The Millennial Model

Aleks Vickovich speaks to Australian delegates at the XY Planning Network conference in the US about the generational wealth transfer and whether servicing Millennials is worth the effort for advisers.

In 2014, prominent American financial advice industry commentator Michael Kitces teamed up with Alan Moore, a Montana-based independent advice firm principal, to launch the XY Planning Network (XYPN).

Its stated mission was to “bring financial planning to those who wish to work with advisers on a fee-only basis but do not have assets to invest”, singling out younger consumers in particular, who do not necessarily need to be placed in financial products, but require assistance with debt and cash flow management and increasing their own “human capital”.

The establishment of the new industry association reflected a new trend in an industry that still places a high premium on assets under management (AUM). Over the past two years it has grown considerably, hosting some of the industry’s most talked-about events and seeking to disrupt the percentage-based-fee orthodoxy in American financial advice, while proving that younger investors can be a lucrative and important client base for those building long-term businesses.

Considering flat fee models have become widespread – if not the predominant model – in Australia, it can be easy to view the US XYPN as behind the times, rather than as a global innovator. But it must be remembered that much of that movement in Australia was forced by government intervention in the form of a commissions ban.

The XYPN, by contrast, has been an organic – if still niche – professional movement, and has been quick to embrace the latest fintech emerging from America’s entrepreneurial class, harnessing innovation to service the next generation of clients.

In order to see what all the fuss was about, some forward-thinking Australian advisers decided to form a delegation and head stateside. I sat down with them in the lobby bar of the marina-side Sheraton in sunny San Diego to draw out their reflections on the conference and the relevance for Australian advisers.


Moderator: Aleks Vickovich, managing editor, ifa

Participants:

Steve Crawford, CEO, Experience Wealth; Founder, Your Spending Coach (SC)

Adele Martin, managing director, Experience Wealth; Winner, ifa Excellence Award 2016 (AM)

Chris Williams, director and senior wealth adviser, Experience Wealth (CW)

Mark Nagle, executive director, Treysta Financial Life Management; Director, FinLife FinTech (MN)

Fraser Jack, partner and chief marketing officer, myonlineadvisers.com.au (FJ)


AV: You have all obviously made a significant investment to be here, with the cost of travel and time out from your business. What was the key motivation behind attending the XYPN symposium?

AM: There were a few key motivations for me. Firstly, I wanted to see how they are using technology over here, what they are doing in their practices and whether there is anything relevant we can bring back. Or, alternatively whether there are functions that technology providers over here are performing that we can put pressure on our technology providers back home to incorporate. I was also interested in investigating the sales and marketing processes of the top firms.

MN: I’ve known Michael Kitces for many years and have been keeping an eye on his various projects. I wanted to understand a little more about the XYPN business model. Secondly, I wanted to understand their specific approach to fee-for-service. And finally, we are undergoing a process in our business where we are repositioning from retirees to younger people to protect the long-term viability of our business, so there are a lot of relevant themes for us.

SC: One of our key business revenue streams is coaching, and at the moment that is focused on budgeting and cash flow management coaching to other advisers. But we have always seen that as a ticket to the game and the end game has been about our students converting millennials into long-term, fee-paying financial advice clients. So on the B2B side, we are interested in what membership of the XYPN entails, the value members are getting and whether a similar model might be viable in Australia.

FJ: My two big motivations were, similarly to these guys, examining some of the emerging tech over here and the way it is being used by advisers. I’m also interested in unpacking the fee-only model and specifically how these advisers are marketing their business models and turning it into success.

CW: Very interested in discovering new ways of servicing clients and making them more ‘sticky’. But also just the whole concept of a conference that is dedicated to [generation] X and Y clients and advisers is very appealing. I think the fact that we’ve travelled all the way here shows we are fair dinkum about trying to find the best ways to service our clients.

AV: So there are definitely some congruent themes in what has brought you all here and, funnily enough, those themes are well represented on the agenda. While it might be a minority of the American industry, the fact that this event exists suggests that at least some advisers are taking the issue of servicing the next generation very seriously over here. Do you think this is also a priority for most Australian advisers?

AM: I think it is. For example, I’ve been in a large institutional dealer group before, where there is an aging client base and they realise they need to get younger clients in order to continue growing their business, but they don’t know how to go about it. Either they are not using the technology and tools that allow them to answer younger clients’ questions quickly, or they don’t know how to have a conversation about fees and about their value. This is an issue I see with many advisers back home, especially those that come from an insurance or commissions background.

SC: I think many advisers back home now know it’s important. When we started [Experience Wealth] we were one of the only firms in the country that was [generation] X-Y focused and now there are others. In addition, the institutions are producing more and more research on this topic. Xs and Ys are really a massive chunk of the Australian population now so people are realising they can’t ignore it. But I agree with Adele that they don’t know how to go about it and especially, they don’t know how to even service these clients. The old model of super, insurance and investment management doesn’t cut it.

FJ: It’s a hot topic to a certain extent but no-one is really teaching it or showing advisers how to do it right, like the XYPN is over here. They’re trying to bring their existing model to a new marketplace instead of analysing the market place and developing a new product or service to meet the needs of that new marketplace.

AV: Mark, I’m going to ask you a bit of a different question because, while I’m not saying these guys are wrong, I personally don’t hear ‘servicing the next generation of clients’ as a top priority back home. You’ve spent a lot of time with American advisers, such as attending the United Capital bootcamp and Implemented Portfolios study tours - while there may be a growing acknowledgment of the topic back home, do you think the discussion is more advanced here?

MN: I agree with you that it’s not particularly a high priority in Australia, not compared to other concerns like compliance. In fact, I think it’s largely lip service to be honest. Business owners have a duty, in my view, to build businesses that their younger advisers can evolve into and I’m just not seeing that at the moment. Those younger advisers are not going to have career progression into the existing model – because the existing model won’t exist. So I think it’s actually neglectful to not be thinking about how you evolve that model.

Am I seeing it as a bigger priority over here? Not really. I think they’re still largely focused on assets under management and retirees. But, having said that, we are not having events like this one back home, so they have the jump on us in that sense.

AV: Regardless of whether advisers are thinking about it, it seems we are agreed they should be thinking about it, so the ‘how’ then becomes more important. One of the striking things about this event is the very prominent role that fintech is playing – you see a very different type of exhibitor for example than you would see at a typical adviser conference back home, with most of them being technology startups. How crucial is technology in developing a millennial-friendly model?

AM: Absolutely crucial. You need to be able to service these clients cost-effectively and technology is going to necessarily be part of that. Looking at the technology available to us in Australia it just doesn’t have the functionality to assist with this kind of service. Xplan pretty much has a monopoly and it just has not kept pace with the need to service younger clients. Efficiency is just not a focus of the typical association and dealer group conferences and PD days.

CW: The clients we deal with want answers straight away, they don’t want to wait a week and a half and jump through the hoops of our financial planning software and compliance requirements in order to have advice provided to them. And there simply isn’t the technological infrastructure back home to provide that.

AM:…especially when it comes to front-end client engagement. That is what a lot of the tech providers over here are focusing on – tools that facilitate and help the adviser-client conversation. Our tools by contrast are all focused on retirement and ‘how long will my money last?’

SC: The way millennials interact with the world is via mobile phone, we know that from research. The delivery of financial services needs to change to factor those sorts of things in, partly because of the efficiency benefits for the adviser that we just discussed, but more importantly to drive client engagement and satisfaction. It needs to be built from the bottom up with a focus on consumer preferences first.

AV: So why aren’t our technology providers using that approach? Is it simply a matter of scale and the fact that the market size of advisers demanding better engagement tools or mobile functionality is still too small to offset the costs of product development?

MN: I think there’s a fundamental difference between the two landscapes [of the US and Australian advice industries]. Most Australian advisers buy their technology from the licensee and the licensee’s top priority is compliance. So the people who are generally in charge of our software usage actually consider client engagement a long way down the list of priorities. If you want to create a great business, you need great software, which means that you will need to get it from somewhere other than your licensee. That shift in purchaser behaviour is necessary for things to change.

AV: Fraser, would you like to respond as the token licensee in attendance?

FJ: I don’t think you should have to choose between compliance and client engagement. At the end of the day, both need to occur and we can build tools that cater to both needs for advisers. As a smaller, more innovative licensee, we do focus more on technology than some of the larger, older groups and we do try to provide our advisers with the best of breed, which is part of the motivation for being here.

SC: I think, partly, our use of technology is very different too. American advisers here seem to be shopping for the best tech provider for each niche issue or need they have and then sticky-taping the various tools together. Most Australian advisers are happy to just use whichever one, single piece of software their licensee gives them and then complain when it doesn’t work the way they’d like. We have taken steps to modify our use of our software provider as well as we can, which takes effort, but many others don’t do this. When they are confronted with a new technological innovation, often the first question from an Aussie adviser is “does this fit seamlessly into X financial planning software?” We’d love to all use just one single tool, but it doesn’t exist.

AM: Yes, but having said that, many of our software providers are not opening themselves up so that other tools can easily be integrated like they seem to be here.

AV: Sure, but to play devil’s advocate, a software provider back home might say their consumers are not demanding that they do this…

MN: Well again, their consumers are licensees generally. They’re not going to do anything that isn’t in the interests of licensees. Even if the adviser is enlightened and wants the things we’re talking about, it is either too expensive or the licensee blocks it.

AV: While it is true that many, maybe most Australian advisers don’t even control their own destiny on this sort of key decision – and that their interests and those of their dealer often don’t align – do you think there might also be a cultural issue at play? Do you think those advisers that are free to make their own technology decisions are hesitant to experiment with new innovations?

SC: I think it is definitely a factor. If you look at most of the attendees here at XYPN, a lot of them are ‘solopreneurs’; they are young, hungry and massively focused on building new, long-term businesses. Most young, Australian advisers do long apprenticeships inside established businesses and there is not as much of a cultural focus on entrepreneurship, so I think they don’t as readily challenge the systems and the status quo that they are trained on. Here, this is just what they do.

MN:…it’s cultural.

AV: I want to move on to the other key topic of this event, which is remuneration models. XYPN has a very specific flat fee monthly retainer model that it recommends to its members, and that model differs greatly from the dominant American asset-based or percentage-based fee. Do the two discussions – servicing millennials and how you charge your clients – need to go hand in hand, or are they separate issues?

SC: They absolutely need to go together. Millennials, technically people aged 22 to 37, generally don’t like the idea of paying a hidden fee, but they will happily pay a clear, transparent, ongoing fee if they see the value. Their whole lifestyle is based on that system; this is the Netflix generation. They want to see various packages and be able to move seamlessly between them. They despise lock-in contracts and things like that; it’s a very different generation in terms of buyer behaviour.

AV: Having said that, a lot of advisers who are focused on younger clients say insurance really needs to be part of the discussion. So wouldn’t it make sense to have insurance commissions as part of your model if you are servicing millennials?

MN: Well maybe in the short-term, but there is political risk around that. Anyone building a long-term, future-focused business based on fees derived from product is heading in the wrong direction in my opinion. Everything you charge for has to be advice related; the old model is just not sustainable. You need to demonstrate value so that you can charge accordingly.

FJ: I think there is a role for insurance commissions, but they will likely be level commissions not high upfronts, and will be there to recover business costs and help clients through claims and so on. But younger consumers are switched on, they want disclosure, they grew up with the GFC and distrust financial institutions, so I think a lot of advisers servicing millennials have realised they have to operate uber-ethically when dealing with this market.

SC: I think we are well ahead of a lot of American advisers here at the conference when it comes to this fee discussion. And I think we were forced to have the discussion when investment commissions were banned and now we are being forced to have it again with the risk commission debate. I like that they are having it voluntarily but at the same time their businesses are still so focused on AUM. We came here thinking that we were going to learn so much from them, but it may be that ultimately they learn a lot from us.

MN: Both countries are facing the same key challenges though, which is “how can we achieve scale within our businesses and service more people on a fee that is not hidden within the product?” Until we can reduce our prices and service more clients it will be hard for fee only businesses to thrive.

AM: I agree, and we need to think about scale in different ways, like for example providing advice to numerous clients at once; like a group personal training session. There just might be a way of providing advice one-to-many in the future.

SC: ASIC will obviously need to play a role in this…

AV: …In that providing personal advice to more than one person at a time doesn’t really fit into the current regulatory framework?

SC: Exactly. But I think the whole ‘robo’ discussion has forced ASIC to look a little differently at what consumers might want and that that might include DIY or group options.
At the end of the day, regulators, licensees etc. will all deal with whatever consumers indicate is their strong preference. We need to push for change and highlighting the benefits to these first adopter consumers will be key, and that’s one of the takeouts from this experience.

AV: Are you all more positive about your businesses and the landscape back home than you were before this, or less?

AM: Definitely more positive. Without sounding arrogant, I think we have discovered we are ahead of the game a little bit and are really trying to build client-centric businesses.

MN: It’s interesting because we have more advanced advice models with lacking technology, and they have more advanced technology with old school advice models.

FJ: This experience has also highlighted that our compliance regime is a lot heavier than theirs and our advisers face a lot of burdens that American advisers don’t.

AV: Well, I tried to give us an opportunity to end on a positive note, but in true ifa fashion we have ended on ‘the regulators are to blame’. Thank you all for your time and I look forward to hearing how you have implemented some of these learnings into your respective businesses.

 

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