FOFA crystal ball – what’s in store for the wealth management industry?

28/11/2011

Future of Financial Advice (FOFA). It’s coming. Like it or loathe it, the Australian wealth management industry is going to experience change and preparation is a must.

Changing focus

The reforms will not only require providers to ensure that their adviser based systems can cater for the opt-in and scalable advice models; but will be a catalyst for far more broad reaching implications. Platform and product providers will need to ensure they are strategically placed to take advantage and deliver in the new environment.

FOFA is provoking a shift in focus from product sales to the provision of services and the changing environment is pushing planner focus on High Net Worth (HNW) individuals, where they can add more value and charge appropriately. This may not be the outcome intended by the government in implementing these reforms, but in an industry where it will be even harder to make money, it is an attractive (perhaps necessary) approach to remain competitive.

This push to HNW clients will require platform and product providers to deliver broader product offerings that they can tailor for clients (IMA / SMA / UMA, direct shares, ETFs), or may even lead them to encourage clients to move off platforms altogether to retain their margins.

Need for product flexibility

Product flexibility will be key in the new environment and the ability to react quickly to changing market and distribution trends will be essential for platform / product providers.

Default MySuper products will be basically look-alike, low cost and low margin products. It will become imperative for platform and wealth managers to innovate in terms of their service offerings to retain and grow their businesses. Developing the ability to transition clients seamlessly from MySuper to Choice to Wrap into HNW SMSF-like offerings, with the appropriate provision of risk cover and advice, will ensure a head start on client retention.

Nature of advice driving the change

Rather than abandon clients with lesser investment balances, some planners will look to standardise models for these clients to provide a cost effective level of advice relative to their risk profiles. They will also require the ability to scale up advice for highly tailored client solutions with very HNW positions, or require significant asset and liability planning.

In line with this move to HNW clients, advisers are now looking towards the growing SMSF sector that has historically lacked an advice component, with some statistics suggesting that advice attributable to SMSFs will outstrip retail advice by 2015. Time will tell how effective sector penetration will be, given that SMSF funds have traditionally been established to allow investors to “take control of their own destiny”.

The changes will also spark a consolidation of adviser groups and increasing strength in bank-based wealth management distribution channels. Advisers will look to product and platform providers to assist them in profitably supporting their clientele. They will look for online automated advice and calculators to streamline the servicing of lower balance members and call centre based advice for intra-fund scenarios. This effectively frees up the advisers to focus on the higher touch advice for those clients seeking holistic planning. The bank based wealth managers will similarly look to provide these online and call centre based advice models as they push into the D2C markets that are potentially being overlooked by the adviser market.

Rather than seeing the decline in adviser numbers we are seeing an increase in the employment of new financial planners as the sector effectively “changes guard”. The entrance of a new, tech savvy generation is increasing pressure on dealer groups and platform providers to meet a new paradigm of operation. Real-time, online access with mobile enablement and straight through processing will be essential, as well as tools to assist these planners to transition clients into the new world of service provision.

Providers need to change their service proposition to meet the demands of these new distribution channels, including how they support their adviser based solutions and enable cost effective servicing of their client base.

Technology facilitating change

The level of change hitting the industry over the next three years will be immense and will significantly impact administrators, super funds and wealth managers. They will toil to keep up with regulatory change and make the strategic moves required in their business to compete in this new environment. The majority of platform providers and administrators have a complex web of old and new technology and the scope of the changes required will divert their focus to coping with the changes rather than taking advantage of them.

Technology will need to evolve to enable new tools and facilitate providers in supporting scalable advice models. Technology solutions will also need to encompass the flexibility to allow clients to move up the scale; starting with very simple / self-service advice, moving to call centre / targeted advice on a fee-for-service basis and then support clients moving into a full advice model with planners.

Providers will look to technology vendors to help deliver the changes and, in many cases, take the headache away from their business, allowing them to get back to basics and enable strategic development. Many will seek out the headspace to focus on growing or protecting their business during the change in distribution models.

Businesses continue to seek efficiencies and ways to simplify their business allowing them to focus on the parts of their proposition that differentiates them. To this end, Business Process Outsourcing (BPO) is still alive and well, with renewed focus not only on back office processing but, more broadly, on support activities and potentially extensive IT outsourcing of hardware and software environments.

A vendor’s point of view

  1. As we enter into the FOFA era, it is essential that IT systems offer flexibility to meet the evolving needs of adviser and distribution channels.
  2. Regulatory change is a fact of life in the Australian financial services industry, and employing a (tailored) out-of-the-box solution means shared costs, which can mean serious savings in the long run.
  3. It’s not just about the product, it’s about the overall solution; a good product is only as good as its implementation and the skill and knowledge of the team that implements it. Experience and business acumen in a vendor are as important as a robust, functionally rich product.

About the author

Darren Stevens

Darren Stevens

Director, Product Management & Strategy

Darren Stevens has over 30 years of experience in the financial services sector. Having held various senior management and executive positions, he has an extensive understanding of the wealth management, life insurance and funds administrations industries in Australia and the UK.

As Director of Product Management and Strategy, Darren is responsible for developing, refining and executing Bravura’s corporate strategy for both its global Wealth Management and global Funds Administration segments and the global strategic direction and product management of Bravura’s Wealth Management product suite and leading merger and acquisition activity.