Feature: Wraps in Australia Market report: Pensions
Wizards of Oz
How Australian planners have embraced the wrap concept
regulations - they chose to merge their businesses into larger firms. A number of institutions (banks and life insurance companies) found an increased appetite for acquiring planners (and their clients) as they aggressively sought to swell their own distribution capabilities. Another segment of planners recognised the changes as a great opportunity to better deliver on the needs of their clients and to grow the value of their own Financial Planning business. This group evolved their business models to deliver on this potential.
Double digit growth
Australia has long embraced the wrap platform concept
Jason Huddy of Macquarie looks at lessons for the UK from Australian planners’ long experience of wrap platforms
I
n the mid-1980s Australians embarked on a path of compulsory retirement savings – or superannuation as it’s known Down Under. It started in unionised sectors with a contribution of three percent of pre-tax salary and grew to the entire Australian workforce making compulsory contributions of nine per cent, and more if the individual chooses to do so. It has created an enviable pool of privately held retirement savings and spawned a sizeable Financial Planning market – for all of its various participants. The success of Australia’s superannuation policy has created an issue which is equally relevant in the UK as it is in Australia – the increasing need for consumers to have access to high quality Financial Planning advice. Compulsory savings or not, the demand for quality advice is driving changes that suggest a bright future for the Financial Planning industry in both countries. Obviously, the UK wealth management market does not directly mirror that of the market Down Under, but there are a number of themes common across both.
Market Dynamics
The Australian regulator (ASIC) was successful in introducing the Financial Services Reform Act legislation into
parliament in 2001. The legislation sought to address a decade of questions regarding fees versus commissions, product sales versus client-centric advice, the need for greater consumer protection and higher professional standards. Does this sound familiar? One outcome was the notable reduction in the number of financial advisers in Australia in the years that followed the legislation coming into force. It is estimated that adviser numbers fell from approximately 20,000 at the turn of the millennium to around 15,000 today as many decided to sell and exit the industry rather than to adapt their practices to new regulation. Many struggled with the changes (See Graph 1.) There was a significant drop in the supply of advice at a time when the number of consumers needing advice had grown appreciably alongside their retirement wealth. But it was great news for planners who remained in the business and an opportunity for those who wanted to join their ranks. Over the same period dramatic changes also occurred in the financial advisory landscape in Australia. Some planners who previously ran their own practice decided the extra cost and effort associated with the increased compliance burden was too great to maintain their own advice licence under the new
Key Points:
1
Wrap accounts notably dominate the Australian financial advice landscape, fuelled not just by the compulsory savings regime but also by their proven ability to support planners in helping better serve clients and grow business value. Logic suggests that only one wrap account need be used to best support a planning firm. The Australian experience to date has, in some planning segments, been a multi-platform approach. Today, better technology integration is increasingly important to planners if improved operational and service efficiencies are to be realised. Wrap consolidation is an interesting topic of discussion but don’t let ongoing discussion delay transition to a wrap that ‘fits’ your business.
2
Wrap accounts (and their various iterations) have been used by planners in Australia since the 1980s, so by the time this new regulation rippled through the planning market, wraps had already enjoyed some level of success. While they certainly weren’t used pervasively, it became evident that wraps had the ability to support planners and planning firms across all segments to improve service delivery and increase their business value. Today, 90 cents in every $1 directed by planners in Australia finds its way into investment markets via a wrap account (Graph 2: Percentage of Australian client money placed via platforms). This has fuelled a wrap market of approximately. A$400billion (£195 billion) in size which is growing at double digit rates each year. While the pros of using wraps have clearly outweighed the cons, it is interesting to reflect on why Aussie planners have taken to them so enthusiastically as a core component of their business model and to understand some of the lessons learned along the way.
Business Models
Wraps, in themselves, are not a business model. Their purpose is to support a business model and one single wrap typically does not fit all business models. There remains some confusion in Australia (and the UK) about what exactly a wrap is. This is largely a result of planners caring less about definitions and more about which wrap(s) ‘fit’ their business model. Over almost three decades of wrap growth in Australia,
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Feature: Wraps in Australia
alongside success has come competition and with competition has come innovation in platforms. In the face of what may seem to be common sense, planners, and planning firms in Australia actively use on average three platforms. This fact takes some explaining. There are a number of planning firms that use only one platform - mostly firms which have a business model based on servicing a distinct client segment which they believe is best served by a particular wrap. There are also firms with a business model predicated on serving a more diverse market segment. They will use different wraps for different ‘types’ of client (for example: high net worth clients, lower balance/lower ‘touch’ clients, corporate clients). This, together with firm merger and acquisition activity and planner success in ‘winning’ clients from other firms using different wraps, has contributed to some multiwrap business models. The momentum in Australia is most evident around planners seeking a more integrated wrap back office solution in order to drive further operational efficiency within their business model, give them greater capacity to serve more clients and grow greater value in their own business.
(Regrouped from unprompted responses) [n=249] 1. The hardesT ParT oF being a Financial Planner in ausTralia
0% Compliance/regulation Administration/red tape Perception & reputation of fin. planners/industry Dissatisfaction with nature of industry/job Nothing/I enjoy it People issues- clients Working conditions People issues- staffs/associates Technical aspects Others 2% 3% 6% 5% 4% 10% 9% 8% 24% 10% 20% 30% 40% 50% 46%
Q67 What do you dislike the most about being a financial adviser?
Source: Investment Trends: November 2007 Planner Technology Report
Q19 What percentage of new client clienT money practice place via 2. PercenTage oF ausTralianmoney (inflows) does yourPlaced via PlaTForms platforms?
2005 [n=329] 30% 2006 [n=288] 2007 results [n=342]
25%
20%
Planner Commitment
Wraps are a service proposition for Financial Planners – enabled by technology – to support the planners’ service delivery to their clients. Executed successfully, it has been proven in Australia, and increasingly in the UK, that a wrap has the ability to support planners by: Assisting the planner or firm to deliver consistent, quality service standards so increasing the loyalty of clients, Growing the number of ‘recurring revenue’ clients that can be serviced per planner, Increasing the sustainable, recurring revenue from clients Improving operational efficiencies without commensurate increases in business costs, Improving a planner’s ability to deliver on its compliance obligations, and, via a culmination of all of these outcomes, growing business value. However, if a wrap is executed poorly the planner is left with a more random service experience for their clients and most likely a higher cost to their business. This is evident when IFA firms have ‘trialled’ multiple platforms at once over an extended period of time or ‘dabbled’ with a wrap without fully committing to the plan of action required to make the transition work. For a wrap platform to fulfil its
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15%
10%
5%
0% None 1-9% 10-19% 20-29% 30-39% 40-49% 50-59% 60-69% 70-79% 80-89% 90-99% All (100%)
Source: Investment Trends: November 2007 Planner Technology Report
Jason Huddy of Macquarie
potential to support a planner’s business model, the wrap must first satisfy the service requirements of the specific business model and the planner must commit to the wrap transition. An illfitting wrap partially implemented within a planning practice will only succeed in putting the practice in a worse position than before.
Size matters
Small platforms are not sustainable over long periods. To retain the support of planners, a wrap must constantly invest in the ongoing development of its functionality and people. Therefore wraps need to achieve the critical volume of client support that means they can afford continued investment without relying too heavily, or for too long, on the parent or shareholder. So if size matters, there must be a reasonable amount of consolidation of
the multitude of wraps in the Australian market, right? While that thinking is logical, the situation is not yet reality. The question of wrap consolidation has been longstanding in Australia. The reality to date is that providers of wraps have themselves consolidated faster than the discrete wrap offerings. Whatever the future in terms of consolidation, it is clear in the Australian experience, where wraps dominate planning industry funds-flow, that wraps are becoming the most effective way to support planners to deliver on their service proposition to their clients and to grow their own business value. This is also becoming increasingly the case in the UK. Jason Huddy is UK head, Macquarie Banking and Financial Services Group, a division of Macquarie Bank International Limited.
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