increase in advice fees under a fee-for-service regime?

On face value they seem to hold some logical weight – increase the effort required and you increase prices. But as we have discussed previously, the (FOFA) Opt-In process doesn’t necessarily have to be overly onerous and expensive, and if collecting fees from clients was such a difficult and expensive process, then every business from print shops to groceries stores would be having trouble just covering their administration costs.

The reality is that Fee-For-Service has a very minimal effect on the cost of advice to clients, and I’ll explain why.

First, we need to consider where the source of the costs to clients comes from, and the primary bulk is from the delivery of the advice that they clients require.

So let’s use superannuation advice as an example. If you already have a process of providing quality superannuation advice that gives clients independent and objective advice that helps them to achieve their goals, then irrespective of whether you are running a fee-for-service or commissions-based business, how you provide that advice remains exactly the same.

(Of course, if the quality of the advice is not up to scratch, that’s a different matter but that has no relation to fee-for-service.)

Therefore, the fundamental cost of the service delivery is unchanged even in a fee-for-service setup. And whilst fee-for-service does have an impact on some of the other ancillary processes, such as payments collection, engagement process, etc., when compared against the core service delivery, which makes up the bulk of the 10-15 hours that normally goes into providing superannuation advice, the effect that fee-for-service has on the overall cost is negligible, in the order of $25-50 on a $2,500 service.

A more accurate way for us to assess the reasons for an increase in the cost of advice in fee-for-service versus commissions is to look at how clients have historically been “charged” in a commissions-world.

Firstly, in the legacy world we have always had the issue of the 80/20 rule – which based on our experience with practices, is closer to 70/30 – that is the top 30% of clients provide 70% of the practice’s income, with the remaining 70% provide the remaining 30% of the practice’s income.

Not surprisingly, the top 30% also happen to represent the typical practice’s “active” client base.

And here’s the rub. Under a commissions-setup, the reality is that it is the top 30% of clients who are having their advice fees being subsidised by the inactive 70% who pay commissions without being provided with any services.

And to address the expected comments that I will no doubt receive from some planners, there is of course the occasional inactive or low-value client that receives “subsidised” advice, but this will always pale in comparison to the active 30% that a planner will be actively engaging. It’s like winning the lotto – yes, you can win, but the odds are so low that it’s not worth consideration.

So, if we assume that a practice wishes to retain the same level of income in fee-for-service as they did in commissions, then realistically speaking, they would need to add an additional 30% (which was subsidised by the inactive clients) to the advice fee in order to ensure that the financial equation remained the same.

And it is this effect that explains much more the movement of advice fees under fee-for-service – not that the actual costs have increased, but that clients are now seeing the TRUE COST of the advice that they are receiving, costs which were previously being subsidised by the inactive segment of the client base.

So with that in mind, as a practice transitioning to fee-for-service, how do you position a perceived increase in fees to your clients? And the answer is, as honestly as possible. For some planners to claim that it is due to the Government or fee-for-service is disingenuous. In a user-pays world, it is about representing to clients the true cost of their services to them.

The other option is to take the opportunity to improve and redesign your service delivery to be better, faster, and more efficient, and in doing so, pass those savings onto your clients.

Either way, as professionals, we have a duty to be upfront with clients and not misrepresent what is happening.

Until next time,

Lap-Tin

With the recent merger of AMP and AXA creating the so-called fifth pillar, the friendly merger between Shadforth Financial Group and Snowball Financial Solutions (among the more prominent of examples), there has been a trend towards consolidation or strategic acquisitions occurring across the industry of late.

Of course, on paper, the business reasons that drive these deals are usually pretty obvious – size and scale – but are they really the bee’s knees, and should every practice be looking to grow larger in size to compete with the majors?

Size is a relative matter, and so it may appear a bit strange to compare the AMP / AXA merger (combined 4,200 planners) to the Shadforth / Snowball merger (188 advisers), however, in both cases it is clear that both deals are looking for scale and efficiency from a back-office / platform perspective, as well as size and reach from a distribution / adviser perspective. And in that regard, it is hard to fault either deal.

However, if we take a closer look, there are some clear challenges that both deals face.

AMP has recently released its product and platforms plans as part of the merger, and reading in-between the lines, there are obvious product and platform overlaps between the AMP and AXA entities which will require a costly rationalisation and transition exercise (when is it ever cheap?)

While this would probably have already been known to both parties prior to the merger, that doesn’t make the rationalisation process any easier. And given AMP’s patchy history at integrations (or for that matter, many organisations), the real question is not so much “Do the scale and efficiency benefits justify the cost?” but rather “Will the integration and the expected benefits ever be successfully realised?”

On the flip side of the coin, the other overriding driver for such deals is to increase the size of the adviser group and increase distribution and reach. And it would be most certain that the increased size and geographical reach hasn’t slipped the mind of both the AMP / AXA and Shadforth / Snowball boards.

However, with an increased distribution size, also comes with it an increased need to control the quality and consistency of the service delivery – which is something that is easy when you are talking about 5 planners in the one office, but much harder when we start talking about hundreds of planners spread out over a large range of locations.

Firstly, without even looking at the differences between individual planners, there exists already for both deals, the issue of trying to create a common experience between both AMP & AXA, and Shadforth & Snowball. That in itself is an issue that will easily occupy both groups for the years to come.

The second of course is actually trying to build and maintain a consistent experience across their upsized networks, which leads us to the natural outcome – standardisation.

Now, standardisation of processes is not a bad thing per se. Actually, all good businesses should be looking to try and standardise their processes to create more consistent outcomes and efficient processing for their clients. Ask a business coach one of the keys to business success, and they’ll tell you that standardisation is a critical step in the growth and maturation of any business.

However, one of the flipsides of standardisation, especially on a large scale (such as that of the AMP / AXA entity), is that in an attempt to cater to as many of their constituents as possible, the end result often panders not to the highest principles of “best practice” but rather to the lowest common denominator.

This in itself is fine for an AMP / AXA, which, by AMP’s own admission caters to the “Mums and Dads of Australia”, however, for a group like Shadforth which bills itself as high net worth specialists, presents a bit of a dilemma, as “stock standard” and “high net worth” don’t typically go hand in hand. Ever heard of a HNW person that just wants “what everyone else has”?

And while it is a somewhat broad generalisation, we know empirically that HNW clients generally do want something a bit different, a little bit different, something tailored to them, and they are willing to pay extra for it. However, when trying to manage and maintain consistency and quality across a large group of planners, it can be very difficulty to do that if every client wants their own special treatment or special service.

In many ways, that’s why some HNWs avoid the majors and go to boutiques where they expect to receive a more personalised and tailored service.

How it will ultimately play out for AMP / AXA and Shadforth / Snowball in the long run is unclear, but there will certainly be some challenges that they will have to face in the near future if they want to reap the full benefits of their mergers.

So while size definitely has its advantages, before you dive into a merger or acquisition, in order to make it work for you, you need to make sure that you know what to expect, that it fits your business model, and that you have the expertise and resources to see it through to the very end – and not just rubber stamping the deal.

Until next time,

Lap-Tin

In this edition of our newsletter, we take a closer look at the latest updates to the Opt-In proposals as part of the Future of Financial Advice reforms:

Please leave your comments and feedback for the video.

While most of us were off enjoying the Easter long weekend, Bill Shorten and a few of his Treasury friends were busy spending their long weekend on another important matter – the next phase of the Future of Financial Advice reforms.

Sneaking in post-Easter on the 28^th of April, the latest FoFA update addressed a smorgasbord of outstanding items, some expected, and one or two more left field than most. And when summed up as a whole, it is very clear that the future of financial planning rests very much with fee-for-service.

So let’s take a quick look at the key aspects of the new elements of the reform:

1. Prospective ban on commissions from insurance within superannuation
2. Opt-in renew every two years
3. Prospective ban on volume rebates and similar payments
4. Prospective ban on soft dollar benefits above $300
5. Introduction of a new form of limited advice called scaled advice

Prospective ban on commissions from insurance within super from 1 July 2013

While having spoken to some planners that believe that this will spell the end of the industry, it’s interesting to note the following Financial Standard article that states that commissions within super represents “only 15% of total estimated life insurance commission revenue”.

The bigger question (and the bigger potential impact), in my opinion, is whether this is just the first step before the inclusion of insurance outside of super. And, if all indications are right, and depending on how the industry copes in the meantime, there is a high probability that insurance outside of super will be next up in a few years’ time.

The other question to ask is whether this will result in some planner shifting clients from insurance within super to outside of super in order to receive commissions. This could well be one of the unintended consequences which, ironically, might only speed up the timeframe for extending the ban to insurance outside of super.

Opt-in renew every two years

Given the very vocal opposition to the Opt-In provisions when they were first announced, the latest update on the provisions leave the doomsayers looking frankly lacking in credibility and quite silly for their disproportionate cries over what is, in the detail, quite a benign piece of reform.

Now with a two year renew period, instead of the original year, planners have more breathing space.

Secondly, in reading the detail, the Government’s requirement is actually quite straightforward. A renew form which is sent out 30 days before the renewal date, with an additional 30 days grace period after the renewal date.

Understandably, some commentators will still say that it’s not the right of the Government to legislate such things, but from a business perspective – why wouldn’t you be doing this anyways as a matter of good customer service?

Prospective ban on volume rebates

The ban on volume rebates, although not unexpected, will be the one that will, aside from the ban on commissions, be the biggest impact on financial planners. Based on our experience, we estimate that, for the practices that do accept volume rebates, 15-20% of their revenue comes from this source of income.

While 15-20% isn’t necessarily a business-breaker, it will undoubtedly hurt the top-line of those practices that have built themselves on that premise. For those practices, getting their fee-for-service model right becomes even more crucial in ensuring the on-going profitability of the business.

Prospective ban on soft dollar benefits above $300

Bye bye holidays, cruises, and trips paid for by fund managers or dealer groups. Sure, not getting to go on that paid-for holiday is a bit of a bummer, but then again, how many other industries can afford to pay their professionals for exotic holidays?

Whether this will apply to things such as marketing and other business-related activities is unclear, but those are things that practices should already be starting to come to grips with themselves anyways, as part of becoming better and more effective businesses.

Introduction of a new form of limited advice called scaled advice

The most left-field of all the updates to FoFA.

Interestingly enough, the concept of scaled advice is something that I’ve spoken about for a few years already. It’s a very natural outcome of the two ends of the spectrum of limited and holistic advice, and in my opinion, it is a very welcome thing to see the Government actually taking a serious look at this space.

Of course, it’s still early days, so we’ll reserve our judgment for later on, but it’s still a positive sign nevertheless.

So there you go, in a nutshell. With this new round of updates, we can very much surmise that the last bastion of commissions (or any other form of payment not directly from the client) is insurance outside of super. And it won’t take much for that last bastion to fall. A new financial crisis or another financial scandal is all it takes.

It’s time for all financial planners to step-up and be proactive. Fee-for-service is definitely on its way.

Until next time,

Lap-Tin

Now that the Fee-For-Service discussions have moved ahead another 12 months since the original Future of Financial Advice reforms were first announced (yes, it has been that long!), it’s been a very interesting sight to see what has evolved in the industry in that time.

Some of course will argue that not much has changed, and in a broad sense, there is probably some truth to that statement, but if we look closer we can see some obvious developments occurring – with a key one being the development of, or greater emphasis on, new services that straddle the gap between limited and holistic advice.

I like to refer to these services as specific advice – services that are not (in most cases) tied to a specific product and/or cover a greater area than RG200 intra-fund advice but, conversely, target a more specific area of a client’s life than what holistic advice would be expected to cover.

With the Fee-For-Service/FOFA changes driving planners to take a good, hard look at what they are really offering to their clients and how to create valuable and profitable services that clients are willing to pay for, we have seen several new areas of specific advice gaining ground over the last twelve months…

One of the more prominent ones is estate planning, which has been promoted heavily by estplan and which the Financial Planning Association has also backed. Another trend, has been the rise of services targeted at helping clients to save and budget (clearly austerity is ‘in’ again), with providers such as Lifestyle Planner and others rising to the occasion with a variety of offerings.

Both have the distinction of being completely independent of product; offer tangible outcomes and benefits to clients when delivered correctly, and; if structured properly, can create a consistent stream of quality income for the practices that offer them.

One of the interesting observations of the propagation of these specific services is an underlying theme that I have discussed in this blog before and of which I am a big proponent of – the creation of services that meet the specific needs of certain client segments.

Indeed, this is where I still feel that as an industry, planners are still missing the opportunity in not creating more segment-specific services. Many are still relying on the holistic approach, and while I don’t subscribe to the pessimistic view that “there is no such thing as holistic advice”, I do firmly believe that in order to get clients into the holistic space, we need to be able to offer them easy-to-understand and easy to take up ‘blocks’ of advice, and then gradually step them up into the holistic space as their sense of comfort and confidence grows.

The critical point to remember is that, although Fee-For-Service itself creates an onus on the planner to articulate and demonstrate value, by taking a market-driven, customer needs-based approach, there are actually numerous opportunities which are untapped, just waiting for a clever and savvy planner to create the right solution.

For example, the following article from the Sydney Morning Herald discusses Gen Y start-up entrepreneurs. Based on the article, surely there is an opportunity for an entrepreneurial planner to create a service to help such young entrepreneurs to obtain a loan, write-up a business plan, build a cashflow/savings plan, set up insurance cover in case of accidents, etc. Putting aside for the moment how such a service would be delivered, it’s a straightforward example of another opportunity of a service for a segment that is relatively untapped and waiting for the right person to come along and give it the attention it deserves.

Fee-For-Service is about the customer, and it’s time that we broaden financial planning’s range of services to reflect customers varied and changing needs and make planners more relevant to a greater number of people.

Until next time,

Lap-Tin

With the fee-for-service changes driving practices to take on different approaches to providing advice to their clients, there has been a major movement towards reducing the reliance on product-driven advice and towards the provision of strategic advice as a product-neutral service to clients.

I believe this is an excellent step for the industry, and is the right action to take in order to improve the professional standing of financial planners in the eyes of the community. However, that’s not to say that strategic advice is entirely without its own set of risks and dangers.

In the more youthful days of my early career in the investment banks, I learnt what would appear to be a pretty obvious rule – that the longer the investment time period, the greater the level of risk, as there is a greater opportunity for a shock to occur during the period the investment is held.

How does this relate to strategic advice? Well, when we are talking about strategic advice we are, in most cases, also talking about a long term relationship with the client. And with that longer term relationship also comes the increased opportunity of something going wrong during that period of time.

What are the risks of strategic advice?

The most obvious risk is of some shock in the investment markets, which over the course of a 20-30 year period is highly likely. But from a business perspective, if you are a fee-for-service practice and are not using an asset-based fee, that this in itself would have minimal impact on you.

No, the biggest risk and challenge you have when it comes to strategic advice, is not actually the investment markets, but something far simpler but more unpredictable and uncontrollable – keeping your client on track to their plans for that entire period of time.

Consider that if there was an investment shock. As a provider of strategic advice, you would already assume that you will encounter one every so often. However, the problem is not so much you, but when your client opens up their statements, sees themselves 20% down and as a knee-jerk reaction out of fear, wants to take everything out and protect their position…

Or the client that hears about some new investment that’s going gangbusters and wants to go all in…

Or the client that buys a house and completely changes their financial position without telling you…

And guess what? Over a 10-20 year timeline, you can bet that for 99% of your clients that it’ll happen at some point.

So what can be done about it?

Well, when you think about it, the big question we’re really trying to resolve here is, “How do I get my clients to stick with the plan?” Because, 1) if they don’t, they probably won’t reach their objectives, and 2) if you let your clients make rash, compulsive decisions, you only risk diminishing your own credibility and authority in their eyes. After all, “if you let me do it once, why not do it again?”

This is where an additional service above and beyond the strategic advice, such as financial coaching or education, can help you build a stronger relationship where you have a greater influence over your clients’ decision-making.

It also provides an opportunity to engage with your clients more regularly, instead of just during the annual review – and this is where you have the opportunity to catch and address your clients concerns before they become an issue.

Of course, it also doesn’t hurt that, if done correctly, such services can also create an additional source of income that is completely independent of investment or product performance.

As an industry that is trying to demonstrate that it can step up its game into the professional arena, it’s important for us to look for new ways to create additional value for clients. Strategic advice gives us an excellent foundation, and it’s up to us to build upon it from there.

Until next time,

Lap-Tin

The Opt-In provisions of the Future of Financial Advice reforms have been an area of significant debate and controversial of late, with even calls for planners to get their clients to lobby the government to remove the provision.

This is quite an ironic development, considering how the Opt-In provisions form just a small part of the entire FOFA reforms. Indeed, it is the smallest part of the reforms that is causing the most headaches and concerns at this point in time.

But let’s take the emotion and highly stigmatised debate out of the equation for a moment and have a look at Opt-In from an objective point of view and at what the pros and cons could mean for your business.

Opt-In from a Client Perspective

In all honesty, the call to arms to get clients involved in calling for the removal of the Opt-In provisions are as likely to succeed as my chances of dating Adriana Lima.

Firstly, it is highly unlikely that a typical client is that passionate about their financial planner that they would take the time to formally raise it with their local MP.

Secondly, from a client’s point of view, there is no downside for them, only upside. If they are already on, or wish to be part of an on-going service arrangement, then signing a form that says that they want to continue with the service during their annual review is an inconsequential factor for them. In their minds, they have already made a choice. The form is just a formality.

On the other end of the spectrum, if a client has doubts about the service that their financial planner is offering them, then the Opt-In provisions provide them with the perfect opportunity to voice their doubts – by not opting in.

Clearly we won’t be seeing any mass protests calling for the Government’s resignation over the Opt-In provisions any time soon.

Opt-In from a Planner Perspective

So while Opt-In is good from a client’s point of view, how does it stack up from a planner’s point of view?

A recent article quoted officials from the Treasury estimating that Opt-In will “cost around $100 per person”. Of course, without knowing the exact source of this information, it’s hard to say the exact situation it would apply, but logically speaking, it would make sense that, for an existing client that is inactive and who would need to be contacted in order to Opt-In, it would cost roughly around $100 to contact the customer, provide the necessary forms, collect and process accordingly.

However, when it comes to active clients, would that still be the case? And that is the key question. If a client is actively engaging you for your services, would it really cost $100 to effectively get them to sign a form confirming that they wish to continue engaging your services? If signing a form costs $100, then there are more significant problems at hand than just Opt-In.

And this clearly lays out where the differentiator for Opt-In lies. For practices that have disengaged, inactive, or dissatisfied clients, Opt-In exposes their vulnerabilities and presents a clear and obvious threat to their business.

On the other hand, if you are a practice that is already actively engaged with your clients, then Opt-In becomes a mere formality that, barring logistical and timing issues, becomes a non-issue.

In many ways, Opt-In is very similar to those hotel or shopping club memberships. You pay to sign-up for a year, and in the next year, they’ll send you a form to renew again. At that point, you can choose whether or not to sign-up again. The onus is then on the business to provide enough value to entice you to sign-up again.

So is Opt-In the end of the world? Clearly not if you have a business with satisfied and engaged clients. If your business is built on transactional services, then it doesn’t matter also. The only practices that will really feel the pinch are the ones that have let their clients fall by the wayside and who are now exposed.

And this is where Fee-For-Service and Opt-In complement each other. By having a compelling and attractive Fee-For-Service offering, you also provide the necessary “incentive” for clients to Opt-In. So get that right, and Opt-In naturally follows.

Until next time,

Lap-Tin

Consider, when you purchase something, do you think about what your purchase (service or product) will do for you? Or do you think about what the marketing and promotion says you will get out your purchase?

According to a recent Money Management article, “[f]inancial planners are not doing a good enough job communicating the value of their advice to clients”, and less than 7% of the respondents said that they expected to pay $2,000 to $3,000 for financial advice.

With fee-for-service on the horizon, the need to demonstrate value is of paramount importance in successfully getting clients to take up financial planning services.

However, the challenge of conveying the value of financial planning to clients is made up of two key parts – not just communicating the value, but also defining it in the first place.

This brings us back to the question that was posed at the start of the article. While marketing and promotion can undoubtedly have an influence on how people perceive their purchases, at the end of the day, there is clearly a stronger correlation between how clients perceive the value of their purchase with the utility that they get out of it.

That is, while marketing and promotion can help in bringing clients in and engaging with the business, at the end of the day, when the client is about to hand over their hard-earned money for a purchase, they will always consider what they will be getting out of the purchase and judging whether it is, in the whole, a positive outcome for them.

This presents a challenge to financial planners in defining the value of their service offerings, as this means that simply adding extra components (for example offering client seminars) may seem like a value-adding exercise, but they may actually not be considered of value if clients do not see any use or utility in it for them. This means, for some planners, that they need to seriously reconsider whether that yearly golfing event or birthday card is truly going to be a value-add for their clients, especially if none of them can play golf.

The answer, therefore, in attempting to define the value of advice to clients, means first understanding what the client wants and values, whether it be tangible factors such as seminars or newsletters, or intangibles such as understanding or planner availability, and building that explicitly into the service offering and pricing correspondingly.

By doing so, the value is not only built-in into the service, but more importantly, it is directly relevant to the client – because there is nothing that flattens out value more than having costly extras that a client does not care about, value or want.

With this approach, communicating the value of advice to clients becomes a much simpler affair. And when the current gap between how much clients are willing to pay versus the fees that planners want to charge is so great, then we should do everything possible to help bridge the gap for clients and planners alike.

Until next week,

Lap-Tin

This week we are introducing a new column to bust some of the common misconceptions about Fee-For-Service that we have encountered.

The first one, to get us started off, is one that pops up very often – the idea that “Fee-For-Service means I should cut down to a small number of clients and sell the rest of my book” that appears to be a prevalent theme amongst planners right now.

And look, we shouldn’t deny that, if you have a single planner with a book of 10,000 clients, even if you only spend 1 hour per client per year, there are just not enough waking hours available to service even 1/3rd of the book. It is ethically and professionally responsible, in such a case, to reduce the client base to something that is realistically serviceable.

But there is a self-propagating belief going around in financial planning circles that a good Fee-For-Service business means cutting down to a small number (80-100) of “A” clients and then offloading the rest.

While the logic is sound (remove unprofitable clients and focus fully on a profitable sub-group), there is 1) nothing inherent in Fee-For-Service that states this is necessary, and 2) by doing so, there is an extra level of risk that has now been added to the business.

How? Consider a practice with 80 clients. If even just one client was lost, that individual client would equate to 1.25% of the business’ income. On a 30% profit margin, that would mean an immediate loss of about 4% of the business’ profit – from a single client. Only takes a few for it to add up. And the opt-in provisions, without debating its merits, only make it easier, through poor service, or even just the client being on holidays during the renew period, to lose clients.

The most extreme case I’ve encountered is a planner with just 10 clients – all legal professionals and all referred to the planner by each other. No doubt a profitable and comfortable business, but imagine – all it would require is for one client to be lost for 10% of the business’ income to go out the door. And if the loss was due to poor service, it wouldn’t be a stretch for the other clients to walk and take their business elsewhere.

The other issue with the “Less is More” strategy is the question of, “How do you select the right clients to service?” Even if you are going from 1,000 to 100 clients, that’s still 90% being walked out the door. This presents several obvious issues:

• How can we be sure that the 100 “A” clients will be just as profitable and viable under a Fee-For-Service model? Most “A” clients are selected based on their profitably under a commissions model. But there are no guarantees that a client previously paying $10,000 on commissions will be happy to pay the same amount for a fee-based service.
• How can we be sure that the 900, non-“A” clients didn’t want or wouldn’t have been profitable under a fee-for-service business model? Perhaps out of the 900, there are some aspirational customers that, if only they were asked, would be happy to pay more for a higher level of service. Perfectly good clients pushed out the door.
• Finally, we have to consider that, having just been “dumped” there is a good likelihood that the 900 might never return to a planner ever again. (Would you if your planner just told you that they don’t want you?) From an industry point of view, is this really a good way to build up the image of the profession?

While there is obviously no “optimal” number of clients a planner should have, the automatic assumption that “Fee-For-Service = Less Clients” is not only a misnomer, but also adds extra risk to the business. For some practices, it will make sense, but the key is really to find the optimal number you can ably support with what you are offering. There is nothing wrong with having more clients on a simple service if they are happy with it and you can support it.

Myth – busted.

Until next week,

Lap-Tin

This week we will be concluding our discussion on fiduciary responsibility by looking at the last two areas of fiduciary responsibility – Service & Pricing.

It is important when discussing service that there are two parts to make up the entirety of a service – quality of the service, and the service delivery (i.e. how the service is delivered).

Quality Service

When it comes to services, quality is always a difficult factor to quantify. Even ASIC’s current definition of the quality of financial advice, as related to the ‘suitability’ and ‘appropriateness’ of the advice, is widely open to interpretation.

However, putting the definitions of ‘appropriateness’ and ‘suitability’ aside for a moment, the bigger question in regards to fiduciary responsibility is whether, within the context of operating in a position of trust and confidence for the client, ‘appropriateness’ and ‘suitability’ of the advice are sufficient to meet the requirements of being a fiduciary.

And arguably the answer is that they are insufficient, as ‘appropriateness’ and ‘suitability’, although setting a reasonable standard, do not necessitate the provision of the highest quality of advice.

Akin to advising a client on climbing a mountain, ‘appropriateness’ requires only that the solution demonstrate that it can help the client reach the top of the mountain. However, there might also be 4 other ways, and delivering to the “best interests” of the client would require that the solution not only help the client reach the top of the mountain, but be the best of the 5 different ways to do so.

This would have a significant implication for financial planners, as the onus would extend to include not only demonstrating that the strategies recommended by the planner 1) help to achieve the client’s objectives, but 2) that they are also the ‘best’ way to do so – where best would be defined by the unique objectives of each customer, whether it be time, cost, etc.

To facilitate this would most likely require at least some form of presentation of a range of different solution “options” or “scenarios” to the client, to demonstrate how the recommended solution is the one that best achieves the client’s objectives in accordance with their requirements.

Most likely, this would add to the workload of most financial planners, increasing service delivery costs and requirements, or at least requiring a change in the current generation of platforms to allow for the consideration of different options for the client’s circumstances, with flow-on costs. This leads us on to…

Service Delivery & Pricing

Of course, one of the issues with increasing the service delivery costs is that this usually results in an increase of the price of the services to the end client.

However, as we touched on briefly in Part 1 of this discussion, there is a prevailing view that “a fiduciary must not profit from the fiduciary position”¹, which places us in a tight bind between the need to fulfill the fiduciary responsibility to clients, while still allowing financial planners to operate a viable business.

If we were to take a more balanced view and make the following assumptions – that 1) it is acceptable for financial planners to earn a level of income and profit for their efforts; and 2) in order to as closely align to the “no profit” rule as possible, the level of profit earned from clients should be of a reasonable, acceptable, and conscionable level, then this leads us to two conclusions, that a fiduciary responsibility requires a planner to:

1. Price their services in good conscience and as cost-effectively as realistically possible to the end client; and
2. Continue to improve the efficiency and effectiveness of their service delivery in order to, where possible, share (in whole or part) any efficiencies with their clients.

The first point is relatively straightforward. However, the second point has the greatest implication of all the points we have discussed to date, as it would mean that, from a service delivery point of view, under a fiduciary responsibility, there is an obligation for financial planners to be continuously aiming to be better in how they deliver their services (e.g. not completing the SOA in 10 hours when it could be completed in 8 hours), and to share such improvements with their clients in order to provide the “best” service, whilst maintain a commercially viable operation.

This in a way helps us to summarise effectively the implications a fiduciary responsibility would have on financial planners, which are the need to:

1. Set clear and realistic expectations of the benefits and outcomes of their services with clients, and ensuring that clients actually understand these expectations,
2. Offer the highest quality of their advice, by being able to demonstrate that their advice “best” helps to fulfill the client’s objectives, and
3. Continuously improve the effectiveness and efficiency of their service delivery in order to offer the “best” price for their services to their clients.

Ultimately, the running theme is that fiduciary responsibility requires planners to not just say “that’s good enough”, but to constantly be looking at how they run their businesses and to deliver their services to provide the most optimal service for the client – thereby helping to achieve as close to the client’s best interests as humanly possible.

So while the actual definition of a fiduciary responsibility as it applies to financial planners is still yet to be fleshed out by the FOFA committee, it is nevertheless useful for us to consider, in the on-going fight for consumer trust, what implications and impacts fiduciary responsibility might have on how practices currently operate and start to prepare for what changes might be needed in the near future.

Lap-Tin

1 – Meinhard v Salmon (1928) 164 NE 545 at 546

Disclaimer: This article is of a general discussion nature only and should not be construed as any form of advice.

Continuing on with Part 2 on our discussion on fiduciary responsibility, this week we’re going to discuss the key areas of the practice that are impacted, and what, in a practical sense, fiduciary responsibility means in the day-to-day running of the business.

If a fiduciary responsibility involves a certain obligation or duty to a client or customer, then inherently, this means that any part of the business that directly or indirectly impacts or engages with the client needs to be considered within the scope of responsibility.

Looking at this in a considered fashion, this focuses us on three key areas where fiduciary responsibility comes directly into play:

• Marketing & positioning,
• Product or service, including the delivery of said product or service, post-purchase support, etc.,  and
• Pricing, and the appropriate of the pricing structure.

Whilst arguably some other areas such as skills and expertise of the team (human resources) also come into play, ultimately, they fall in under one of the three key areas, so it is easiest for us to consider it under the three individual banners.

Marketing & Fiduciary Responsibility

An obvious question at this point is why should marketing be an area of consideration with respect to fiduciary responsibility?

If we look back at the view of a fiduciary responsibility as creating a “relationship of trust and confidence”, then we would have to consider that there would be an obligation on financial planners, as part of their marketing and positioning, to ensure that they market and position themselves and what they offer to their clients as being both realistic in its expectations, and deliverable under normal circumstances.

This managing of the expectations of the client is crucial to the fiduciary relationship, after all, as we learnt from the lessons of Storm, MIS, et al, during the GFC, it isn’t difficult to sucker in naïve and uneducated clients with the promise of untold riches – delivered through high-risk and unsustainable means.

However, if a fiduciary responsibility implies a need to manage the expectations of the client into the realm of the realistic, then in addition to the “what can you do for me?” side of the equation, then there exists also a clear obligation to answer the “what could go wrong?” question for clients.

But while it is easy to tell clients what are the risks, there are arguably two issues with using only this approach. Firstly, most risk disclaimers are too vague to be of any practical value; and secondly, most clients cannot envisage what it means in a real-world context.

And in a fiduciary context, the responsibility to ensure that the client fully understands the situation, at least in the first instance, must fundamentally lie with the professional.

One possible solution, if we take a page out from the medical profession, could be to adopt a disclaimer of the statistically probability of success – much like how doctors rarely guarantee the success of a treatment, but provide a probability (e.g. 70%) of the likelihood of successful treatment, and then allow the patient to decide to proceed or not on that basis.

How this would translate into the financial planning arena would be challenge in itself, however, it would help to take the vagueness out of equation by providing a quantitative indicator of the risk, which makes it easier for clients to understand what they are signing themselves up for.

At least if a client signs up for a high-risk strategy acknowledging that there is only a 20% of hitting their objective, it would be difficult for them to argue a lack of duty of care on behalf of the planner should their objectives not be met later on.

Not to mention, if a planner is required to disclose the probability of success, this would, 1) force the planner to consider whether they really want to offer something of such low reliability, as well as, 2) force the client to seriously consider if it is a service that they want to pay for. And in doing so, this would encourage both sides to come back to a realistic and deliverable basis.

So while it is not intuitively an aspect of a fiduciary responsibility, how we market and position our businesses to our clients can play a significant part in setting the right foundation and expectations for building the trust and confidence in the relationship.

Next week we’ll take a look at the other key areas of fiduciary responsibility – Service and Pricing.

Until next week,

Lap-Tin

A few days ago, the US Securities and Exchange Commission (SEC) released its recommendations for a common set of fiduciary standards for brokers and investment advisers. This brings the US in line with both the UK and Australian governments in calling for a fiduciary responsibility to be applied to financial advisers and their related counterparts.

The unifying fact about fiduciary responsibility, across different industries, professions and usages, is that there is no universally agreed definition of what constitutes a fiduciary duty, and importantly, when and in what way it applies.

This poses an interesting conundrum for the industry as it starts to come to grips with the inclusion of fiduciary responsibility into its modus operandi, without knowing exactly how to interpret or deal with it.

Unlike the current regime of “suitability and appropriateness”, which allows for some flexibility in interpretation, a fiduciary responsibility however, offers little in the way of flexibility, without clearly offering a way forward. Even the commonly accepted definitions of what it means to be a fiduciary, as someone who:

1. Undertakes or agrees to act for or on behalf of or in the interests of another person;
2. In the exercise of a power or discretion which will affect the interests of the other person in a legal or practical sense; and
3. Which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of the other person who is accordingly vulnerable to be abused by the fiduciary’s position.[1]

Or:

“A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.”[2]

Only offer a view on WHAT a fiduciary duty entails, but not HOW that duty is then executed by the fiduciary.

Spectrum of Responsibility

If we were to take a moment and consider the spectrum of responsibility to the client as sitting on a scale beginning on the lowest end, which we’ll liberally call “scr*w the customer”, to the other, where the client comes first ahead of all other interest, then the definition of fiduciary duty sits it clearly on the highest end of the spectrum.

Taking this spectrum, if on the lowest end, the interests of the client come last, then the primary goal in that situation is to extract as much tangible value out of the client as possible without consideration or care for their welfare.

However, inverting that picture around and taking the most extreme interpretation of a fiduciary responsibility would result in a most intriguing scenario of its own – the provision of the best and most appropriate level of advice and responsibility, for ZERO cost.

This might seem like a pretty crazy concept, but if we take the most literal interpretation of the extreme, where the goal is to ultimately work in the client’s absolute best interest, then clearly, a situation where the client can obtain the maximum outcome for zero or minimal cost, is the best case scenario for the client.

However, in this modern age, this is obviously an impractical outcome, even if there is a certain view that “a fiduciary must not profit from the fiduciary position”[3]. If we were to interpret the extremities of fiduciary responsibility as literally and absolute as on paper, we would ultimately be seeing millions of accountants, lawyers, doctors, and financial planners begging on the streets for the occasional gift of sustenance for their efforts.

So the question facing us is clearly, “how do we reconcile the requirement and onus of a fiduciary responsibility with the practical considerations of being a professional and operating a business?” Because ultimately, a practical middle ground has to be found where the client’s best interests are consistently and adequately acted upon, but the professional is also reasonably compensated for their efforts.

With that in mind, in Part 2 next week, we’ll discuss some views on the three areas of your business that a fiduciary responsibility will impact the most, and what are the practical considerations that you will need to consider.

Until next week,

Lap-Tin

1 – Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 per Gibbs CJ at 68.

2 – Bristol & West Building Society v Mothew [1998] Ch 1 at 18 per Lord Millett

3 – Meinhard v Salmon (1928) 164 NE 545 at 546

It was with great astonishment that we all watched the year start with the incredible once-in-a-lifetime floods rushing across Queensland destroying properties and businesses alike.

Although the full scale and extent of the damage of the floods is still being worked out, we already know that it will be massive and likely to be in the order of billions. For the many businesses that were affected, beyond losing stock and equipment, there is a good chance that those businesses will never fully recover, and will be forced to close down, or at best case, restart all over again in an entirely different form.

The reality is that mishaps such as floods, theft or fire, are not as rare or uncommon as we may think. While they might only happen once every ten years, the real problem is that most businesses are unprepared for such mishaps. So while you can spend years building up your business, it only takes one mishap to lose all those years of time, hard work, and investment.

So with that in mind, and the new year ahead of us, here are 5 ideas to keep in mind to help safeguard your business against the unexpected:

1. Backup your records on a regular basis

Whether it be floods, theft, fire, or some other calamity, without a copy of your financial records, it can be very difficult to claim insurance or damages. In addition, if you lose those records, you also lose the financial history of your business, which can create lots of problems later on from taxation or other business purposes.

2. Keep an additional backup of your files in a separate location

It’s not much good to keep your only backup in your office if your whole office ends up going up in smoke. With the many free storage services available online nowadays, it pays to set up an account and upload a backup of your key business records on a regular basis just as an additional fail-safe.

3. Double-check your insurance coverage

As some of the stories from the QLD floods has shown, it pays to double-check the details of your insurance to ensure that you are properly covered in case something happens. From a business perspective, it’s also worthwhile checking to see how long an insurer will pay out claims, especially at a time when cashflow really matters.

4. Have an emergency plan

If something happened, would you know what to take out of the business and know where to get it as quickly as possible?

Having a plan of what to do, what to get, and where its located, can make a big difference in an emergency situation.

5. Set up an emergency fund

While insurance should cover for most expenses, there is always the chance that there will be other additional costs that insurance just won’t cover. Putting aside even just a few thousand dollars a year will mean that should anything happen, you have an emergency fund that you can fall back on to help get the business back up afterwards.

A bit of effort and preparation is all it takes to protect you and your business from the unexpected.

And to a safe and prosperous start to 2011 for everyone.

Lap-Tin

Last week we discussed how the upcoming industry reforms provide a valuable checkpoint to review and revisit your business’ strategy and direction.

With the year coming to a close, and the festive season providing a welcome break from the normal levels of activity, the next few weeks provide a timely opportunity to take stock of your business, how it went this year, and prepare for next year.

However, many people miss out on invaluable insight and opportunities when it comes to reviewing the performance of their business, and so, today I’m going to share with you what I believe to be the most important lesson to help you get the most out of your planning activities.

Now, you are probably thinking, “Reviewing how things went last year is easy. I know exactly how well my business performed.”

And that’s true. What business owner worth their salt doesn’t know exactly how well their business has performed? But do you know WHY?

For example, let’s assume we ran a campaign where our target was 80 responses, and 100 people responded. That would be a successful campaign wouldn’t it? Yes. What is the natural response? To reuse the same campaign next year. After all, it was successful right?

But let’s put aside the headline results and dig deeper.

Why was it successful? What about the campaign actually got people’s attention? Was it the intentional aspects of the campaign or was it something else? Could it have been influenced by external factors? How sure can we be of the effectiveness of the campaign independently of everything else?

Of the 100 people that responded, are there any common characteristics across the group? For example, if 60 of them happen to be couples, does that give us any useful information? If we knew that 75 of the respondents all live in the suburbs could that help us to refine and improve the campaign for next year?

And whilst I have used a campaign as the scenario, this same type of analysis can be applied across the board.

Of all the new clients that your business picked up this year, are there any interesting or recurring themes in the mix? Do any of these trends indicate a new potential opportunity for your business? Perhaps your business has predominantly been focused on retirees, but digging further into your new clients indicates that quite a few young professionals have been signing up. Does this indicate an opportunity to open up and focus on a new market for your business?

Alternatively, one of your planners has a far higher rate of success than the rest of your team. Why are they a standout performer? What is it about how they engage clients that makes them such a high performer? Is there something you can learn from this that you can use to either help the rest of your team or improve the business?

All of the examples above point to an extra level of inquisitiveness, an insatiable curiosity and desire to understand and find out the WHY behind the success.

And this represents the greatest missed opportunity of all in the planning process that, unfortunately, many people fall for.

Focusing on the headline results is easy. Reporting a profit is easy. Presenting a campaign as a success is easy. Celebrating a client that has brought $1 million in FUM is easy.

On the other hand, understanding why it all worked out is much harder.

But if you want to get to the nuggets of gold, if you really want to find the opportunities that lie in your business, then it pays to go beyond the headline figures and dig deeper into the WHY. That’s the insight that will help to drive the next round of success for your business.

So as you start to plan and prepare for next year, remember to dig deeper into your business. It might take a bit more effort but the insight you gain can make all the difference in your plans for next year.

And on that note, from the E&W team, we wish you all a Merry Christmas and a Happy New Year. We will be back again in early January.

Lap-Tin

At the FPA National Conference a few weeks’ ago, the Financial Planning Association announced a significant change in its strategy and the way it would engage with its members; in particular giving individual practitioners within their member base a bigger say in the focus and direction of the FPA.

While the verdict is still out on what impact this will have on the FPA, this markedly significant shift poses an interesting question for other organisations also, such as – When(or how often) should you revisit and change your business strategy?

If we look across the financial planning landscape, we can actually see that, for the better part of the last decade or so, most business have been quite stable and conservative in the way that they have operated.

But are financial planning businesses due for a change?

Take the FPA as an example. Their recent changed was triggered not by regulation or the GFC. Rather, their change was a response to feedback from, what are effectively, its customers – the members who’s fees pay for the day-to-day operation of the Association.

Indeed, of all the reasons that an organisation’s strategy might change, responding to the changing needs of its customers is one of the primary reasons that justify a major shift in the strategic direction of a business.

This paints an interesting picture for financial planning, as the predominant customer base that the industry has historically been built on – the baby boomers – has already started to fragment and disappear as the baby boomers start to retire; the next generation of accumulators are preparing for the latter half of their life; and Gen X and Y are entering and establishing themselves in the workforce.

Consider, for example, if your practice has pre-dominantly been built on the retiring baby boomer segment, without a change in direction, what will happen to the business in another 10 years once that segment either passes away, or in their retirement, decide to discontinue their planner relationship?

What if your business has been built on baby boomers (who will now be heading towards their 60-70’s), and as part of your succession planning, you are bringing on new planners who are 20-30 years younger than your clients? How reasonable is it to expect a 60 year old to pay for and take advice from a 30 year old?

In both cases, the solution is seemingly obvious. In order to ensure the longevity and sustainability of your business, you will need to seek out new markets and reduce your reliance on a market that has a limited remaining lifespan.

And in that very act, the strategic direction of your business, and the other facets that go with it, such as branding, marketing, etc., have to change to enable that new reality.

So if we look at the financial planning industry on a strategic level, the answer is very much “Yes”, the industry is due for a change.

Will it be a very quick and sudden change? No. But is it a real change? Very much so. Are they avoidable? Very unlikely.

Fortunately, the upcoming reforms provide an excellent opportunity to not only review the long term direction of your business, but also to use as a rationale to explain any changes you make to your existing customers – which is one of the biggest factors that put businesses off changing their plans: fear of upsetting their existing clients.

So taking the lead from the FPA, does it make sense for you to take another look at your client base and revisit the strategic direction of your business? Are you on the right path to ensuring that the long term future of your business is secure? Is it time for your business to change?

Until next week.

Lap-Tin

A few weeks’ ago I was at a function about the Asian investment markets, when one of the speakers decided to veer off into a discourse on career advice for some of the younger people in the crowd.

The presenter proceeded to illustrate the number of employees in his current organisation (140,000) followed by the statement (quoted verbatim):

“This means: You mean nothing!”

*Cue surprised faces*

Now, this gentleman was correct in his sentiment, that in large organisations, it is easy to be lost in the crowd. And the intent of his statement was certainly not to (I hope) scare anyone, but to share his advice with some the audience that in order to make a difference, they would have to do something different to stand out from the pack.

But because of the negative angle he used, instead of passing a good message along, the only result he achieved, from looking at the stunned faces in the room, was to make the audience focus on the delivery of the message, and not the lesson behind the message itself.

And this example illustrates how difficult it can be, and how important it is, to strike the right tone in your own messages if you wish to affect meaningful change and action from your staff.

I liken it very much to the highly charged tension that exists in the industry around fee-for-service. While I strongly believe that the long term will show it to be a very positive change for the industry as it moves to a profession; if we look at how that change has been communicated to date, we can see that there has been a significant amount of negativity to it. For example:

• A punitive punishment on the industry because of collapses like Storm, MIS, Opes Prime, etc.;
• The professionalism debate which has invited very much an “Us vs Them” mentality;
• The industry funds vs retail funds vs financial planners debate;
• And so forth.

Without dwelling on the history, the key lesson from this that we can apply to your business is that, if you want to get genuine buy-in from your team, then relying on negative messages, such as fear, will rarely achieve what you are looking for. Negative messages only result in people becoming defensive and questioning the message, rather than the significance behind it.

Therefore, as the new year gets closer and you start to prepare your team for the changes ahead, here are a couple of things to keep in mind to help engage your team in an effective and positive manner:

Paint a positive and realistic picture

Staff, like most people, can inherently sense BS. You don’t want to paint a negative picture, but you also don’t want to paint one that is too rosy or unbelievable. Keep it upbeat but realistic. Highlight the challenges ahead, but that they can also be overcome.

Have a plan for moving forward

Show your team the plan for how you will be tackling the challenges ahead and what part each of them will play. There is no greater buy-in for staff than knowing that their contribution makes a difference.

Highlight the end goal

Every change has its reasons and intended outcomes. It could be reducing effort for staff. It could be improved customer service. Whatever it is, it is vital that everyone involved understands “why we are doing this”.

Repeat, repeat, repeat

And don’t be afraid to repeat the message again, and again, and again. With the right message, if you repeat it long enough, people will start to 1) remember the message, and 2) believe in it. If it’s important enough to say, then it’s important enough for people to remember it.

In a services profession like financial planning, which is very people-dependent, managing change in the right way is crucial. The tips above should help make sure that you are on the front foot in engaging your team effectively and in a positive fashion.

Until next week,

Lap-Tin

With this week’s announcement of the sign-off of AMP’s bid by AXA’s independent directors, the group of major wealth management players finally seems destined to become a family of five.

While consolidation and rationalisation in and of itself can be a good thing, the big question now is what the future will hold for the smaller, independent players in the industry.

Indeed, there have been quite a few big names that have speculated on the demise of the independent market, based on the rationale that the independents will no longer have the size or scale to compete with the majors.

My main issue with this line of thought is that I believe it dismisses the innovative potential of the independent planning groups.

While it is true that size has its advantages (think buying power, scale, and efficiency), if you look at practically any industry, it has almost always the smaller, independent players that, partly out of desire, and partly out of need, have led the way with newer and better products and services to allow them to compete with the size and scale advantages of the majors.

Indeed, the origin of the modern day practice stems from when the institutional insurance brokers were pushed out into their own practices, spawning a whole range and diversity of businesses over time.

This resulted in many different innovations in terms of service approaches, product delivery, branding, marketing, tools, and the platforms that we take for granted nowadays.

But if you are an independent player, in what areas will the latest round of innovation be fought? Three areas come to mind:

1. Service Delivery

In an industry where the majority of client interactions are still completed face-to-face, some groups are already looking at different and more efficient ways of delivering their services. Face-to-face will never go away, but new methods of delivery, such as improved use of the online services, will complement and streamline the process for both you and your clients.

2. Value Propositions

The general value proposition of financial planning has remained relatively unchanged for better part of the last twenty years. In order to truly differentiate yourself from the majors and capture the interest of prospective clients you will have to create unique propositions that go beyond the run-of-the-mill “we grow your wealth”. This will not be an easy one, as a very established mindset exists in the industry. But unless clients can see that what you offer is something the majors cannot, there is no reason for them to go “off the beaten track”.

3. Practice Efficiency

While the majors rely on their scale to be their source of efficiency, competitive pressures will mean you will need to develop or adopt new tools and processes that will improve the efficiency and competitive performance of your practice against the majors. Size works against the majors in this case, since, as an independent, you have the flexibility and responsiveness to quickly test new ideas and solutions that can put you back on an even keel with the larger players.

These are not small challenges, but if history is anything to go by, then we haven’t seen the last of the independent market yet. Businesses have always had a way of adapting to change and challenges, and I’m sure we’ll be seeing many new and exciting developments over the next few years.

So, the next time you see someone talking about the demise of the independent market, remember that it’s not a foregone conclusion, and it could be the back of your head they’re looking at as your business zooms past theirs.

Until next week,

Lap-Tin

Hi Everyone,

This week’s newsletter is in response to a question we received about last week’s article about marketing:

Matthew asks, “I recognise that I probably should be doing more marketing for my business. But, I run a small practice pretty much by myself. I don’t have the time or resources to really do all that much. Do you have any thoughts on any easy ways to market my business that won’t break the bank?”

That’s actually a very good question. After all, everyone knows that you need to market and promote a business for it to succeed. But when money gets tight, it is very tempting to hold back on marketing, because it can very easily become a big burden on the bottom line.

However, a lack of resources shouldn’t be seen as a deterrent to effectively marketing your business. Even if marketing is not your forte, there are some simple and effective tips and tools that you can use that will help you do some effective marketing on an affordable budget:

1.       Know Thy Client

It sounds pretty commonsense, but knowing exactly who you are marketing to is critical if you want to have any chance of marketing effectively to anyone. This doesn’t mean you need to know exactly that it’s Joe Bloggs of 123 ABC St, but it does mean having more specifics than just “Accumulators” or “Couples with children”.

There are two main reasons for wanting to be as precise about your audience as possible:

1. Broad definitions usually result in large sample sizes, and the larger the number, the more expensive it will be for you to market to; and
2. The broader the market the harder it will be for you to hook into specific needs and grab people’s attention, lowering the effectiveness of your marketing.

2.       Set the Objective

What are you hoping to achieve from your campaign? Are you marketing to get new leads? New sales? To build up your brand and presence? To grow customer loyalty?

Remember that different objectives will require different messages and/or forms of communication. Knowing what you actually want to achieve with your marketing is essential if you want to make sure that your valuable marketing dollars are spent in the right areas.

3.       Outsource the Development

One of the biggest developments in the last 5-10 years for small businesses is the proliferation of the online freelancing / outsourcing market. Through sites like oDesk and Freelancer*, any business can easily access professional resources from around the world for a fraction of the price.

This means that, if you are not too experienced in writing sales copy, or just don’t have the time to do it yourself, that’s OK. Pop onto one of these sites, and in a few minutes you can have your requirements up with contractors around the world bidding for your work.

It might seem a bit disloyal to local suppliers, but consider that a regular marketing agency could easily charge $1,000+ to write a sales letter for you. Through these freelancers, you might be able to get the same done for $100.

Of course, it’s not a total panacea. To get the most out of such services, you need to be specific with your requirements. And expect to have to fine-tune the deliverables afterwards. But if your main deterrent is a lack of time and / or resources, these services can be a very quick and cost-effective way to get your marketing material developed. Best of all, some of these freelancers specialise in certain areas (e.g. email marketing), which means you can also tap into their expertise.

* – We have no affiliation with these services. They are only mentioned for illustration purposes.

4.       Finding the Right Channels

By this point, you probably have a list of 500-1,000 contacts, with marketing copy ready to go. But what channel(s) should you use?

The good thing about being more specific in defining your client set and reducing the set down to a manageable 500-1,000 is that, from a cost perspective, it’s unlikely to break the bank either way. An email campaign on 1,000 will cost roughly around $100. A direct mail campaign will probably set you back approx. $800. These should be pretty reasonable amounts for most small businesses.

This, therefore, gives you the flexibility to look at it from the perspective of which channel will be most effective for your target audience. You could even do both just to make sure you get the maximum coverage. Just look at what level of responses you expect, and double-check that the ROI is there.

After that, it’s just a matter of testing, refining, and delivering your marketing campaign. But by following some of the techniques mentioned above, you can keep your costs down, while still delivering an effective campaign for your business.

Until next week,

Lap-Tin

“The business enterprise has two–and only two–basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs.” – Peter Drucker

Ask a planner what marketing means to them, and the most likely response you will get is: Referrals. Time and time again, referrals come up as the #1 marketing method that planners use to seek out new customers.

However, when I look across the industry, I have a concern that this emphasis on referrals as the favoured marketing strategy of financial planners is going to bite the industry in the behind in a big way in years to come.

Now, before I go any further, I should clarify – I am not against referrals as a method of marketing. It is a perfectly legitimate method, and history has shown that it clearly works. But, let’s take an objective look at referrals for a moment.

Referrals are indeed a powerful method for the following reasons:

• It costs very little to do, compared to other methods;
• Referrals produce very high conversion rates when they occur (approx. 90%)

Objectively speaking though, there are some downsides to referrals also:

• You have very little control over when it will occur – it could be tomorrow, it could be two years from now;
• You cannot directly control the type and quality of clients that are referred to you – but because an existing client referred them, you have an implicit obligation to what could be a non-ideal client;
• It is difficult to control the message and the (potentially unrealistic) expectations the referrer might have set;
• And of course, if you are a new business, you still need a client base first before you can leverage off referrals.

More significantly, while the assumption behind referrals is that 10 clients become 20, and 20 become 40, it hardly ever works that way. You might have one client refer a few of their friends, but at that point, the social circle closes upon itself and further referrals cease. Therefore, in reality, referrals are often quite limited in the scale and coverage they can provide.

Strategically-speaking, the issue we are facing here is that, the future of the industry is shaping up to be one of increasing competition amongst planning groups for a population that now, more than ever, has easy access to financial resources and education far beyond what was available even just a decade ago.

Not to mention that the generations post the Baby Boomers (who are the next group of accumulators) are, on the whole, far more independent and less trusting of so-called figures of authority than their parents. Meaning the road to convince them of the need for financial planning is also a much longer one.

Put in context, this means that practices will soon have little choice but to start taking a much broader look at their marketing to include not just referrals, but also more ‘active’ methods such as direct marketing, seminars, internet marketing, etc., in order to reach prospective customers. (This isn’t to say that practices don’t already do this today. It just isn’t a very prevalent thing compared to the preference that referrals take in the planner arsenal.)

Which takes us back to the quote at the start of this article. The reality for practices is that, in order to be competitive, succeed and grow, they will need to step-up and start thinking of themselves not as a financial planner that just happens to have an ABN, but as a real business that needs to proactively market itself to survive.

And this means marketing the business using more ways than just referrals, and having a system that can allow you to monitor, control, and improve the results. This requires a marketing plan, but more importantly, it requires getting your hands dirty and finding out what actually works with your customers and what doesn’t. Speaking from personal experience, there really is no substitute for getting hands-on to jumpstart your marketing skills.

So how big is your marketing arsenal? How else could you be reaching out to your existing and prospective customers today?

Lap-Tin

Last week, I spoke about professional trust. This week, I’d like to share with you a very simple tool called The Bet which can be a very powerful way of assessing the level of trust your customers have in your business.

Trust, is after all, a very loose and fluid concept, and half of the problem in dealing with trust is trying to figure out what actually makes up “trust”.

First, let me warn you that The Bet does require some gambling (timely given the Melbourne Cup), but in this case, it is all imaginary money. Otherwise, it is a very easy-to-use concept, and it goes something like this:

Let’s assume you and I were going to McDonalds and decided to have a wager. How much would you be willing to bet with me, that if you ordered a Big Mac, you would get exactly what you expected? Double or nothing.

$5? $50? $500? $5,000? $50,000?

Say you’re willing to bet up to $50,000. What are you saying in that instance? Effectively, that you are willing to bet $50,000 with me that if you get a Big Mac from McDonalds, it will be exactly as a Big Mac ought to be. More importantly, you are saying that you are confident that you will double your money.

So what has happened here? You have basically used a betting value to quantify how comfortable or confident you are in McDonalds delivery, or how RELIABLE their service is – how much you TRUST their service.

After all, the greatest factor in trust is RELIABILITY – delivering what you said you would do. And this is true irrespective of whether we are talking about professional or personal trust.

What is so powerful about The Bet is that instead of viewing trust as a binary equation, The Bet forces people to try to quantify it as a tangible value. After all, intuitively, we know that trust is rarely ever absolute. I trust the taxi driver to get me home, but I wouldn’t trust him to do brain surgery on me.

But what is the practical application of The Bet?

It should first be said that The Bet is not an analytical tool. It can’t tell you what’s wrong. It can only tell you that something is wrong. But using the example above, I have had people willing to bet up to $1 million with me on a Big Mac. Contrast this with $4.35 for a real Big Mac, and right away, you can see why hundreds and thousands of Big Macs are literally flying off the conveyor belt every day.

Win: When the amount that people are willing to bet far outweighs the actual cost (or investment)

Contrast this with Investment Trend’s latest research which says that Australians are willing to pay about $300 for advice. If we take this at face value, this is effectively the bet value. Yet, conversely most planners want at least 2,000-$3,000 for a plan. In reality, over the course of 10-20 years, a client might spend over $50,000 on their financial planner. So, that’s a $300 bet against what is really a $50,000 investment. Not exactly the kind of balance we are looking for in the equation is it?

Problem: When the amount that people are willing to bet is below the actual cost (or investment).

The saving grace for us is that people’s bet value can change over time. McDonalds didn’t get its $1 million bet value overnight. It did it by building up a customer base, delivering to it reliably over and over again, building trust with its customers, and promoting its reliability.

Likewise, there is no reason that the people surveyed who are only willing to bet $300, cannot, with offers that are simple, low-risk and delivered to expectation increase their bet value over time to significantly higher amounts. (The emphasis is on low-risk and delivery, which shows that financial planners are reliable and can be trusted to deliver.)

Certainly, it is not enough to say, “Well, they don’t want to pay enough so we won’t service them.” This assumes (incorrectly) that the $300 value is static, and cannot be changed. This misses the real opportunity, which is to build the trust with these customers, develop a sense of reliability, and increase their bet value in your business.

And in order to achieve this we need some genuine innovation in the industry – but that will be a topic for another week.

So, now it’s your turn to use The Bet. Put yourself in the shoes of your customer. How much would you be willing to bet on your own business? Try The Bet with your own team. The results could be very interesting.

Lap-Tin



(Credit where it belongs – The Bet is an extension of a concept which I learnt off and was originally created by Jonar Nader, author of How to Lose Friends and Infuriate People.)

Welcome to first edition of our newsletter, and my weekly discourse on industry matters, as well as tips, lessons, and ideas to help your business grow and prosper.

To get us started, I thought I’d take a moment to discuss a very interesting topic that popped up again this week (interesting how it tends to come up on a regular basis) in an article from Money Management – link here.

If you have a read of the article, you’ll see that it is about trust – trust in financial planners. And once again, financial planners haven’t rated well at all. Indeed, once again, financial planners rate behind pharmacists, doctors, dentists, and the humble accountant.

My team and I do a lot of work around the area of Fee-For-Service. In my opinion, however, the whole issue of trust goes hand-in-hand with fee-for-service, and this is why it disappoints me when I see planners approaching fee-for-service as purely a matter of administration – how to collect service fees from the client. It misses the point of why the entire fee-for-service argument came up in the first place.

But how does fee-for-service relate to trust?

Let’s consider this for a moment. Many financial planners would say that their clients “trust” them. But is the type of trust they are referring to a personal level of trust based on likeability and personality, or a professional level of trust based on the qualification, reputation, and quality of the planner?

Of course, I’m sure most planners would say that it should be about professionalism, reputation, quality, and the other factors that make someone a “professional”.

Clearly, however, an immediate conflict between trust and commissions appears – and this is why fee-for-service is such a critical issue for the industry to resolve. After all, how can you completely trust a professional, if you aren’t 100% sure that they are working 1) for you, and 2) in your best interests?

An example.I have an insurance / risk adviser that handles my personal and business insurance. Nice guy. Calls me once a year to fill out the forms and send them in again for renew. And each year, he tells me the same thing, “Well, I’m going to keep you with the same provider, because they’re the cheapest.”

Now, that may be true, but how can I be absolutely sure? He says it is, but I know that he is receiving commissions on the backend for it. As a business, I need to have this cover. But how do I know that it really is the best deal for me and that it hasn’t been chosen because it happens to pay more commissions back to the adviser? So, I might LIKE my planner, but I might not necessarily TRUST them professionally speaking.

Of course, this isn’t to say that I don’t trust my adviser (don’t take it personally if you’re reading this). It just highlights very quickly why the mere existence of commissions damages, not personal trust, but more critically, professional trust. Yet, professional trust is the very foundation for the beginning and continuation of every client relationship that your business will ever have.

It even extends out to the next level of trust – Industry trust – trust in financial planners in general. It is, from a marketing perspective, very little surprise that the Industry Funds’ campaign against financial planners and commissions has been so successful. It’s like the “used car salesman” theme. It might be a broad generalisation, but it only needs to be potentially true, enough to put doubts in people’s minds, to reduce the community’s trust in that industry.

Which brings us to the question of the week – What can you do today to create a better sense of professional trust from your clients in your business?

Until next week!

Lap-Tin