Total Disruption or Cyclical Change?

Total Disruption or Cyclical Change?

Long Read - Financial Planning Distribution 2030 considerations.

Australian Financial Planning is a disrupted market.

Is the current disruption here to stay or does it mark the end of the latest cycle and possible end to the industry’s first major cycle in Australia?

We take a look into the past cycles to consider the future.

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Accelerated Change in the Financial Planning industry

The pace of change has accelerated significantly over the past few years’ due to the findings of the Royal Commission, Grandfathering and back end implementation of FOFA, ala new educational standards. The two key impacts from these events are banks and institutions leaving the advice industry by cancelling AFSL’s, and Advisers leaving the industry on mass. We view these events as end of cycle indicators, and likely the end of the first major cycle.

Many of these afore mentioned banks and institutions left their decisions late thus increasing the rate of change, end of cycle behaviour that puts a full stop on this cycle. This late cycle race for the door simply reflected a desire to milk as much profit as possible out of the broken distribution business model before it gets shut down. Milking every last cent out of a dying business division or model is good business not ignorance. We’ve all known this was coming since PS146 (now RG146) was introduced 20 years ago.

Making their decisions late cycle as a group (MLC pending) just added to the disruption and increased the rate of change in the market. The market is now rolling over and we have quickly entered a new cycle with green-shoots appearing so abundantly they’re too many to list. These green-shoots are appearing in private equity consistent with the entrepreneurial early stages of a new cycle, plus new overseas entrants well positioned and capitalised to plug into this next cycle.

Reflecting briefly on the past three cycles (possibly creating the first major cycle) we can learn from the past to envisage what the future may hold. Since the late 1990’s the market has witnessed private equity and new corporate divisions run in tandem as green-shoots in the early stages of cycles, innovation and quick growth being the themes. The cycle then develops mid-term into survival of the fittest with some new businesses flourishing while others flounder, often due poor execution not good ideas.

Late cycle many of the new businesses hit growth ceilings (capacity + capital) and the bigger fish move in to swallow up their prey, focussing on the more successful prosperous operations that add value to existing portfolios. Late market behaviour is typical identified by a consolidation period.

Cyclical Behaviour

As an example, one of the greats of the industry successfully navigated and repeated his efforts in successive market cycles. Tony Fenning purchased a small platform business called “Asgard” in the early 1990’s whilst working for Sealcorp Holdings a mid-tier Licensee. The purchase represented innovation & growth for Sealcorp to obtain a competitive market advantage, and that it delivered. The business was subsequently acquired in 1997 by St George Bank, a bigger fish, eventually swallowed up by an even bigger fish Westpac. Here’s a flashback for those interested – Sealcorp

Tony then moved on to establish Tynan Mackenzie in the 2000’s a private equity advice business that attracted many of the industry’s top Financial Planners – they innovated, grew quickly and with a forward sale agreement were swallowed up by AXA Financial Planning and became stable mates with IPAC, Subsequently all were engulfed by AMP. Smaller innovative fast growing fish swallowed by Big Fish!

Not finished yet, Tony repeated the behaviour post the end of the early 2000’s cycle triggered by the GFC in 2008, establishing Shadforth Financial Group (SFG). Another private equity advice business similar to Tynan Mackenzie in many ways, “sprinkled” with innovation, high quality Advisers and Tony’s ability to stay ahead of the market. SFG were subsequently sold to IOOF with an on-market takeover in 2014. Thankfully for Tony’s competitors he hung up his boots after the sale. – IOOF acquisition

AFR quote 2014 “The merger between the two financial services firms comes amid a frenzied period of merger and acquisitions activity both in Australia and globally, as companies take advantage of low borrowing rates and the relatively benign economic environment.”

Thus the cycle in simple terms, Green-Shoots - Innovation - Growth - Consolidation.

The next Cylce for Financial planning

Reflecting on past cycles and theses examples, we can get the crystal ball out and start looking at what’s ahead. But we’re at a different starting point this time around, and this is where the current late market cycle behaviour is SO different in SO many ways. Leading us to a conclusion the past three cycles created the major first major cycle for the industry. And we may have just reached the end.

For a start, instead of a late cycle flourish of take-overs and big fish absorbing distribution that we’ve witnessed in the past, this time around the big fish are divesting or out housing distribution channels. The new norm does not resemble past market cycles with consolidation marking the end. Secondly there is no anticipation these bigger fish will have any appetite during this next cycle to acquire and absorb distribution as we’ve seen in the past.

Apparently focussed on the new norm emerging of service line engagement, research and product expertise, support in essence to Advice businesses replacing the Licensing model. Many may see a resemblance to past Dealer Group distribution but when we remove product lines replaced by service, the old model is unlikely to return.

I’ve written a corresponding article on The Changing role of Licensee Practice Managers, how this role has evolved and changed, and what Advisers should reasonably expect for the Licensee dollar.

The question for many market players now appears how to remain relevant to Financial Planners and maintain engagement through relationships shaped by a different set of variables.

A recent article Placing bets on the future of advice goes someway in describing the extent of the current disruption to industry business models, and the questions the industry is grappling with.

The advice distribution model has changed forever and size does not appear any great advantage in this evolving landscape, save resource availability.

The market is in flux, highlighted by the most significant disruption of the Financial Planning industry in history. From an employment market perspective this huge disruption has displaced a huge number of Advisers from the salaried channels.

Although as a juvenile industry we’ve seen these changes coming for many years, vertical integration and “client best interests duty” were never good bed fellows.

Growing Pains

As an emerging industry, Financial Planning as whole needed to get attention, gain traction and develop some momentum to survive. So three steps forward one step back. For a new industry established in the main to support the introduction of the SGC, this should not be viewed as peculiar. Three steps forward one back, does this equal 3 individual cycles creating the first major cycle?

The industry is grounded in entrepreneurial roots and minds. The current green-shoots represent a combination of old school minds and fresh, innovative and energised new entrants.

But there are many questions to be answered and the past may not be the most reliable educator of what the future shape of distribution in the Australian Financial Planning market will emerge.

For small and mid-level market participants and private equity plays there may be no end of cycle consolidation this time around. There is sure to be consolidation but likely not on the scale seen in the first major cycle just ended. So is it IPO here we come?

Disruption of the market yes, but taken in the context of the age of the industry, significant re-shaping required by regulators, long term professionalism, and technology advancements, our view is end of first major cycle. The majority of indicators overwhelmingly reflect cyclical market behaviour at its best. Albeit a few changes to the themes in the last mini cycle, our view is this abnormality marks the end of the first major cycle for the Financial Planning industry in Australia.

Looking to the future

Our summary is the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry sector is an exclamation mark to end this first major cycle. The curtain is now opening on the first mini cycle to start the second major cycle of the Financial Planning industry. The industry desperately requires public acceptance as a profession, maturing from a juvenile into an adolescent industry with a view to the fully matured market participant it will eventually become.

This article seeks only to examine what part disruption is playing in the overall development of the industry, and how cycles inter-play in this context.

As we explore influencing factors towards a market model of Financial Planning Distribution 2030, several considerations need a more detailed contemplation.

Some of these considerations and future articles are:

  • Future battlegrounds for the industry – regulation & structural change.
  • What can we learn from other industries?
  • Can we learn from overseas?
  • How big a part will technology play?
  • The changing dynamic for advice delivery?
  • Resource availability & who is training the next generation of Advisers.
  • The changing role of Licensee Practice Managers.
  • The tail wagging the dog – adviser led or innovation led.
  • The conduit for Product – APL’s or Service

We hope this has provided some food for thought.

 

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