Lure of the Independent Market Sees Fortress Under Siege

01 Sep 2014

“Institutions exert enormous control – through direct ownership or other commercial relationships – over vast swathes of Australia’s financial ­planning businesses.”

Financial planning in Australia began as a “cottage industry”, a village of mainly small-to-medium dwellings occupying the virgin territory carved out by the swashbuckling financial deregulators of the 1980s.

More than two decades later, the terrain has lost that quaint frontier town atmosphere. Today, the Australian financial advice landscape is dominated by a small number of high-rise fortresses, most of which bear the bright logos – the modern coat-of-arms – of their institutional masters.

The general consensus has it that the big four banks plus AMP control north of 80 per cent of Australia’s financial planners. Industry title Money Management, which has surveyed the top 100 financial planning firms annually since 1999, puts the figure somewhat lower. According to its 2014 analysis, the “big five” own about 60 per cent of the advice industry, with total institutional ownership (including IOOF, Macquarie, Suncorp, etc) at just over 72 per cent.

Institutions exert enormous control – through direct ownership or other commercial relationships – over vast swathes of Australia’s financial planning businesses.


In truth, financial institutions have always wielded significant influence over financial planners through ownership, sales volume-dependant business alliances and product remuneration. For example, the 2003 Australian Securities and Investments Commission (ASIC) “shadow shopper” report estimated 70 per cent of the advisers it surveyed were “aligned” with financial institutions at the time.

But even if the degree of product-manufacturer leverage over financial advisers has remained more or less constant, the diversity of ownership has narrowed.

In 2003, ASIC reckoned banks owned about 15 per cent of the financial advisers; by 2014, that market share had more than doubled to 38 per cent, based on the, arguably, conservative Money Management figures.

At the same time, two of the biggest independently owned financial advisory networks, which regularly vied for the runner-up spot behind AMP in terms of adviser numbers, have dropped out of the race: Count, in a $373 million sale in 2011 to the Commonwealth Bank of Australia (CBA), and Professional Investment Services (PIS), which has seen its adviser ranks decimated – falling to under 500 after peaking close to 2000 – following a series of scandals and regulatory interventions. Plenty of other smaller, less well-known, independent firms have also fallen by the wayside.

According to Ian Knox, head of financial advisory licensing firm Paragem, the last few years “have been a very difficult time for independent financial adviser businesses”.

Paragem itself, launched by Knox in 2005 to provide a licensee home for “independently minded advisers”, has just been purchased by listed investment platform firm Hub24 – further evidence, perhaps, of just how tough the market is for stand-alone advisory firms.

But a number of forces are arraigning against the vertically integrated institutional financial advice model: high-level government attention, including warnings from ASIC and the recent Financial System Inquiry (FSI); an unprecedented level of mainstream press coverage following multimillion-dollar scandals in the financial planning arms of CBA and Macquarie, and; technology-based competitors gathering over the horizon.


John McMurdo, head of independently owned advisory firm Fitzpatricks Private Wealth, says the institutions are “not impregnable”.

Having spent about half his professional life working within institutions – including a stint as head of AMP Financial Services in New Zealand – McMurdo brings insider knowledge to the observation.

“We’re starting to see a sway away from institutions and back to the independent market,” he says.

According to McMurdo, over the past few months Fitzpatricks, which houses about 45 advisers in its network, has been “inundated” with calls from institutionalised financial planners.

He says the heightened interest is partly due to a natural “deconsolidation” phase after several years of a bank-led, cheque-book diplomacy drive among the ranks of Australia’s most successful financial planning practices.

But McMurdo also says a post-Future of Financial Advice (FoFA) re-evaluation of business models and the recent bad press about CBA and Macquarie have motivated many advisers to question their institutional ties.

As well, he says with more consumers turning on to the value of independent financial advice the “imbalance of supply and demand” should open up more opportunities for non-institutional advisory businesses.

“I expect more independent groups will pop up,” McMurdo says. “We’re seeing increasing client demand for independent advice and at the same time, we’ve lost supply as ownership has consolidated in institutions.”


Ray Miles, head of independently owned advisory firm Fortnum Financial Group, agrees the trend is swinging away from the institutional advice model.

“A lot of independent groups have gone under over the last few years,” Miles says.

“But all that is about to change as consumers and government start to understand what is really going on [in institutional advisory businesses].”

However, Miles, who famously had a number of run-ins with financial institutions over the years relating to his previous advisory firms, Associated Planners and Genesys, has only just erased the final vestige of bank ownership in Fortnum.

Early this month, Fortnum bought out ANZ’s remaining 20 per cent stake in the business for a reported figure of just under $10 million.

He said while ANZ was a hands-off shareholder, clients were increasingly demanding a bank-free advice relationship.

Miles recently argued in an opinion piece that banks et al “will ultimately lose their best advisers to well-run, independently-owned licensees” because the institutional value proposition is based on product.

Although, he admits a “number of small, independently owned licensees including Fortnum may appear to replicate the vertically integrated model” with their own products (both Fortnum and Fitzpatricks, for example, offer in-house investment solutions). These are qualitatively different to the typical bank approach to advice.

“The . . . outcome of the [institutional] advice process is almost always to place a client on an institutionally-owned administration platform and/or in an institutionally-owned investment product,” he writes. “ . . . While the large and unwieldy institutions will struggle to change and will continue to attract the regulators’ ire, small and nimble players are in the best position to transform the advice process and ultimately the perception of financial planners.”


None of the big four banks approached by Asset were willing to comment on the merits of vertical integration.

However, Anthony James, financial services partner with consulting and accountancy firm PwC, says the vertically integrated model “is never going to go away”.

“The real question in the long term is how to uplift the quality of advice and remediate the defects in a system with a number of inherent conflicts of interest,” James says.

“And what isn’t spoken about [in the media] is the tremendous amount of work going on in banks and wealth managers to do just that.”

A number of banks and AMP have announced upgrades to their adviser education programs.

James says while banks have copped a lot of flak for “product-flogging”, they’ve also been forced into a corner through regulation that has “taken the profit out of advice”.

“In [the regulatory] efforts to make consumers face the full cost of financial advice, institutions are becoming ever-more reliant on product revenues to maintain margins in their wealth businesses,” he says.

James also questions the “scalability” of independent advice businesses, suggesting most of these are too pricey for middle-market consumers, where big financial brands still hold sway.

He says the real challenge to the vertical-integration model comes from technological outsiders rather than independent financial planning firms.

“New [technology-based] players are appearing that can offer financial advice at scale,” James says – a threat most banks have already recognised.

“Banks need to adapt – it’s as simple as that,” he says.


Paul Resnik, head of risk-profiling firm  Finametrica, says “holes are beginning to appear” in the bank-dominated Australian financial advice scene.

Resnik, whose firm derives more revenue from the US and UK these days than home-town Australia, says there appears to be momentum building towards non-aligned financial advice.

But he says there are huge entrenched forces ready to defend the status quo when it comes to institutional ownership of financial advisory businesses.

According to Resnik, Australian regulators tend to engage in endless debate with interested parties about what’s “acceptable” practice for institutionally owned advice firms.

“In the UK, the regulator just cleared the mess up,” he says.

“They’ve introduced effective regulations with a clear set of principles that say ‘if it’s not in the best interests of clients, then don’t do it’.”

Since the UK implemented the Retail Distribution Review (RDR) reforms 18 months ago, most banks have sold down or closed their advice arms to limit “the risk and costs”, he says.

Likewise in the US, he says institutional control over advisers has waned – but for different reasons.

“The US advice market was institutionally-driven but that was undermined when their integrity came into question during the GFC in 2007-08,” Resnik says. “Advisers discovered they could set up on their own, serve their clients well – and get paid better.

“There’s a genuine movement there towards giving good, independent advice.”


Paragem’s Knox says the dual CBA and Macquarie debacles have affected the banks’ employed advisers for the first time, rather than the thousands of semi-autonomous financial planners who sit under various institutional banners.

“[The CBA and Macquarie scandals] have been about a failure of governance and monitoring more than anything,” Knox says.

While both banks are paying a high price for those failures now (and giving a free lesson to other institutions), he says in the long term, they will retain large employed adviser forces.

For independently minded advisers within institutions, the future is less clear, Knox says.

“But the reason institutions own 90 per cent of the advice market is that many independent financial advisers were willing to be bought.”

Even so, he says institutional ownership may ratchet back to 70 per cent of the advice market. Ray Miles reckons 60 per cent would be the lower limit.

PwC’s James says measuring the size of the advice industry and market share by adviser headcount alone may soon be outdated as technology and alternative advice models grab market share.

The fortress is under fire from all directions.

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