First State Investments' Rob Adams takes a look at how Australia adapted to changes within the industry and explains what his UK counterparts can learn from his country's experience
What we all know is that the change that is going to occur here in the UK in the next two years to the way IFAs work will exceed the change you have seen over the last 20 years.
And is Australia relevant to this change? Well, the simple answer is yes, it is. It is relevant.
We have a market in Australia that has over the last 10 years changed dramatically. It has gone through radical natural evolution. It hasn't taken regulators to make decisions and tell advisers how to run their business. It has been change driven largely from within combined with a range of circumstances that has led to substantial change in financial services intermediation in the Australian marketplace. Today we have pretty much a depolarised marketplace.
Our market was depolarised in 1994 and 1995. The market in Australia is advice driven. Advice is valued and advice is a standalone product. Advice is a product that you can put a price tag on.
The Australian marketplace is generally pretty well technologically advanced. There are a couple of reasons for that. Australians generally are early adapters of new technology but importantly to our industry, the industry of financial services intermediation and product provision, is pretty young, not much more than 20 years old.
Therefore we didn't have the legacy issues that perhaps exist in the UK to try to reconstruct different product systems and structures and regulatory environments into a single platform.
Platform in an Australian context is very different to the sorts of platforms that are talked about here. The fund supermarkets we see and the Cofunds of the world existed in Australia in the late 1980s.
The platforms we have today are actually not products, they are business models and advisers wrap their business around those platforms.
So the Australian example is relevant, we believe. Let's have a look at financial services in Australia circa 1990. What was the old business model like? What did the industry look like?
The industry in Australia in the early 1990s was product driven and sexy things were sold.
It was a sales-driven environment. Volume was important although it wasn't necessarily recognised by those that were focused on volume. It was a transaction-driven society with high front-end commissions and very little focus on trail commissions.
People within the industry didn't necessarily understand the value of recurrent income and how that builds up a business base that can be passed on.
With such low barriers to entry ' anybody could literally call themselves a financial adviser. You could put a sign up outside your office and you could start giving advice to anybody. The regulator couldn't regulate that and there was a low level of internal and external compliance which resulted.
As a result of this there was a general feeling of mistrust from consumers about what the role of a financial planner was and what they were doing in their relationship to the planner.
It was a bit of a mess and that was recognised by the people that ran it.
A significant tied element existed in the marketplace. Does this sound familiar?
There were three main instigators of change.
One was compulsory superannuation. In 1991 the Australian Federal Government said that every single Australian and every single employer had to put a set amount of money away to individual pensions and that set amount would increase over the next decade and that's exactly what has happened.
In a sense the industry was underwritten, all of a sudden choice on product became important and it became relevant to every single Australian investor. But also it provided the underwriting for the product providers as well.
At the same time there was a rash of privatisations and demutualisations that led, over a three-year period, to 45% of Australians having a direct ownership in direct equity of some description but probably not understanding it and needing to seek advice. The need for advice became pretty apparent.
Advisers became focused and they began looking at how to educate their clients to service their needs. Advisers finally began to focus on building real businesses. Manufacturers began to focus on tying up distribution and they figured early on that if they owned the distribution they could assure themselves of distribution in the future.
However, when it failed they realised that that didn't work.
A good example was a company called Mercantile Mutual ' now know as ING in Australia.
ING bought the three largest dealer group networks in a two year timeframe in 1994 and 1995.
Twelve months after each of those acquisitions they looked at the support into their products from each of those acquired businesses and in every single case the intermediaries' support for that product had fallen.
So ING thought about how they were going to make these acquisitions work.
They learnt that the platform was the key. Provide a platform of open architecture not just for mutual funds but for direct equities. They have run that platform ever since through those three dealer group networks and they are now seeing value.
Let us draw that down to what we call a dealer group model, the name for networks in Australia. The same sort of principle applies it is just that the picture is a bit simpler.
At the heart of this is what is simply referred to as a dealer group platform. It has open architecture, but not just for mutual funds. It has all the tax tools, all the planning tools that you need and, importantly, it has a theme base.
The important thing about these platforms is that they are tailored to meet the needs of the individual dealer group. They are scaleable, which is crucial. They are technology rich as well. These all combine to give a financial planner or adviser a more saleable asset at the end of the day.
Financial planning is the phrase that describes the activities of people in IFA roles back in Oz.
They produce full financial plans: 30-page risk needs analyses that are updated on a quarterly basis. They sell advice not products and the advice can stand in isolation.
The focus is on asset allocation and tax planning investment not just product sales. It is a broader picture. Transparency of fees or commissions, it doesn't matter, is the key.
Fees versus commission. Which one is better? How do you move from one to the other? Looking at Australia's experience it doesn't matter. You should provide both if that is what your clients want. Give your clients choice.
Disclosure is the key and offering an easy transition period. From a government perspective, to force people into fees is entirely wrong. It should be up to the business manager and their client and it depends on the strength of the relationship and nothing else.
At the end of the day it is pretty clear that the Australian advisers raised the bar.
To become an adviser in Australia now is not just a matter of hanging a shackle outside your door.
There is a minimum qualification period, specific course periods that are two years long. There are now eight degree courses in Australian universities in financial planning. It is a different environment. In 10 years, in fact probably less than that, I'd say in a five-year timeframe the industry has quickly become a profession not an industry.
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