The rise of specialist advice businesses

By Jayson Forrest - Managing Editor  - IMAP Perspectives

Paul Barrett sees the rise of specialist advice businesses, as the future model of financial planning businesses in Australia

With a track record in financial services spanning well over two decades, there’s not too much Paul Barrett hasn’t seen in the sector - both from an advice and distribution perspective.

Paul cut his teeth in the Australian wealth sector having served stints with Connelly Temple, Rothschild Australia Asset Management and Fiducian Financial Services, before being appointed General Manager of CBA’s Financial Wisdom dealer group and later, General Manager of Distribution for the bank’s wealth arm, Colonial First State.

After seven years at the CBA, he joined ANZ Wealth Management, rising to Managing Director, Global Advice and Distribution.

Today, as the CEO of AZ Next Generation Advisory (NGA) - a network of client-centric accounting and financial advisory firms - the one thing that is likely to set off the industry veteran is talking about the challenges that lay ahead for the sector post Royal Commission and FASEA.

“I think the one thing that the Royal Commission has made clear is that whilst the industry should always endeavour to work together to find common ground, it’s actually up to individual players in the industry to do the right thing. This means looking at their own fiduciary obligations and focusing on meeting those, because if everybody does that, then the industry will be addressing the challenges that lay ahead,” Paul says.

For Paul, it’s as simple as individuals turning up to work each day, being clear about their professional obligations and the expectations of their clients and the wider community, and then focusing on delivering that.

“If the industry focuses more on that and less on navel-gazing, then we’ll have a stronger and more ethical industry in the years to come.”

However, Paul concedes the Royal Commission did accelerate some of the changes the industry was already in the process of addressing, with the key issue centring on the delivery of advice.

“The key problem that needed to be addressed was that advice was seen as a means to an end - it was seen as distribution. Whereas, the change that is happening now is that advice is being seen as an end in itself. That’s a subtle but really important change that is happening.”

Paul, who established AZ NGA in 2015, adds: “Today, there are businesses, like AZ NGA, that are investing directly into advice practices, which really didn’t happen before. These businesses are now approaching the delivery of advice to clients much differently than they did five or 10 years ago, which is a great evolutionary development for the industry.”

In the wake of the Royal Commission, there has been a lot of discussion around the need for financial advisers to regain the trust of Australians. But it’s an observation Paul says is more opaque than many people might think, based on the fact that most advisers who have an established relationship with their clients, are generally already trusted by them.

Instead, he says, the issue around ‘trust’ really resides with how the majority of consumers, who do not have a financial adviser, think about them.

“It’s these consumers who we need to re-engage with and re-establish trust with,” he says. “However, I don’t necessarily think those consumers trusted the financial advice sector before the Royal Commission. So, I think the only way we are going to establish trust with disengaged Australians is through a combination of generational change and less conflicted business models.”

In fact, Paul views generational change within the industry as a vital component for restoring consumer trust. But what does he mean by generational change?

He refers here to the entry to the financial planning sector of a younger, highly educated, technically savvy generation of professionals, who operate in less conflicted commercial models, where advice is distinctly different and clearly separated from product.

“This is something that won’t happen over night,” Paul says. “It’s going to take some time. This rhetoric of the industry becoming a profession is totally true. We need to become a professional services industry. And that requires high barriers to entry, it requires high education standards, it requires less conflicted subsidised remuneration, and it requires a stronger professional body to monitor and supervise all the participants.”

Paul adds the FASEA requirements, with its higher education standards and code of ethics, are particularly important for raising the barriers to entry, but he acknowledges the industry still has a way to go.

“All this change is something that won’t be dealt with in one or two years. It will require generational change,” he says. “This industry has come from a sales-based background and needs to evolve into a professional services model. And that’s not going to happen overnight. It’s still going to take time.”

While Paul supports the premise that the success and viability of an advice business will hinge on generational change and a non-conflicted remuneration model, he also believes the survival of small to medium businesses will rest on three key questions:

• 1. What am I really good at?
• 2. Who do I know?
• 3. What problems do the people I know need to solve?

“With the first question, you need to look in the mirror and truly answer that question. The answer could be that you’re really good with connecting with people, or your empathetic or you’ve got a specialist technical skill that you excel in. Whatever the answer is, you need to be very clear in identifying it.

“With the second question - Who do I know? - you need to think deeply about the cohorts of people you know, while the third question revolves around solving the problems of the people you know by using the skills you excel in.”

Paul believes if a business can line-up those three elements, then there is a sustainable business opportunity.

“You can build a business around properly answering these three questions by identifying opportunities and playing to your core strengths. If you’ve got a skill set that you can deliver to people you know, and they want to work with you because you can solve their problems, then you’ve got a business.”

Paul concedes the first question - What am I really good at? - may be a struggle for many advisers and businesses to answer, but he adds, in such cases, to ask a follow-up question: What things could I be good at, given the access I’ve got to resources, people and know-how?

And that’s precisely the approach Paul takes with the community of AZ NGA practices. He says while some practices or advisers might not have a specialist technical skill, invariably, another practice or planner in the AZ NGA network will have that skill to leverage off.

“So, I think that businesses in the future will have an element of specialisation. They still might offer a raft of different services, but advice businesses will increasingly become deep and narrow with their skill set. The days of having generalists providing a bit of everything will become increasingly limited.

“Instead, as we move forward, the average advice business will have one or a handful of specialist expertise that they deliver to their clients in a really deep and narrow way. But that doesn’t mean firms won’t be able to offer holistic advice, it’s just that they will do so in a ‘multi-disciplinary’ way – via specialist teams.”

Paul points to the medical profession, where the number of specialists to general practitioners is increasing. It’s these specialists, he says, who are able to deliver greater value and therefore, are able to charge a premium for their skills and expertise. 

He believes managed accounts play well in this specialist niche, allowing advisers to be more reactive with investment conditions and opportunities, while providing the flexibility and transparency clients are increasingly demanding.

“For today’s advice businesses, in order to develop a successful and viable business model in the years ahead, you need to think long and hard about what you are good at. Then you need to determine whether you can build a business around these core strengths and in so doing, become more specialised by utilising your skill set.”

When it comes to acquiring an advice practice under the AZ NGA umbrella, Paul says there are two key attributes a business needs to have - ‘capability and capacity’.

“We look at a business’ capability. We assess what it is they are good at. For example, once we acquire ACME Financial Planning, we have invested in a capability. We want to leverage that capability in our network to unashamedly grow our revenue line and create organic growth opportunities,” he says.

“So, as an investor, when we are looking at these businesses, we’re asking: What’s the capability that we’re acquiring?”

Paul’s second key attribute in business acquisition is ‘capacity’.

“Once you’ve got the capability, you need capacity,” he says. “Capacity means working out how to dispense, disperse and serve the community with that capability. It’s all about how many people I can provide this advice to and how efficient I can be in doing that?”

As an example, Paul says the business might acquire a firm that has a specialist capability in working with pharmacies, but the firm only currently operates in one geographical location. Instead, AZ NGA would seek to leverage that capability into every part of Australia where there are pharmacies.

“Doing business in fairly simple,” Paul says. “It’s about understanding: what’s my capability and what’s my capacity to deliver it. You need to focus on those two elements. By doing so, you can build a successful enterprise.”

Ask Paul for his views on the future of advice and what the financial planning sector might look like in 5-10 years, and he definitely sees the market consolidating and specialising.

“In the years ahead, we’re going to have fewer small operators and generalists,” he says. “Instead, I predict a smaller number of larger SME multi-disciplinary businesses operating, with far more clarity in terms of their value proposition, their service offering and their strategy.

“These businesses might have an investment division, an insurance division, an estate planning division, an aged care division, and potentially accounting and legal divisions. And within the traditional financial planning division, you might have services available for particular demographics, like doctors, pharmacists, teachers and so forth.

“And there’s room for other areas of specialisation, like regional specialisation. So, firms need to develop expertise and capability inside their businesses that are deep and narrow.”

As the sector moves forward by raising the bar to entry and installing higher professional and education standards, Paul says the biggest challenge for the industry is to shake-off “the prehistoric tag of being a sales-based commission-driven industry”.

“Shaking off this tag is still going to take longer than people think. It’s at least a 5-10 year proposition to change the overall reputation of the industry in the minds of the general Australian population.”

However, for individual practices, Paul says their greatest challenge will be remaining “viable and going concerns”.

“It’s about going from a commission-based sales organisation or a sales channel, to becoming viable advice businesses in their own right, with a clear value proposition that clients want to pay for. It’s as simple as that,” Paul says.

“What matters is: Can I deliver a meaningful service to a client who values that service and is willing to pay for that? It’s really that simple.

“If you can do that, then you’ve got a business that is sustainable and heading in the right direction.”