In our new 'Christmas Cracker' series, each morning through to Christmas we will bring you a top insight from one of our contributors. These will be diverse and could be a macro call, sector view, stock idea, or even some useful tech. Today's insight is from Harley Grosser, Founder of Capital H Management.
A hot theme for 2018
The idea that wealth management and accounting is converging has been well known for quite some time. 2017 saw a lot of the listed players implement strategies to be positioned for what is coming. There has been, and will continue to be, a significant amount of change that has occurred in these two industries. I suspect 2018 will be a year where we see the winners start to emerge and the model of the future become clear.
New educational requirements for financial advisers mean that the adviser of tomorrow will look a lot more like todays accountant - holding a degree, responsible for strict continuing educational requirements and subject to a code of ethics. Gone are the days of an adviser up and running after an eight week course. It is estimated that up to one third of current advisers will not be able to meet these standards. That is highly beneficial for the industry as the bar will be raised, and particularly so for the high quality professionals who can already meet the more stringent requirements.
The accountancy market is worth roughly four-fold that of the financial planning market and the accountant has long been seen as the gatekeeper. But in many listed company examples the ability to actually cross sell services has been quite limited and there are different views as to why this is so. Much of it has to do with the ownership structure of these firms and the incentives for the professionals involved. There is also the question of whether the accountant respects the adviser enough to refer a valued client; just because a joint venture is in place does not necessarily mean the referral will happen. The elevation of the financial planning industry to sit alongside the accountant, and to work in partnership in the same firm, will likely see this improve.
The ongoing rise of the SMSF is central to the theme. This is the growth area that essentially all firms are targeting. There was a view that the accountant would tap in to this through the limited advice offering but uptake has generally been below what many in the industry expected. Instead it appears the opportunity will flow to the adviser, but with client acquisition through a referral from the accountant - a big reason why the converged offering will win.
The structural push towards independent financial advice, and away from vertical integration, continues unabated as the banks sell their wealth management businesses. The Royal Commission will arguably accelerate this trend as the integrated model comes under heightened pressure, which looks ominous for large integrated players like AMP and IOOF. But it is not just the regulators that are driving this. Advisers themselves are moving away from conflicted advice and pressure from parent companies. In this respect the independent dealer groups will continue to look increasingly attractive.
Today, most of us visit an accountant, but far fewer pay a visit to an adviser. It is sometimes seen as the domain of the wealthy - by definition, you need sufficient wealth to manage if you are going to see a wealth manager. But as the size of all of our retirement savings grow and we increasingly choose to manage it ourselves I suspect it will become more common to seek advice from a trusted professional on how best to do so - and this will be the case for both baby boomers and millennials alike. The argument that we will all seek advice from a robo-adviser and eliminate the personal relationship entirely doesn’t quite fit with me. There are certainly aspects that can be automated, but I believe there is a role for the quality adviser for many years to come.
So, now is a good time to be looking for the winners. My bet is on the firms that employ a structure that best aligns the incentives of their people with both clients and shareholders, that looks at technology proactively, that employs best in class systems and processes and has the accountant sitting alongside the financial adviser in the same office.
It takes time for the winners and losers to become clear, but I think 2018 will be the year that occurs.