Horizontal Integration
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Horizontal Integration


A panel of key financial services executives discusses the opportunities in multi-service firms at the SMSF Strategy Day held recently in Sydney

Tony Greco -

With the growth [in SMSFs] come opportunities for both planners and accountants – in particular for accountants, with the regulatory change that is going to be thrust upon them.

If I can take a quote from [Charles] Darwin – “it’s not the strongest of the species that survives nor the most intelligent, it is the one that is the most adaptable to change”.

I think firms that adapt will be the winners, going forward.

[There are] accountants who practise in the financial planning space, and financial planners who finally have… come to the realisation that they provide tax advice as part of providing financial planning, so you do have a merging of those two professions.

[We are going to discuss] the concept of a blended practice, in particular challenges and opportunities for building the advice side of the business, untapped potential [and] the merging of the planning and the accounting worlds.

David Lane -

Why have accountants moved into financial advice, and currently why are they doing it? From a historical perspective, [there have been] small to medium sized accounting practices [that] have built up a business over a period of time.

I’m sure this has happened to many accountants. Typically, their clients began asking them for [financial advice]; at some point… some of these forward-looking accounting firms think, ‘You know what? This is probably a good business to be in. It’s easier for me too, it makes my clients more [sticky] and it also enhances the revenue mix of my business’.

The more diversified the business the better off it is for selling, [especially] when you have something like financial advice [offerings]. So you’re using the same clients and providing a diversified revenue base.

It has been an evolving discussion, but I think any way you look at it, it makes a tonne of sense to bring together the accounting side of the business and the financial advice side of the business.

Chris Appleyard -

I do believe there is mass consolidation to come [with] financial services regimes, and accounting is certainly the new frontier.

The practical applications of working through multi-discipline practice and evolving your firm into something that is cross-monetised and provides you with the ability to extrapolate an enormous amount of fee out of your existing client base is something that I have found most interesting – and certainly your biggest opportunity.

[Approximately] 90 per cent of financial planning revenue is generated from the accountancy fee base. Imagine the effect [of] that overall on your bottom line, and [on] the reduction in marketing. It is absolute proof that the best place to cultivate is, of course, your own backyard because you already have the engagement.

From an accountancy perspective, the absolute facts are that you hold the greatest and most trusted relationship. Unfortunately, the financial advisers, the credit suppliers and the real estate agents come considerably further down the list.

There is this opportunity to capitalise, it is profound and we encourage it – ASIC encourages it, believe it or not. There’s a lot of fear-mongering going on at the moment [that] this is a difficult thing to do, that you shouldn’t touch other areas of financial advice or other specialist vocations in the advice arena.

It’s not true. It is about how you approach it, how you disclose and about how you engineer your practices, ultimately to ensure one thing: better service for your client and consumer protection. It can be done and my belief is that it should be done.

Matthew Kidd -

It all comes down to potential. Going back to [the year] 2000… I started a financial planning division within a chartered accountancy firm. They had a total of about $2 million under management and in the space of six years, we had $135 million under management and that was all from the [existing] client base.

So you’re sitting on an absolute [nest of golden eggs]; it’s just knowing how to farm them. Accountants traditionally are very conservative by nature and will take [their] time to understand financial planning, whereas financial planners tend to be eager to go into accounting firms and try and extract the wealth out of those clients.

I think you need to have that balance [and] there’s different ways you can do it from practice development. I think one of the best ways is by way of joint venture – it’s actually a really good experience – to help develop the financial planning business within your current [accountancy] firm.

Unfortunately, that does take time – normally it takes [at least] six months. [But] we’ve done several joint ventures with some chartered accountancy firms and we’ve got some great results now.

Legislation is now really pushing us together. We will never be the same beast, but we’re certainly coming closer as a profession and we must embrace it. The true value is actually in your client base. You’d be absolutely astounded by what work can be developed just by looking inwards.

[Within] our accounting firm … we now have a full suite of services so our clients will never need to go anywhere else. From their tax returns to their super funds, residential property investment, their mortgage [etc], it’s all available in-house now.

The genesis … was originally an accounting firm. The opportunity is there, it’s just about exploring it, and [accountants] are the trusted advisers, whether rightly or wrongly.

Tony Greco -

[There’s] untapped potential amongst the majority of [accounting] firms who haven’t taken that next step. And there are a multitude of choices – it comes down to personal preference and what you’re most comfortable with.

Accountants can go for a limited licence, although only 19 firms have actually [taken that option]. There [are some accountants] sitting on the sidelines and waiting for other options. There’s also the authorised representative approach or you’ve got the full AFSL and then you’ve got hybrids of some of those alternatives.

It shouldn’t be feared; it should be about harnessing some of that potential. That’s really what it’s about.

Audience question -

The rise of self-managed superannuation is often seen as the enabler for these sorts of blended practice opportunities. How much of a role does it play in your respective businesses in terms of workload?

David Lane -

I think [self-managed funds are an] important strategy, but I think it’s a strategy that needs to be used by the right people. Providing advice to someone in a self-managed fund is in many ways not that different to providing advice to someone in a retail fund.

There are certain people [for whom] self-managed funds really make sense. I personally don’t necessarily subscribe to the view that because the global financial crisis came all of a sudden, people should be moving to SMSFs and they’ll manage their funds better.

The reality is that many of these managed funds are run by professionals who [invest] as their day job. I do find it hard to believe that there are a tonne of investors out there who are going to go out and beat the professionals on a regular basis.

That said, for the right people, self-managed funds can make a lot of sense. I really think it is a matter of taking the right advice as to whether it makes sense for you to be in an SMSF or whether it make sense for you to be in some kind of other superannuation vehicle.

Chris Appleyard -

[SMSFs have impacted our firm] in quite an important way. And simply put, the clients are asking [SMSF-related] questions. In my view, you need to be able to facilitate a good part of those questions and provide those strategies because those clients will [otherwise] need to go elsewhere to seek those answers.

[Having a self-managed fund] may not be the most appropriate strategy. It [might be that] you must take their fund and look to a bank or industry product to incubate them for a while. It may not suit – full stop. But if you can’t offer that service, clients will go somewhere else because they do need to seek the answers to those questions for their own peace of mind, and people are becoming more astute.

[SMSFs have] impacted us because clients have the questions and I believe you need to have someone appropriately qualified to help you answer them.

Tony Greco -

There is interest from a new class of SMSF trustees… with the [limited recourse] borrowing restriction being lifted. As professionals, we have to explain the risk of putting a geared property into an SMSF and ask whether it is appropriate.

There are lots of risks with gearing, diversification becomes an issue and you need to consider how many years out from retirement you are. In saying that, it’s also important to remember property is a good asset class. It has certainly bought a new class of trustees to the fore who think that is a reasonable strategy.

Chris Appleyard -

[My view on property is] if you do not start with a blank sheet of paper, you have failed. You are not an adviser, you are selling a product. If you do not structure your process in that way, then you have not met the client’s needs; you’ve started with a pre-determined outcome and you’ve sold the product.

That’s what’s wrong with our industry and financial services. It’s certainly what’s wrong with property in my opinion. It’s fundamentally flawed because you walk into a real estate agency or a property marketeer and you have to get what’s in their window – it’s rubbish.
What the client needs and what their capacity [is should be where you begin.] You start with a blank sheet of paper, determine their needs, qualify and quantify the process, find out what they can afford and why the need to afford and if it suits them fundamentally.
Then you engineer something that suits their needs and addresses them and that’s how you get a good outcome. And if you manage that process and you manage that well, which takes a lot of time and investment, then you don’t have a conflict.

My comment in relation to the property spruikers out there is a very direct one: don’t talk about SMSFs if you’re starting with the property in mind. It’s not your field, stay out of it. It may be suitable – that’s all well and good – but how do you know? Start with the clients’ needs first.

Audience question -

The concept of horizontal integration is nothing new… it hasn’t worked in some other industries. Why do you think it will work just because it has an SMSF focus?

Matthew Kidd -

It has been tried many times. I think it’s just the way it has been approached. It [can] fail because of trust – I think there’s a massive gap in the trust between an accounting firm and financial adviser.

With a joint venture, it’s a six-month window before anything starts to happen and a lot of advisers lose patience well and truly before six months and they walk out the door. I think you’ve got to get over that hurdle – if you are going to commit to building a financial planning practice within an accounting firm, whichever way you do it… you have to [stick] to it.

At the end of the day, you’re trying to drive results for your clients. You don’t want them going somewhere else… you want to control the process because if you’re outsourcing any part of the process then you’ve lost control, you don’t know what advice that third party is giving that client.

I think, ultimately, your client will thank you for being in control of that.

Chris Appleyard -

I think the SMSF being the epitome is an enabler across [a range of] industries [and is] actually driving us together. So when you look at the practical application of one that may embark on a property strategy with an SMSF, you’ve got financial advice, you’ve got lending, you’ve got cash product, you’ve got insurances and you’ve got property.

That very product has caused this horizontal integration, so there is this consolidation by default through property use in something like an SMSF. Historically, the gap between financial advice and accountants has been quite profound. It is a trust [issue] and I believe… [it] is a skill set issue.

The skillset of financial planning has been relatively poor for a number of years, but it is improving drastically and rapidly. The new breed of financial advisers that are coming through are smart, sharp, and experienced. And accountants are slowly starting to respect that now.

Accountants are starting to merge and work together as well, but lawyers are a whole other concept.

David Lane -

If you put yourself in the client’s position, what every client will tell you is that what they really want [is] to give their set of financials to one person and have them do everything. They just want to say, ‘Here’s all my stuff: you now know everything about me, I want you to do everything.’

The challenge is whether a firm can be mature enough to be a truly diversified wealth management firm and see those clients as clients of the firm and treat them as such. I would argue that there are plenty of firms out there that have historically done a very, very good job of that.

It does strike me with the removal of the accountants’ exemption… this is an opportunity to either fully take advantage of it, to take advantage of some of it or to get out of it completely. Everyone is going to have to make some form of a decision. My view of it is if you know this is what clients want, it’s a very smart avenue to go down.

Audience question -

All three of your businesses hold your own AFSL and are quite clearly focused on growth in terms of the number of firms that are aligned to that licence. How much is that holding of the licence… the backbone of being able to expand into these various sectors?

Chris Appleyard -

It’s control. Having an AFSL is the epitome of control, and if you don’t have it then you can’t dictate [that control]. So in many ways, an AFSL is the backbone.

Is an AFSL required for an accountancy practice? Perhaps. [You need to] know your firm and know why you’re doing it and what the purpose of it is.

An AFSL gives you the control, it gives you the flexibility and, certainly, just the sense of ownership in the direction [you take] – what kind of advice, how it looks and feels and smells and how you look to charge and so on and so forth.

So I think it’s vitally important.

As far as whether it’s economically viable or not, ask any dealer group principal – [they will say] not really. I would rather not have to do it, but it’s an important by-product of wanting to develop something a little different and deliver ultimately [a] multi-discipline practice.

Matthew Kidd -

For us, having an AFSL is an opportunity to attract advisers who have similar investment [philosophies] as us.

For us, it’s not [about the] fees. We have flat fees that we charge our advisers; there’s a margin there to run the business. What we have got is the one-stop shop model. So our advisers use… all our services and we can help to offset their fees that [they actually pay us].

We also help them build their business. We work very, very closely to help them build their practices. Because we are… actually practising advisers and we work to help our advisers grow their businesses. To us that’s where our fundamentals are and our philosophy and that’s why we’re attracting a lot of new advisers.

David Lane -

What I would say is an AFSL for most people and for most businesses… doesn’t make sense. I think for most small businesses, taking out an AFSL is a giant liability. You go and sell your business and nobody wants to buy it, it is effectively a series of future claims, and you will hold to [that same partnership] until those claims run off.

The reason for having an AFSL is whether you want to have scale, in my opinion. And [Count is ] fortunate enough to have scale – we have 300 member firms and so we can provide a whole bunch of services and it does provide a whole bunch of revenue, but it also allows us to roll out a whole bunch of services.

We use those revenues to help out our member firms grow.

We can help those firms with practice development, we can help them with research. We can help them because we can use scale to get professional indemnity insurance. There’s just a whole bunch of things that we can do with the AFSL and use the AFSL for.
So ultimately, I think it’s a scale game. And I think if you’re a small accounting firm you would question whether it makes sense to have your own AFSL.

This article first appeared in the February 2014 issue of ifa magazine

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