Planners Urged To Forget The Past And Face The Future

28 Oct 2019

The post-royal commission landscape, regulatory change and a focus on higher educational standards will spur a “substantial exodus” of existing advisers from the industry in years ahead.

Koda Capital chairman Steve Tucker says players in the battered financial advice industry risk having “no future” unless advisers and firms stop clinging to failed structures of the past and conflicts of interest.

As private wealth firm Koda nears its five-year anniversary, Mr Tucker highlighted that a lot of the industry was grappling with the change required to restore faith, following the spate of scandals that were fleshed out at the Hayne royal commission.

“There are many that are trying to work out how they can transition from the old world to the new world and get a glide path which still allows them to have some conflicts that they manage carefully,” he said.

“Our view would be that is like a fish that is out of water: it’s trying to get back into the water all the time, but it’s out of the water. Until our industry can learn to forget about the past and position themselves for the future, they have no future.”

Mr Tucker, the head of National Australia Bank’s MLC until 2013, joined with former JBWere boss Paul Heath and set up Koda in the latter months of 2014. The duo say they established Koda — which focuses on providing independent advice, primarily to the high-net-worth segment — with the view to getting ahead of where the advice industry and regulation would end up.

Mr Tucker was an early vocal advocate of shifting the industry to a fee-for-service model over a product and commission-based structure.

However, MLC was embroiled in controversy in 2018 because the firm, along with other big bank-owned networks, had for many years charged customers fees but provided no services.

Still, Mr Tucker and Mr Heath took a different course with Koda under a partnership model that was based on providing unbiased advice without conflicts.

“The industry has been built around the notion that conflicts of interest are OK … that’s changed and it’s changed forever,” Mr Heath said.

He believes the post-royal commission landscape, regulatory change and a focus on higher educational standards will spur a “substantial exodus” of existing advisers from the industry in years ahead.

“FASEA (Financial Adviser Standards and Ethics Authority) is raising the bar on educational standards and ethics; increased regulation is simply upholding community expectations around the fiduciary obligations for advisers to act in the best interests of their clients and — arguably most importantly — the banning of many conflicted revenue streams is placing enormous pressure on the economics of the traditional business model for many advisers,” Mr Heath added. “This will be a painful but critical transition for the industry.”

He said the changes sweeping the sector would take many years to play out as firms shifted away from vertical integration.

“This aggregation up into the vertically integrated model took place over 30 years. It’s not going to unwind over the next two to three,” Mr Heath added.

Koda’s partners and employees advise on about $7bn of assets and the firm has an open architecture model, with access to products throughout the domestic market and overseas.

Mr Heath also noted that Koda does not permit advisers to recommend clients invest in boutiques that are part of Mr Tucker’s funds management venture with Euroz, due to the perceived conflict.

Koda’s early financial backers include Quadrant Private Equity’s executive chairman Chris Hadley, Archer Capital founding partner Peter Wiggs and Ironbridge founding partner Julian Knights.

Mr Tucker and Mr Heath say while it was challenging in the early years of Koda, the growth in the company was helped by paying a “huge amount of attention” to culture. Koda’s company mascot is an elephant.

And there is an elephant in every room of its offices to remind staff they should speak up and give feedback.

Koda — which has 71 staff, including 35 partners that have equity — has been profitable since mid-2017 and will this month pay its third dividend. It has focused on four areas including tax and structuring, investment strategy, philanthropy and family stewardship.

Mr Heath said while the growth was continuing, Koda was on track for 30 per cent revenue growth this financial year, and the firm’s ideal size without losing its focus and adviser discretion was around 100 staff.

“We are building this firm with no intention of selling it, zero,” he added.

Others in the domestic market including Escala Partners and Shaw and Partners have this year sold large stakes in their businesses to offshore firms.

Mr Tucker cited recruitment as one of Koda’s biggest headaches since inception, including the problem of not being able to attract people quickly. Koda has also suffered departures in recent years, including Brian Francis and Eli May who decamped in 2016 to set up Yarra Wealth.

Mr Tucker sees the financial advice industry in Australia becoming more like the middle market of the accounting and legal professions.

A broader shift back to smaller advice firms would see collaboration between practices, he added.


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