Enormous changes that would normally take 20 years to filter through any other industry are currently being crunched though the financial advice industry in a very condensed time frame.
Older advisers are being hit the hardest and it is taking a toll. But the pain is by no means over.
Whilst passing the adviser exam looms as the hurdle with most urgency attached to it, it is not the one that will do the most damage. That is yet to come.
And it is likely to come in the form of two Hayne Report recommendations which have the potential to be industry transforming.
- The requirement to declare non-independence to clients; and
- The total reduction of insurance commissions to zero.
If they become law, which appears likely if the government makes good on its promise to implement all Hayne Report recommendations, the combination will force every commission based business in Australia onto a fee structure.
The non-independence declaration (the term ‘independent’ is defined and discussed at RG175.64) is likely to kick-start the transition away from commissions to fees. Reducing insurance commissions to zero will abruptly finish the job because it will mean the elimination of the last bastion of non-client revenue.
As a result, many long-time advisers will have to face the reality of having to rebuild their practices, or risk the value of their businesses falling through the floor.
Converting a commission-based business to a viable fee structure is not simple and it is certainly not an overnight change. It is not a matter of commission income one day and fee income the next.
Very few clients are likely to want to pay a fee to a product intermediary for what they perceive as a commodity-based insurance transaction. Suddenly superannuation based insurance and direct insurance will become much more attractive.
If risk advisers are to survive, they will need to stop being product purveyors and start providing valuable advice that will set them apart from institutional product providers who will always be able to provide a commodity transaction service at a cheaper price.
Two major challenges that risk advisers face in the practice conversion process are:
- Coming to terms with a fundamental shift in mindset from a commission-for-commodity business to a fee-for-advice. These concepts are poles apart.
- Changing from a fixed pricing structure where adviser value is determined by an insurance company, to a self-determined pricing structure which is potentially unrestricted provided that it is fair and represents value for money.
In a nutshell, practice conversion boils down to:
- Redesigning an advice proposition that represents superior value to clients and makes the desired profit for the practice
- Building a fair value fee structure around the advice proposition; and
- Connecting with clients who are attracted to the new offer
Unfortunately, any new advice proposition is not likely to sit well with existing clients who were initially attracted to the commission-for-commodity proposition years ago and have been comfortable with it ever since (a point repeatedly overlooked by pollies and academics).
So the rebuild will be a two-pronged process involving (a) the practice and the skills within it, and (b) a transitioning client base.
This process will continue until equilibrium has been achieved once again.