The Australian wealth management value chain has evolved over the past six or seven years – from an opaque, conflict-riddled structure to one where the alignment of payments and value exchanges is simple, flat and clearly serves the best interests of the client. It will evolve further, post-Royal Commission. This video explains how that might happen.
It starts with the households of Australia
The starting point is Australian households – their ability to create savings by spending less than they earn. There are payments and exchanges of value that occur throughout the wealth chain, and some of these have historically been opaque to the consumer. The consumer’s lack of awareness of which party was paid, how much they were paid and what they were paid for doing, led to perverse outcomes such as fees for no service. Consumers did not know they were paying for a service, nor what service they should receive for the payments they made.
In a simplified representation of the historical value chain, the client makes an investment into a product, often via a platform. The client might also make a payment for advice, to the licensee, and some or all of the payment is remitted to the adviser.
Value flows to the client from the product, through the platform; and value flows to the client from the adviser. Arguably, the exchange between the adviser and the client is the most valuable in the entire chain. It is where a consumer is transformed through financial advice from a state of uncertainty, chaos or disorder and potential vulnerability, to a state of order, greater certainty and greater financial robustness and confidence.
Payments didn’t cover costs
But historically, consumers were unable or unwilling to pay the full cost of delivering advice; and advisers were unable or unwilling to pay the full cost of services from their licensee. Advice and licensee services had to be subsidised from somewhere, and the natural and most easily accessible source was the investment the client made in a product. Hence the existence of what we might call “contraflows” – flows of money from products that support licensees and advisers. These payments were often invisible to, or at least shielded from, the consumer.
Payments by advisers to licensees result in an exchange of value between adviser and licensee, but often did not cover the licensee’s full costs.
Reform leads to change
Regulatory reform, including the Future of Financial Advice (FoFA) laws, has resulted in a different flow of money. Again, the client makes an investment in a product; and pays for advice. And value flows back to the client from the product, and from the adviser. The adviser pays the licensee and receives value in return.
But because contraflows have disappeared, or largely disappeared, in this representation of the value chain, clients are being asked to pay closer to the full cost of advice, and advisers are being asked to pay the full cost of licensee services.
This places the onus on advisers to articulate a value proposition to the client; and upon the licensee to articulate a value proposition to the adviser. There are concerns the cost of advice to the consumer will rise; but in fact all other things being equal the cost to the consumer doesn’t change, they’re just not being subsidised. It’s just that they have greater visibility of how much they’re paying, and what they are paying for.
Where to next?
But the realignment of the value chain will go further, potentially driven by recommendations of the Royal Commission as it seeks to make the advice process as transparent as possible.
The client still makes an investment in a product; and value flows back to the client. And the client pays the adviser directly for advice and receives value in direct exchange. The adviser pays the licensee for services, and receives value in direct exchange.
In this simplified model, each party pays the other the true cost of delivering services. Payment is only made to parties that provide services or value; and value or services are received only by those who pay for them.
As financial advisers and planners begin to think and act more as professionals, providing professional services to clients, rather than as distribution networks for product manufacturers, the links in the wealth management chain will line up to better serve the best interests of consumers.
The “Value chain in transition” is taken from the CoreData Future of Advice Market Intelligence Report. For more information on the report please contact Simon Hoyle.