Dynamics, disruptions and opportunities

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How tough can life be? To the casual observer it might appear that industry participants in Australia’s $1.5 trillion superannuation and wealth management sector are assured of future prosperity and revenues served to them on a plate.

Think again.

Behind the big numbers and mandated growth is an industry jostling to get on top of fundamental shifts, each with potentially highly disruptive consequences and opportunities for those who are fleet of foot.

Here are six market-shaping forces that I foresee.

1.    Middle Australia and the rapid growth in ‘scaled’/’scoped’ advice

Australia’s 20,000 or so licensed financial advisers are already migrating to higher value segments (mass affluent, affluent and High Net Worth). The transition to ‘fee for service’ and ‘opt-in’ arrangements will hasten this trend.

There is a real risk that Middle Australia will be disenfranchised from advice in the process. MySuper may increase the degree of member disengagement with super. Industry funds and bank channels will dominate advice delivery to Middle Australia, predominantly through ‘intra fund’ advice and what is variously known as ‘scaled’, ‘scoped’ or ‘limited’ advice. A series of scoped or scaled advice provisions covering different issues may largely displace comprehensive advice in this sector. How well this is delivered will determine the extent to which Middle Australia is engaged with advice.

Scaled advice delivery will need to be very efficient to close the gap between the cost of delivering advice and what members and investors are prepared to pay. Therefore, expect a significant increase in the use of technological solutions, including call centres, online, mobile apps and co-navigation approaches.

2. Continued inexorable growth of SMSFs

This inexorable growth is no longer news. It is more interesting to examine the granularity of the next stages of growth, such as:

  • Post-retirement. The growth in the post-retirement population over the next 20 years is mind-boggling, with different quinquennial (five year) age groups (e.g. 65-70, 70-75, etc) growing between 60% and 100% between 2010 and 2030. There will be major boost in the 65-70 years segment over the next five years as the first of the ‘boomers’ reaches the mid-60s retirement milestone. Based on the Deloitte Superannuation Model, SMSFs will account for close to half the prospective fund flows in post-retirement. There is a need for much greater sophistication in post-retirement advice and investment solutions, including the use of investment scenarios or stochastic modelling in building optimised portfolios. This poses particular challenges for product and advice providers.
  • Gen X. Strong growth in SMSF establishment is coming from this age group, with something like 25% of new SMSF trustees being people aged less than 45.
  • ‘Coach seekers’. Based on the SPAA/Russell Investments research conducted by CoreData in February 2011, the first major wave of SMSF trustees and investors was dominated by DIY people or ‘controllers’. The next wave will be the ‘coach seekers’, who seek a more co-navigation experience with service and advice providers. This second wave will be more pre-disposed to use of Managed Discretionary Accounts (MDAs) and similar structures as part of advice execution.

3. Political, regulatory and self-regulatory developments

There is obviously a risk that superannuation will be a political football in an election year. Various bodies including the SMSF Professionals’ Association of Australia (SPAA), the Financial Services Council and Association of Super Funds of Australia are advocating bipartisan support for sound, long-term policy and commitment to superannuation rather than short-term tinkering, which could erode confidence in superannuation. The political parties are aware of the voting power of the baby boom bulge which is approaching retirement.

Other key regulatory issues are:

  • The FoFA proscribed Best Interests Duty. FoFA is likely to have profound implications, and Best Interests Duty is largely principles-based and therefore more powerful than any prescription-based regulation. It is likely to affect portfolio construction with significant implications for fund managers and will shape the major growth area of scaled or scoped advice.
  • Licensing. The removal of the accountant SMSF exemption and the introduction of an SMSF-specific licensing framework with a three year phase in from 1 July 2013 will also have a significant impact. Enlightened accountants will move ahead of the required timetable, and that, due to residual ambiguities in limited licensing, many accountants will opt for full licensing, or have strong partnering arrangements with financial advice firms. Accountants will be at the vanguard of a renaissance in the independent advice sector.
  • APES 230. This draft accountant professional standard is still being debated and a final form is imminent. The current form is much more onerous than FoFA, including retrospectivity provisions, and has the potential to be very disruptive. It poses a challenge for the professional accounting bodies in terms of how they respond – the Institute of Public Accountants has already indicated its position. And, lest financial advisers think this is only an issue for accountant-based advisers, there is real contagion risk with APES 230. Some of its provisions extend more broadly, including to licensees and product providers (especially life companies and lenders), and there is a risk that ASIC will decide that APES 230 sets a new higher standard than FoFA.

4. Professionalism and advisers

Professionalism and sound practice management will witness the following: 

  • advisers developing clear market segmentation, with crystal clarity on ideal clients, clear value propositions and service/pricing models (if they have not done so already). They then need the discipline to consciously shift their client base to the ideal target profile.
  • professionals in the accounting sector will want to be specialists in the SMSF sector, and this will drive strong interest in SPAA’s specialist accreditation (advisers and auditors).
  • a natural market shift from asset based fees to retainers. This should be naturally occurring and left to market forces. It shouldn’t be mandated by the proposed standards in the APES 230 model or ASIC Regulatory Guidance.

5. Social media in the wealth management and advice sector

In terms of the classic ‘S curve’ in product and service adoption, the use of social media for business purposes is still in the early stages of the S curve. Expect 2013 to be the year that this really takes off, with fund managers, platform providers, licensees and advisers all rapidly adopting social media for both sourcing new clients and engaging and servicing existing clients. When the penny drops that a sound, well-executed social media plan has the potential to be enormously more powerful than traditional ‘above the line’ marketing such as television, radio and print advertising, then this medium will really come of age.

6. Corporate activity

Although some large wealth management transactions have already been done, there will be continued strong activity in the following areas:

  • change in ownership of practices (both financial planning and accounting), driven partly by demographics (age of practice principals), but also the merger of planning and accounting practices and competencies.
  • continued licensee consolidation, driven by industry dynamics, FoFA regulation changes and the need to modify business models.
  • fund managers, largely driven by industry dynamics such as shifts to core/satellite, and a shift to cheap beta strategies (e.g. passive funds and ETFs), insourcing of investment management by large super funds, and arguably an excess of boutique fund managers.
  • SMSF strategies, such as AMP’s acquisition of Cavendish and a 49% interest in Super IQ, as mid-large wealth management organisations more clearly define where and how they will participate in the burgeoning SMSF sector.

With all this in the pipeline, 2013 will be a year of disruption, but as always when so much changes, it will also be a year of opportunity.

 

Andrew Gale is co-owner and Executive Director at Chase Corporate Advisory and a board director for the SMSF Professionals’ Association of Australia (SPAA).The views expressed in this article are personal views and are not made on behalf of either Chase Corporate Advisory or SPAA.

 

 

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