Private wealth management is an industry on the verge of becoming a profession. Advisers are highly educated, highly qualified fiduciaries and if compared with a lawyer or accountant, they would stack up quite well.
It is logical, then, that the PWM firms of the future will look and feel like professional services firms. They will be owned and run by partners.
They will have a strong client-centric, team culture with a sharp focus on performance and profitability. Adviser remuneration will be linked to the work they do and the value they add and there will be a firm commitment to ongoing training and development.
That is vastly different to the classic PWM model, in which advisers are, in effect, employees serving two masters: the client and their institutional employer. Under this model, the bonus structures and payout ratios are largely unsustainable and prohibitive to objective, independent advice.
In short, vertical integration has been the model of the last 30 years but it will not work for the next 30 years. Signs of the old model becoming extinct surround us today, and are quickly gathering momentum.
Similarly, the ‘independent’ financial planning dealer group model, in which a collection of disparate practices are aggregated under a single licence to share costs and use their scale to negotiate volume discounts and rebates, is under pressure. This is due to regulatory change and the soaring cost of compliance. Licensees are increasingly leveraging their network of advisers to manufacture and distribute in-house products.
The world is changing. Investors’ attitudes and expectations are greater and a spate of corporate collapses and financial disasters has forced regulators and politicians to enforce tougher standards.
Advisers also increasingly want to be recognised and treated as professionals.
As a result, professional PWM firms of the future will share three key attributes:
- A partnership model
- A client-centric and collaborative, performance culture
The partnership model makes economic sense.
Revenue-earning partners/advisers are paid from client fees which are earned by the delivery of quality service and advice. Surplus revenue is reinvested back into the business.
By comparison, the aggregator model sees advisers pay licensing and dealer services fees to their dealer group who is generally also dependent on volume rebates and margins from in-house solutions.
That is not the model of the future.
Partnership and ownership are powerful motivators.
It turns PWM advisers into business owners, which in turn gives clients certainty and confidence that their adviser will be around for a long time to look after them.
Client-centric and collaborative
A cohesive, collaborative team environment is a by-product of a partnership where shareholders and advisers are unified by a commitment to the firm’s collective success.
Advisers are not competitive rivals but rather work together to ensure clients receive the best service and advice, even if that means referring them to a specialist adviser.
Advisers are encouraged to share their knowledge and experiences, and invest in other staff and partners.
This is markedly different from the ultra-competitive, secretive culture of many large institutions, where advisers are pitted against each other and rewarded for putting themselves first above their colleagues, clients and even the company.
Traditional PWM advisers could be compared to decathletes. They are all-rounders who are proficient in a variety of roles. However, a world champion decathlete would not be competitive against the world champions in each individual underlying discipline.
The outperformance of each individual champion (100 metres, long jump, shot put, high jump, 400 metres, 110 metres hurdles, discus, pole vault, javelin and 1500 metres) against a decathlete is monumental.
Similarly, next-generation PWM firms understand that even the best advisers cannot be fully on top of the latest strategies, developments and regulatory changes across the PWM spectrum including super, investment management, tax, insurance, aged care and estate planning.
To set clients up for the best possible access to specialist advice, there are four specialist divisions at Koda: structuring and tax; investment strategy; philanthropy and social capital; and family leadership.
Clients often have relationships with specialist advisers while their primary adviser acts as their chief financial officer and manages their overarching financial affairs.
A new path forward
The PWM industry’s structure is the last obstacle stopping it from becoming a profession.
Advisers will never be recognised as professionals as long as they are housed inside an institution where product fees subsidise the true costs of advice.
Independent advice is impossible inside an institution. Over the next 10-15 years, there will be an increasing number of boutique PWM firms spinning out of large, established institutions.
A precedent has already been set in funds management, where hundreds of boutiques have sprung up over the last 20 years.
Frustrated and constrained by an institutional mindset that encourages portfolio managers to hug the benchmark and amass FUM, many professionals have successfully left the institutions to set up their own shop.
Similarly, advisers need to ask:
- “What does my client want and can I deliver it under my current structure?”
- “Do I want to be seen as a professional and if so, is that possible under my current structure?”
- “What is the economic truth? Is the model I operate within sustainable?”
If the answer to any of those questions is unacceptable to them, they need to find an economically viable solution that will allow them to deliver optimal outcomes to clients and be counted as a professional. Ultimately, they need to be able to confidently say and demonstrate that they are acting in their clients’ best interests.
Read more at professionalplanner.com.au