Have the benefits of scale put financial planning firms at risk?

Colin Williams

UberX is now the biggest taxi business in the world and does not own one taxi. AirBnB has more rooms available than any hotel but does not own a room. The obvious question now is: will the biggest financial planning business be one that doesn't technically own a financial planner?

Only time will tell whether such a model could fit a financial planning business. But what we do know already is that small, nimble, agile financial technology businesses – better known as 'fintechs' – are beginning to encircle the giants of the financial planning industry, and the benefits of scale in our industry are fast eroding.

Scale had been a long time friend of the financial planning industry, whether you were running a financial planning business, wrap platforms, funds management or all three components. A business model with scale would deliver efficiencies and thus a competitive advantage. This was so obvious to all the key players and we witnessed major institutions going on a buying spree, consolidating the industry and developing so-called vertically integrated models to maximise efficiencies.

But now the smaller players with access to new technology, and the ability to implement it quickly, are finding efficiencies. And best of all, they can go about their work without the hangover of a major capital expense.

To get a picture of how much things have changed, take a look at the traditional wealth management 'value chain', versus the new direct/fintech offer.






Traditional fees

0.8% to 1.3%

0.6% to 1.3%

0.7% to 1.5%

2.1% to 4.1%

New direct/fintech fees

0.3% to 0.924%

0.25% to 0.31%

$77.00 p.a.*

0.55% to 1.24%

Note: Fees are complex and difficult to merge into a simplistic comparable table. The fees shown are a guide only and may vary considerably from one provider to another.
* Fees from Stockspot website

As you can see, margins must disappear as the traditional fees get smashed. If you have a business model built on making good margins on the traditional fee structure, you should be worried. The new players' go-to pitch is of course fees, eagerly telling would-be investors how a small percentage difference in fees can erode hundreds of thousands of dollars of their hard-earned savings. It is hard to ignore, especially as the industry funds ram the same point home through their aggressive advertising.

One may argue that the financial planner fee is not a fair comparison, as a person will do a lot more work than the algorithm locked up in a computer chip. The financial planner is also subject to a stringent code of ethics, rules and regulations. There's some truth to this argument. But remember, it's the same argument taxi drivers used against Uber, and it didn't help them.

If your current model means selling the expensive in-house wrap and investment funds that will struggle to demonstrate value for money – compared to your new competitors and your old foes from the industry funds – you must know it's time to move on before your clients move on.

Don't get me wrong: I still believe that financial planners will be in demand. As we all know, critical financial decisions are driven by emotions that need to be tempered with rational advice. Financial planners can sense a client's concerns, fears, aspirations and establish trust and rapport that fintech start-ups are a long way from achieving. But if financial planners want to flourish, they will need to change their business model to meet the challenges that fintech is posing.

The good news is that the technology is there for you, the financial planner, to compete and beat the new rivals. You just have to give it a go.

Yes, you can offer alternative investments such as indexed and exchange-traded funds that are simple to run and after fees, are hard to beat by the active fund managers. Expensive wrap platforms are not required if you break things down more simply. A typical wrap platform is used to solve every admin problem known to every investor. If your clients only need an admin system for tax, look to outsource that tax problem to a specialist, be they a real person or a platform provider such as Sharesight.

New technology also gives you the ability to communicate to your clients at a time that suits both of you best. Those of you who know me would have heard me moan how financial planners insist on face-to-face reviews with their clients, no matter how inconvenient it is for all parties. Thankfully, there are so many options to hold meetings face to face without being in the same room, from your basics like Skype and FaceTime, to more robust real-time communication platforms like GoToMeeting and Fuze. They provide options to hold meetings at convenient times for all parties and record the meeting for compliance and sharing. There's no excuse not to get online!

Technology will also help the adviser to be nimble and proactive. There is ample technology available that will automatically collect referrals, contact the client, collect the client data and book them in at convenient time to meet. All of this can be automated with no human intervention from your office.

You can also track your clients' investments and cash flows with alerts to make you contact the client when something changes out of the ordinary. With modern customer relationship management (CRM) systems, you can track your client's social pages (yes, this is legal) and this may prompt you to contact the client. In 2016, you can be in the palm of your client's hands 24/7 through mobile apps.

What makes it all so exciting is that there is very little expense involved. Unless you happen to be a major institution with lots of advisers, in which case the game isn't that easy to play.

Major institutions sometimes need more robust systems and internal protocols. And with many layers of bureaucracy, by the time they finally get around to implementing new technology it's already outdated.

Most big players are trying to crack this problem and one of their solutions is to bypass the financial planner with their own direct superannuation and investment offers. And we recently saw Suncorp divest itself from its financial planning arms in favour of cheaper distribution options. This trend will continue until a new 'happy medium' is achieved between product distribution and financial advice.

2016 is going to be an exciting year in financial services. Just like years gone past, it won't be the biggest that prosper. It will be those who can adapt.


Colin Williams is the director of HFS Consulting, a firm that adds value to financial planning and wealth management businesses through strategic insight and decisive implementation.

HFS Consulting also operates the long-running website Humble Savers which assists everyday people to make smarter choices with their money. The website is open to contributions from financial advisers and associated businesses.

Colin has over 25 years of hands-on experience in financial planning, starting as a financial adviser through to holding general manager roles with ANZ, ipac, Rabobank and Hillross. Colin has a Diploma of Financial Planning, (former CFP) and a Master of Applied Finance from Macquarie University.

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