THE BIGGEST CHALLENGES FACED BY A BUSINESS WANTING TO TRANSITION TO A LIFESTYLE FINANCIAL PLANNING/INTEGRATED WEALTH PLANNING BUSINESS
To some degree most financial advisors are trapped in the past and simply continue to do what worked best previously. Remaining relevant and re-inventing what they do and how they do it going forward is not something that generally enjoys a lot of attention. Every business has an idea of where they think they add value to client relationships and they may be right to an extent, but have never really assessed the risks associated with what they perceive their value adds or differentiators to be, or how they could be doing this differently or more effectively.
One of the key challenges has been Life Offices and their remuneration models. Generally, this equals new business at all costs, as everything from remuneration to service models are based on upfront commissions, or new assets under advice (management) AUM. From the regional manager all the way down to the consultant and broker everything, including “quality” is measured in new business and the associated upfront commissions and fees. This is not conducive to “good behaviour” and good habits.
The question of who owns the client is generally somewhat skewed in favour of the Life Offices/Investment Platforms. In such an environment it is difficult for businesses to transition as many barriers, from long standing relationships to future service on existing business stand in the way. Sadly, it has and will take legislation to force the changes that are necessary. To compound issues, Life Offices also fight to retain as much of the “old order” as possible, as their new business inflows will be impacted by advisors who will be forced out of business by new legislation and changes in traditional remuneration models, which is largely product and upfront commission driven.
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Financial Planning practices are also their own biggest enemy in making the transition, because of the way they have always positioned their “value proposition” with clients. From a Wealth Management point of view, this has generally centred around picking and packaging the best Unit Trust funds either directly or via a third party who packages these, who behind the scenes “manages the managers” in some kind of white labelled or model portfolio arrangement, which often make the portfolio look like one that the advisor has structured.
Probably one of the biggest flaws existing in the Wealth Management space today from a planning point of view, is the generally accepted financial planning process, which in most cases has a starting point underpinned by risk profiling. In my view, risk profiling was invented to protect both advisor and product provider rather than the client/investor. For the product provider, it is about volumes and managing to the fund mandates and that does not take unique client needs into consideration. They actually don’t have the client’s genuine interest at heart, as the client are purely a customer introduced by a financial advisor. This is further exacerbated by the product provider who believes that they “own” the client. Quality awards and recognition of advisors is based on volumes and assets under management and not the quality of the advice or work done by the advisor and this needs to change in order to change behaviour.
Potentially the risk lies largely in the hands of the advisor, who could be protected by having conducted a “risk profile” and having placed client funds into portfolios suited to a particular risk profile. How could a client possibly hold an advisor accountable for loss of capital as a result of drawing down more than is sustainable, because the returns were insufficient to maintain their needs if the advisor placed these funds into certain portfolios because the client never had an appetite for an appropriate risk. Clients would have a far better chance of meeting their obligations had they only received the correct coaching and guidance in terms of the investment risks they need to consider in order to meet their objectives.
By and large, in probably most financial planning practices in South Africa, the top priority is the client’s money and seldom the actual client. I say this simply because a client generally has a sum to invest and can only stomach so much risk based on a risk profile. The advisor’s role is seen as placing the funds into funds that suit a client’s risk profile and in the process,
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hopefully an appropriate product. Advisors are generally guilty of not probing deeper into what clients actually need to meet their objectives and thus are not always able to provide the best and most appropriate advice. Having said this, there are also many practices that do attempt to do the right thing, but are still missing the boat in terms of what amounts to the real value add from a client perspective. It is these real value adds that are not solely associated with investment that really cement client relationships and more importantly, build trust and understanding of what could be achieved with the correct counselling and guidance.
In many cases the blending of funds may work out, whether this is done in-house or via third party white labelled funds or model portfolios, but this still means that the main focus is on the money and not the client. True value is only unlocked when the focus is primarily client centric. The concern is whether or not financial planning practices actually have the know-how and capacity to be structuring portfolios on behalf of clients, given the modern-day situation where there are simply hundreds of Unit Trust funds to choose from out there. This is a full-time job in itself, thus leaving very little if any time to deal with the client and real financial planning issues.
My journey to a Lifestyle Financial Planning Practice:
In my years of experience before I made the transition to Lifestyle Financial Planning back in 1999, I visited many Unit Trust Companies on due diligence sorties and spent a great deal of time and money travelling to attend these talks so that I could “stay ahead of the game” from a “fund picking” point of view. What I did not realise at the time, was that this was valuable time that I no longer had to spend with my clients on issues that really mattered to them. Fortunately, I saw and recognised the “train coming clickety clack down the track”, so forced myself to start looking for alternatives or a different solution and approach to financial planning.
When regulation first poked its head out, and along with it the reality that advisors could be held accountable for their advice and resultant client outcomes, the answer to this in the Industry was to set up what then were known as “Wrap Funds”. This was a fund made up of different Unit Trust funds with a particular risk profile and managed and put together by so-called professionals. The problem was the large volume of switches that were made to try to justify the extra layer of fees and so-called value add. This became detrimental to the Unit Trust
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Industry, who quickly moved to set up “exit agreements” where “Wrap Funds” had to give extended notice if they wished to switch, thus reducing mobility and undermining the reasons why a switch may have been deemed necessary in the first place. This in my view destroyed a lot of investor value and thankfully “Wrap Funds” were subsequently banned.
“Wrap Funds” to an extent gave way to Specialist Model Portfolios and white labelled funds. While all this was happening there was still not a true focus on the client and their financial planning needs. Be that as it may, there are many successful practices out there that run their own portfolios and emphasis is placed on the value that they add by trying to generate superior returns via “fund picking”. To a large extent, risk profiling continues to play an important role, in which case the client and what they really need and require do not get the attention and subsequently, the appropriate advice and coaching that they deserve, to assist and empower them to make the necessary decisions in order to get the best out of their money and achieve their goals.
My concern around “Wrap Funds” was, how could I justify the fees I was earning as I was effectively no longer “managing the money”. Apart from that, new Unit Trusts were springing up like mushrooms and there just simply was no longer sufficient available time to do the proper due diligences required in order to structure and manage portfolios effectively. I had come to the realisation that Unit Trust managers were simply salesmen trying to sell their funds and were telling advisors what they wanted to hear, rather than what they needed to hear. This made a proper due diligence very difficult, if not impossible.
I was looking for a way to escape the realisation that I was not adequately qualified and simply did not have sufficient time and means to continue doing what I needed to do in order to survive and still add meaningful value to my clients. I knew I had to re-invent myself and do things differently. It was during this time and at such a due diligence at Brait Unit Trusts that I was first introduced to Lifestyle Financial Planning by pure chance. The concept made perfect sense and was like music to my ears. After visiting a number of Lifestyle Financial Planning practices in Australia, I became a Founder Strategic Partner of Ipac which became Acsis and later Old Mutual Wealth. Upon visiting Lifestyle Financial Planning businesses in Australia and interacting with the Principals, I realised that this was how I wanted to and needed to add
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value to the lives of my clients. I had to take a leap of faith into the unknown and because of the trust I had developed with my clients, when introduced to the concept of Lifestyle Financial Planning, they were prepared to take a leap of faith into unknown Multi-Managed Inflation Plus strategies, as the conversations we had started having with them made sense, even to the financially less informed. The key to this was simply that it became about them and not just about their money. What I soon discovered was that by doing things differently via different conversations I suddenly got a much larger chunk of “client wallet” than ever before. Not only this, but referrals began rolling in and the average Assets under Management per client increased dramatically.
The real challenges
There is essentially a “mindset” change that needs to take place and because the drivers of value have generally always been choosing and blending the right and best funds together into a portfolio and packaged into the right product, planners tend not to spend enough time with getting to know and connecting with their clients and their needs. A change of focus needs to take place, away from the client’s money, to the client themselves. It is simply a case of connecting with and looking after the client, where looking after the money can be outsourced to third parties, who are better equipped and more capable than most financial advisors in putting together effective portfolios that can reliably achieve client goals over time.
Financial Planning Advice Process
Planners need to face the reality that proper financial planning does not equal portfolio structuring and choosing the best funds, as there are plenty of professionals and entities who are better equipped and qualified to do this. Shifting focus from being the best fund picker in town will free up time so that the planner may focus their time far more on the client rather than on the money. This is such a simple transition, yet financial planning practices just don’t get it, thus struggle to make the transition away from fund picking to devoting their time to actual financial planning and indeed, the client. It is after all the client who pays the fees.
Most financial advisory practices do not have a solid advice process in place and as a result they do not get to the core of what financial planning is really about. As a first step in the
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transition, a proper advice process should be implemented. Companies such as Old Mutual Wealth support a robust tried and tested, successful advice process.
Planners are so often caught up in their businesses that they don’t have the time to work on their business. This requires a different approach as it requires a planner to look at their business from the outside from a very different perspective. By doing this, processes will become more streamlined and documented, thus more effective. This will create additional time for a planner to spend with clients, who after all are the heartbeat of the business. It is important to also allow time for family and self. A different approach and a more streamlined process allows for this balance more effectively.
Corporatising your business
Many planners are their businesses and thus are trapped in their businesses, as they are all things to all people. You simply do not have a business if you are guilty of this. For business longevity and overall effectiveness, it is important to corporatize your business. By this I mean, clients must identify with the business as a whole and the client relationship should ultimately be with the business and not the individual. Too many planners are “control freaks” and need to learn to delegate tasks and activities to other members of the team. Clients must become comfortable and confident with the business and the team as a whole. This is what builds a successful and robust business. The lack of these insights is a major barrier to transition.
Analyse your client base
A planner can only realistically deal with so many clients if proper financial planning is to be done. As part of the transition process, planners must identify who their real clients are and which clients they really want a relationship with. Many planners believe that the value of their business is based on the total number of clients and Assets under Advice, which is not always the case in reality. Making the transition and following a proper financial planning process will require more time per client, so it becomes important to identify and choose what kind of client you want to deal with. The fear of undergoing such an exercise is thus also a barrier to transitioning to a Lifestyle Financial Planning Practice. Planners need to be prepared to fire the clients that don’t generate revenue or take up so much time that it costs money to look after
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them and service them. Free up the future for this type of client, so that you may better spend this time on clients that do make you a profit. We can after all, choose who we really want to deal with and really don’t need to deal with everyone that perhaps wants to deal with us.
Conclusion
There are plenty of very successful transition stories where Practices have made the transition and have gone on to become leaders in the Industry. There is a good reason why so many of the Lifestyle Financial Planning Practices have produced the majority of South Africa’s Financial Planners of the Year. These are Practices that have made the transition and embraced all that Lifestyle Financial Planning is. These are the same Practices that embrace legislation and change, continually scouting the world for best Practice and implement changes to their businesses before being forced by legislation. These are the leading Planners in the South African Financial Planning Industry for good reason, however in order to get there, they were prepared to face and go through whatever pains and challenges were associated with making the transition and now reap the benefits thereof. It is important to set up a sustainable business that will still be around long after you are gone.
All it really takes is a simple “mindset” change.