In the wake of damaging revelations uncovered at the Royal Commission, technology can play an important role in helping the financial services sector renew trust with existing and new clients, writes Martin Morris.
The last decade has seen an enormous amount of upheaval and challenge across the financial services sector, and few established participants and stakeholders have emerged without impact.
After grappling with volatile markets and client uncertainty through the Global Financial Crisis, five years later, the industry had to navigate through the Future of Financial Advice (FoFA) legislation.
The industry then entered a period of ‘normality’, as FoFA was established and markets settled. But, as the decade comes to a close, this period of normality was short lived, with the wide reaching impact of the Royal Commission touching all parts of the industry.
Whether a licensee, practice owner and/or an adviser, to successfully navigate the last decade and emerge confidently, or at least with a view to a positive future, has required focused resilience.
Disappointingly for those advisers who have demonstrated this resilience, industry and government research continues to highlight a large proportion of unmet advice needs within the Australian community and a continued lack of trust in the sector.
With 47% of customers (Source: Deloitte) still not trusting their financial services provider, it’s a statistic that cannot be ignored. Even more worryingly, regarding this segment of customers, is that 69% were aged 35 or above and surprisingly, 43% were aged 50 and over – arguably the most valuable prospect base for wealth management participants.
This position will not be helped by the high visibility of the Royal Commission and the ensuing media focus on the negative behaviours demonstrated by certain industry participants.
However, while this may paint a gloomy outlook, there will be many advisers who would argue that this is not reflective of their own client base.
Investment Trends research states that ‘90% of planners’ clients say that their financial adviser had a positive impact on them’.
Arguably, Australia has a very robust, valuable and ethical financial planning community that is negatively impacted by a system that sometimes is abused or mismanaged by a small number of institutions or advisers. Therefore, the 47% of distrusting consumers may not actually have a bespoke relationship with an individual adviser.
In the face of a barrage of press projecting a negative image of the planning industry and continued challenges that are often out of their control, how does the planning industry build trust with the unadvised investor, increase referrals and increase the percentage of the population approaching financial advisers for advice directly?
And it’s not just financial advisers experiencing challenges. Licensees have had their fair share of adversity and price pressure also.
Evolving the licensee-adviser relationship
Whilst not a blanket position, it has long been accepted that licensee profitability cannot rely on the current level of authorised representative fees alone.
In fact, many licensees are making a loss on pure authorisation fees. This is not helped by a large portion of advisers in Australia seeing their licensee as a compliance requirement, even those who rate their licensee highly, rather than a value-adding discretionary business-to-business service.
Being licensed is a major cost to a financial planning business and a cost that is non-discretionary, which removes control from a business owner to decide whether it is a service, such as marketing, HR support or business coaching they wish to pay for. This forces the licensee-adviser relationship to be one of compromise, as opposed to a mutually beneficial arrangement.
Finding a price point that sits comfortably with both parties is also a challenge; the practices paying as little as possible and the licensee charging a discounted fee model, where the fee is at a level that can be offset by alternative revenue sources. This price point is rarely met successfully and can often set a false picture of what it costs to be licensed and the risk return fee required for a licensee to provide authorisations.
This leaves a strange dilemma. Advisers still don’t accept or recognise the discounted licensee fee as a value-based model and are often equally distrusting of their licensee’s perceived additional conflicted revenue sources, which they have introduced to offset their loss on authorisation fees.
Vertical integration is one licensee solution, which has been a hotly debated topic before and through the Royal Commission. The fundamental premise of vertical integration is to gain supply-chain efficiencies that can be passed on to consumers.
Unfortunately, however, there are cases across the industry where vertical integration has been used to reduce pricing transparency and maximise revenue streams, often to the detriment of customers, leaving many legitimate models tarnished by those who abused the opportunity.
Interestingly, this leaves the industry with a single recurring problem, whether it’s a licensee-adviser or adviser-client relationship. The problem being a service provider offering services to a current or prospective client base, which is largely distrusting and does not see complete value in the services provided.
Whilst there are pockets of success, until we fix the broader problem, the statistic of 47% of customers not trusting their financial services provider is likely to grow.
Fintechs freed from friction
Whilst licensees and advisers have had to navigate significant business challenges and barriers over the last decade, the fintech sector has really taken hold.
KPMG reports a five-fold increase in the number of fintech start-up companies in Australia over the past five years. Investment in the Australian fintech sector has subsequently risen significantly from US$53 million in 2012 to over US$675 million in 2016.
The number of fintech start-ups in Australia has increased from less than 100 in 2014 to over 650 companies today.
The Financial Planning Association’s (FPA) whitepaper titled, Mapping fintech to the financial planning process, states that 117 fintechs are active in the advice process, but only 54 of those are designed to support financial planners in delivering advice to their clients. That means a greater number are direct to consumer and present a potential threat to the advice community.
A consistent theme underpinning most fintech propositions is a focus on client engagement and consumer experience. Developing solutions that address the tech buzzword of the moment, ‘friction’, are high on the agenda.
Friction being the factors that adversely affect decision-making, or the act of purchasing, by over complicating processes and/or lack of simplicity in providing key information to a decision-maker. Advances in technology are not only reducing friction and cost, they are changing consumers’ expectations, as they become more comfortable with ‘self-serve’ solutions and expect real time access to financial information.
As 69% of distrusting consumers are aged 35 or over, they are clearly not a young generation. They are a diverse, educated, demanding and progressive segment of the population. They are a segment that is experiencing digital excellence in many facets of their lives and cannot understand why this is not transferring more readily to the financial services sector.
PwC has stated that research shows 50% of high-net-worth investors believe their relationship with their adviser should include a digital experience, but we know anecdotally that a large portion of advisers haven’t developed a strategy to meet this need.
Addressing trust with technology
Transparency and accessibility are two factors that breed trust, both of which can be achieved through the adoption of appropriate technology. If trust is a major factor in the industry being viewed as a profession, then technology can play a leading role in helping the financial services sector renew trust with existing customers and attract new ones.
For licensees, practice principles and financial advisers, meeting this consumer need is imperative to future proofing their businesses.
It is only a matter of time before the fintech and robo advice sectors develop new offerings that focus not only on low value investors, but also target the digitally minded, high-net-worth investor, who prefers to self-serve and who, in turn, will find these new fintech offerings compelling enough to negate the need for advice.
Of the 80% of the Australian population who do not obtain advice, there will always be a segment who cannot afford personalised advice and those who don’t want it for one reason or another. The quandary is how many of the remaining prospective consumers will be left for the advice industry to access, or will advisers and licensees always be behind the technology curve in serving the Australian population and leaving fintech providers to take the lion’s share of new business?
Time to transform
We are entering a transformational era for financial services and its participants. For licensees, practice principals and financial advisers, developing a clear understanding of the technology available to deliver a specific value proposition, will be imperative to survival over the coming decade.
To remain relevant, licensees will need to reposition themselves as technologically driven business-to-business service providers. Deciding whether to adopt a broad or specialist approach will be required of each licensee.
However, the one constant factor will be that technology will need to play a major part in ensuring any services provided are cost-efficient, easy to deliver and scalable in a way that the advice community will willingly consume and, importantly, see value in.
Practice principals and advisers will need to reposition the client, and their needs, at the centre of their universe, rather than the business. Development time will need to be refocused on creating and delivering more client-centric solutions, rather than purely solving business issues. Those firms or advisers who have not yet considered how they will use technology more effectively with their clients, will continue to see their model move further away from consumer needs.
The result is that licensees and advisers will need each other to pool resources and design targeted solutions to answer specific client needs and demands. Advisers will need to understand their customer’s digital needs and licensees will need to use this information to develop solutions that assist the adviser with attracting new clients and building greater levels of trust. This in turn will ensure that advisers finally see true value in their licensee.
The good news is the technology is already available, with many established fintechs willing to work with financial advisers. Data sharing environments are central to ensuring multiple technology platforms can work harmoniously together, reducing the cost to licensees and advisers in building individual solutions or connecting directly to
in-house solutions.
Developing and implementing a strategic technology plan can be achieved without significant infrastructure or development cost, giving industry participants the ability to develop a robust plan that will enable them to not only successfully navigate the next decade, but deliver a better wealth management experience for their clients.
Martin Morris is Head of Distribution at Praemium.