The advice sector has been characterised by wave after wave of regulatory change in the last several years. How do advisers keep their eye on the ball when it comes to having a growth plan for their business, rather than being caught in the detail of compliance issues?
Well, acknowledging that it's not easy for advisers, what I'm going to talk about in our session in a week's time is it's reasonably straightforward as to what needs to change. The starting point is that fundamentally any business, we're in the business of financial advice. But we've got to work out what our clients, what the people of Australia need. And I think people want advice to help them live a better life. I don't think they want SOAs, ROAs, PDSs, FDSs and opt-in. I'm not saying don't comply, but what I think we need to do is to work out whether we'd like to be client centric or compliance centric. And work out whether we're going to, follow what the regulator is telling us to do or lead with a value proposition that's going to be in the best interests of the people of Australia.
One small example would be most advisers offer what they refer to as a review, whether it's half-yearly, quarterly, annually. My view is that needs to change from a review to a regular progress meeting. One is looking in the rear vision mirror, the other one is looking through the windscreen about the client's goals, aspirations, and future to determine whether they're on track or not on track. So this issue of change fatigue, it's a big issue that we need to focus on the value in every element that we deliver to clients and prospective clients. It's difficult for some small practices because they don't have the scale required to make the change. But some of the opportunities, and let's be positive about this, most advisers are only spending about 40 per cent of their time dealing with clients. So we need to find a way to increase that, to be seeing more people more of the time and making money.
One of the big changes the industry has gone through has been the change in fee models away from commissions and asset based fees and towards flat fees. That seems to present a challenge for a lot of advisers in terms of costs going up and they're presenting a client with a big bill. From the advisers that you've spoken to, what are some of the concerns that they have or around communicating to clients the value for money that they're getting from these fees?
The starting point for me is however advisers charge, cost is only an issue in the absence of value. And that's a really important point to get across. People aren't cost conscious, they're value conscious. So if advisers are having trouble with larger fees, then really what the issue is they're having trouble articulating their value proposition.
I would encourage advisers that whatever they're charging, they need to align that fee with the value. So if they think they're adding value by picking stocks, timing markets, and blending different asset managers, then maybe they should be charging an asset based fee. But if they're adding value through advice and strategy, they need to find a way to articulate the value that they're delivering and align the fee with that value, what I call above the line.
I think we've gone through or will go through three broad phases. The first one going back 10, 15, 20 years ago, was a product led industry where advisers received commissions from the product manufacturer. In the recent past we've moved from being product led to advice led, but still product paid.
That’s pivoted really from being a price taker by way of commissions, to being a price maker by way of an explicit fee, which was typically assets under management related. I think the third step, which some advisers are making the adjustments to right now is being advice led and advice paid. Where they're the price maker, with an explicit fee, whether that be a strategic fee or a fixed fee. I think there's going to be a lot more pressure on assets under management fees and advisers need to make sure they're aligning their fee with their value and articulating their value as best as they can.
If an adviser does want to change their value proposition and go from an asset based fee to more of a flat fee model, how do they go about that? What kind of work do they need to do behind the scenes if they've decided they want to make this change?
To make the change I talk about the notions of above the line and below the line. Below the line is the money, the products, the investments, the shares, the risk insurance, the mortgages, the debt. And that's been the typical proposition in the past. The new proposition I talk about being above the line, about helping people live their best possible life. And the words that I would use to describe that would be, know me, know my family, understand me, help me, simplify me, declutter me and reduce my anxiety. So how do we move from below the line to above the line? Advisers can have the best intentions to do that, but they need a capacity release.
I see so many advisers have got so many different nuances around their proposition below the line. Their portfolios are in different shares, different funds. I believe they need to get a robust investment philosophy below the line to give them that capacity release, to work on all the elements above the line. What I’ve experienced is that advisers, as I said, can have the best intentions to start to build that new CVP, but they struggle to find the time to be able to do it because of the mess below the line. I think they need to tidy that up first before they start to build the value proposition above the line.
I think most advisers would agree that they need to change to more of a customer-centric mentality and getting to know their clients. But the common complaint is that they're facing an ever-growing pile of compliance demands as regulation gets higher and higher. Do you think that it is harder for advisers to focus on the client in the current environment? Or do you think it's more of a matter of just getting that efficiency and those processes in place to free yourself up to do that?
I think language is incredibly important. I gave that example earlier about changing the language from a review meeting to a regular progress meeting in a forward looking sense. Similarly, I think advisers in the past had customers, but today we have clients. We're now moving towards becoming professional services firms. There's no doubt it's difficult. There's no doubt the pendulum has swung too far and we're certainly paying for the sins of the past. But the analogy that I would use is, professional doctors don't get paid for the sale of pharmaceuticals. So we need to look at the value chain in the past and the value chain today. The value chain in the past started with a product manufacturer, manufacturing a product and using salespeople or distribution to sell something to that customer.
But that's flipped around 180 degrees now. Today we lead with the customer, we run an amazing discovery around goals around values. Then we provide strategy. And then if we need a product, it's some form of research and evidence based products. So hat one, client discovery goals, hat two strategy, hat three product. So we need to lead with the value. We need to align our fees to that. And so, yes, it's not easy, yes advisers are caught up in a whole bunch of compliance, but if they've got the will and the intent to start to build that new value proposition above the line, then it's possible. An example I would give you would be, many advisers today in this compliance centric world that we live in are leading with the financial services guide. Of course it's a legal requirement to give that to the client at the first opportunity.
But if we're able to give that FSG to our new prospective client in the context of, it's great to meet you, we're going to walk you through this amazing process where we're going to help you achieve your best possible life. We've got to consider some of your trade-offs. We got to help to increase your income, decrease your expenses, reduce taxation, et cetera. In all of that, we can help you to lead your best possible life and give them the FSG in the context of that. One is that client centric approach, the other one is a compliance centric approach.
What traits do you think clients really value when it comes to their adviser? Is it really about being the trusted person and feeling like you've got a friendly relationship there, or is it about the technical skills that the adviser brings to the table or is it a combination of both?
I think it's a combination. Psychologists talk about the difference between right brain and left brain. The left brain would be the money, the products, the investments, the spreadsheets, the numbers. The right brain would be the visuals, the outcomes, the benefits. I think more the adviser of the future will be right brain focused, not left brain focused. They’ve got to be talking about goals and outcomes, not necessarily the inputs. I talk about moving from product to people or from money to meaning. We need to move from what we do and how we do it, to why we do it.
Our industry keeps talking about the products, the shares, the investments, and we need to move that conversation above the line. Those words, know me, know my family, understand me, help me, simplify me, declutter me and reduce my anxiety. That's the blueprint for the value proposition of the future. So yes, they need to be specialists on all the products, but they need to be taking them on a journey to help live their best possible life.
Another key challenge that advisers are up against at the moment is this transition to annual opt-in agreements and having to justify their fees on an annual basis. How does that fit in with this new above the line proposition? Because some might say that it's a stronger proposition to be able to go in and say your returns have gone up X percent as opposed to we've had a nice relationship this year. How do you make sure that you're actually showing really tangible results to your clients every year to make sure that they've got that value in there?
I think those words tangible and intangible are great words. I come back to the point that cost is only an issue in the absence of value. Advisers need to be clear on what's their tangible value that they're delivering and what's the intangible value that they're delivering. Tangible value of course can be measured, it's typically below the line and it's typically dollars based. So if we're going to be charging somebody a fee for what we're doing, and that fee ends in thousand, then when we're adding significant value in a tangible sense, we need to be communicating the tangible value that we're delivering in thousands, so that's the tangible piece. The intangible piece is more complex. That's typically above the line. It's typically a feeling. It's our client's feeling that feeling of comfort, reliability, and care.
So I talk about that new proposition to increase income, decrease expenses, reduce taxation, protect their assets, ensure security in any catastrophe in order that they can achieve all that’s important to them and lead their best possible life. We need to be clear on their values, their goals through this deep discovery, we need to ask them questions they've never been asked before. The planning of the future is now collaborative. We're planning with our clients, not for our clients. My experience is it doesn't matter whether someone's mass affluent or high net worth. People want to know their number, whether it's keeping the heater on in winter or whether it's going on that cruise when the borders open up, people want to know what their number is. So in relation to this tangible, intangible value we've got to become really good at articulating the value above the line and below the line.
There’s also a misconception as well among a lot of consumers about what advisers do. And perhaps that feeds into this idea of the adviser getting their value proposition slightly wrong. How does an Adviser sort of turn the conversation around, if they have someone come in and say, "I'm just interested to know whether I should invest in BHP this year and thought I'd get some advice on that." How do you turn that around to say that's not quite what I do and here's what a professional advice relationship can do for you?
You're absolutely right, when someone meets an adviser for the first time, even at a barbecue or a sporting match, and then they say, "David what do you do?" If you respond I'm a financial adviser, the next question's probably going to be, "where are the markets going? I'm interested in buying some BHP.” The way to move them from that investment based conversation is by asking the question why? Sure, I can buy some BHP shares for you, but before I do, can I ask why would you like to buy those? People are only asking that question of us because they think that's what advisers do. So we move them above the line by asking the question, why, what is it that you're trying to achieve?
And then we start to build that up. And whether it's a dinner party, or a sporting game, or even in a discovery meeting with a new prospective client. By moving them above the line, by asking them questions they've never been asked before it opens up a whole new conversation. So what I would say is a leader takes people where they want to go, but a great leader takes people not necessarily where they want to go, but where they ought to go. That's the opportunity that we've got as advisers to take people on this journey. My experience is that people don't really understand and appreciate great financial advice until they've experienced it. So I think there's a great opportunity out there given the small number of people in Australia that are taking financial advice today.
I think another thing that often comes up in terms of how we get more people in the door to get professional advice is this cost gap. This idea that often where consumers are surveyed, they'll say that they want to pay $500-$1000 for advice, and obviously that's significantly lower than what advice at the moment actually costs. How do advisers attract new clients in that environment? How do they convince them that what it costs is a fee that they'll get some value out of?
Look, it's tough with compliance and costs rising. What I would say is that we're not just in the business of financial advice, we're in the business of getting paid for financial advice. Of course, many of us do pro bono work, but that's a choice that we make. To make sure we're getting paid for financial advice, we need to make sure we've got that client value proposition right. And so we need to be clear on the ideal clients that we want to take on. And by default the non-ideal clients that we can't take on because we can't add significant value to them for whatever fee we would need to charge. So it's the client value proposition and the clarity around the ideal clients. I mentioned earlier that cost is only an issue in the absence of value and to create that new value proposition, we have got to get that capacity release.
My experience is so many advisers are caught below the line in the old value proposition, because they've got such a mess around this product related environment. It's only when they tidy that up, and when they get a robust investment philosophy that they're able to start to build that proposition above the line. So again, I don't think people are cost conscious, I think they're value conscious. When people in surveys say they're prepared to pay $500, that's because they don't know what real financial advice looks like. So with our skills, with our questions, with our websites, with our conversations, we'll be able to explain to people what the value of proper advice is.
Looking forward through this transformation that the industry is going through at the moment, particularly as the education standards come fully into force and some advisers exit and those that remain move away from that product focus, how different do you think the industry is going to look in five to 10 years time? Do you think we would have made any progress in terms of that advice gap, and getting more consumers interested in the advice proposition?
We’re going through a big change right now. I mentioned the three phases – product led, product paid phase one. Advice led, product paid phase two. Right now a small, but growing number of advisers are moving from that phase two into phase three, that's advice led and advice paid in a flat and explicit strategic fee. I believe that in the future, the demand is most certainly there. I think more and more people will take advice as we start to build the proposition of the future. I don't think the client centric models are keeping pace with the demand at the moment. The demand is really solid. And I think fundamentally our industry is still unfortunately product focused, and we're not leading with advice as much as we could be. Certainly the client centric software that I think is required is not as prevalent as it should be at this phase.
Most of the software in the marketplace is still product-based and below the line, but the good news it's coming in the future. It's not going to be a question of man or machine, it's going to be a man with a machine. And as that CVP moves up above the line, more and more people will take advice. The statistics today would be roughly that 20 per cent of Australians have taken advice at some point in time, that roughly 10 per cent of Australians are paying for advice today. I think a lot more will pay for advice in the future once that proposition is matching what they're looking for. I think the other big change that we will see is that there will be more female advisers.
I think female advisers are absolutely perfectly suited towards the right brain, above the line conversation and coaching type profession that we will become. And I think the other big change that we're going to see is that the efficiency of technology will enable advisers to move from that roughly 40 per cent of time they're spending with clients today to increase that quite significantly. Because at the end of the day, a professional adviser should be seeing people, providing advice and making money. And right now as our industry is slowly but surely maturing, they're caught up in too much of the back office type areas that they're not necessarily the best person to be dealing with.
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