[tweet_box design=”box_10″ url=”https://buff.ly/2EszFoM” float=”none” excerpt=”There’s a lot of movement, a lot of fragmentation of the advice industry in Australia… The consequence of that is a lot of advisors are rethinking their future and whether or not they’re going to invest that time and effort. – Paul Greenwood on #YAFPNW”]There’s a lot of movement, a lot of fragmentation of the advice industry in Australia… The consequence of that is a lot of advisors are rethinking their future and whether or not they’re going to invest that time and effort. – Paul Greenwood on #YAFPNW 183[/tweet_box]
Hannah: Well I am at the FPA annual conference today. And one of the great things about conferences and being at the largest financial planning conference, really in the world, is just all the people that you run into and meet. And so today I have Paul Greenwood here. And he is a financial planner in Australia. So you’re an Aussie.
Hannah: Yeah, and we started a conversation, and it was just fascinating to me. All the work that you’re doing, but specifically we talk a lot about regulation in the financial planning landscape, but that’s very much focused on the United States. There has been a lot of changes going on in Australia. So I would love to have a conversation with you about what are those changes. And I think that they provide a really interesting lesson for us in the United States about what are the different options in regulatory and the impact that that has?
Hannah: So let me just start out. I know I’ve been hearing rumblings of this. Of what’s been going on in Australia and the big change that just happened recently. So can you tell me, what is that change and kind of provide some more context to that?
Paul: Yeah. Absolutely. Well thank you for the chance to talk to you. And it’s terrific to be here in Minneapolis, traveling the other side of the world. And it’s a real eye-opener to see what American advisors are doing. And yeah, you’re right, there are a lot of changes happening in Australia in the financial planning world because of changes in regulation. Which happen everywhere, I know. And I think why they’re being talked about so much at the moment is they’re reasonably extreme, I think, is the best way to describe them.
Paul: And before I sort of explain what’s happened, I think to explain briefly why they’ve come about is maybe helpful. About 18 months ago, two years ago, the government in Australia decided to conduct what’s called a Royal Commission. The inquiry calls on a number of people, so it’s a bit like being subpoenaed. They can call on financial advisors, consumers, financial product manufacturers, regulators, anyone they like. Those people answer a series of questions about what’s going on in their world. It was an inquiry into banking and financial services broadly.
Paul: During that inquiry a number of the big banks, or all of the big banks in Australia of which there are four major banks, were asked to give evidence about what had happened to their customers and how their customers had received advice and been treated. They also heard from a number of those customers. There were other institutions involved as well, but the banks were really a major focus of it.
Paul: During that inquiry what was discovered was that a lot of consumers had been charged a fee-for-service, which is something we hear spoken about a lot. That advisors are moving away from commissions and fee-based fees linked to product, and that advisors are now a fee-for-service operation. And what was revealed in this inquiry was, that was true, that advisors were charging a fee-for-a-service. What was discovered was that there was no service often being delivered. So consumers are paying a fee for no service, and so that’s the catch phrase now in Australia, is it’s actually a fee for no service.
Paul: So it’s almost as bad as the problem it was trying to solve. The reason that they got rid of commissions was because consumers were paying fees on financial products and not getting a service for those.
Hannah: So that’s interesting right there. In the U.S., we’re still paying… You can get charged so many different ways, for selling the products, for doing assets under management. But in Australia two years ago, you could do none of that.
Paul: Yeah, correct. So a major focus of-
Hannah: So they took away all the commissions?
Paul: Depending on the product. If we talk about insurances and commissions on insurances, they’ve leveled the field. So there are still insurances on commissions but they’ve capped the amount of commission that can be received. And they’ve made it a consistent percentage across product providers or insurers to remove that potential for conflict. When it comes to investment products, you can still charge an assets under management type fee, but it needs to be something that’s disclosed to the client on a regular basis every year. The client needs to be told what they’re being charged and they need to be told what they’re receiving for that from the advisor’s point of view. So not what the investment manager is doing for the investment management fee, but the extra fee that’s extra fee that’s being charged that’s coming out of the product that’s being paid to the financial advisor. That needs to be clearly explained to them, what they’re getting for that.
Paul: So you start to mix up financial advice if we’re doing strategy work with a client. It can sometimes get very confusing because we’re doing some strategy work with a client, but the fee’s coming out of the investment product. That’s confusing for consumers in the eye of the regulator, and lots of advisors as well. So they’ve clamped down on that.
Hannah: When I hear fee-for-service, I immediately think a financial planning fee.
Hannah: Is that kind of what you would draw the comparison to?
Paul: Correct. So they would be… Yeah, the definition of what a fee-for-service is is half the debate. And that I think is part of the problem.
Paul: When these, what I’d call asset-based fees or product-linked fees, were being charged by advisors they often weren’t seen at all by the consumer. Up until probably eight years ago they weren’t seen at all by the consumer. And then eight years ago new regulation came out that said that on financial statements it gets sent to the consumer each year about their investment. It needed to explicitly outline how much was paid to the advisor. So we got to that point. And then they’ve gone a step further and they’ve removed a lot of that, those embedded fees.
Paul: But it does depend on the financial product. So I wouldn’t say it’s just a blanket, it’s banned across every financial product. But one area where it is banned, which does affect most of us in Australia, is on our retirement savings-types investments. So our 401(k) equivalents. We call that superannuation in Australia and advisors, everyone, has to have one. Everyone who works in Australia has a superannuation fund. Employers in Australia are mandated by law to put nine and a half percent of an individual’s salary into superannuation.
Hannah: So kind of like our Social Security almost, like an equivalent.
Paul: Correct. It is. It’s the equivalent of an advisor here receiving, if there’s fees embedded in that type of product, advisors here receiving a fee for Social Security type investments. So that had been going on in Australia for a long, long time. And that was banned several years ago. That’s sort of what has happened. But then when they banned those commissions advisors, being industrial and industrious, then started to charge a fee-for-a-service. But the problem was these promises were being made to consumers about, we’re going to charge you $4,000 a year, and we’ll give you two review meetings, and a birthday card, and whatever. And yet, on reflection that wasn’t being delivered at all. And when the Royal Commission investigated this and found that this was a systematic problem, or systemic problem, sorry, they asked the banks, who were ultimately responsible for these advisors, to pay back those fees and-
Paul: The last number that I heard, which was only a couple of weeks ago, was something like ten billion Australian dollars as being paid back to consumers.
Paul: The other consequence of it… So that’s enormous. Certainly enormous in Australian sense. The other consequence which is enormous is that these major banks are now starting to spin off or all of them have spun off their financial planning, financial services divisions. So their reputations are being caught up in their broader reputation. Their banking reputation has been tarnished by these financial services activities. So the banks have said it’s just not worth us putting up with that anymore. So they jettisoned that part of their business. So that’s an enormous, enormous change because close to 70-75-80% of advisors would have linked to those major banks. Now they’re all out there trying to find a new home. So there’s a lot of movement, a lot of fragmentation of the advice industry in Australia.
Hannah: And the crazy thing is we haven’t even gotten to what I was expecting you to talk about.
Paul: No. That’s the background.
Hannah: Oh my gosh.
Hannah: Oh my goodness. Okay. So much to get into. Okay. So everybody’s kind of spinning off. What are the big changes?
Paul: So that’s how the market, if you like-
Paul: Or the participants in the market are reacting. Our regulator, which is ASIC, A-S-I-C ASIC, they weren’t found to be operating at how they should be either. They were accused of not probably being harsh enough on some of these behavior, not finding it earlier. Why did it take a Royal Commission to find this out? So they’ve certainly racked up their compliance activities, and they’re certainly executing their role a lot more vigorously than once upon a time they would have.
Paul: Another consequence is PI insurance has gone up in Australia. So because of these problems that are being found, there’s lots of consumers who are seeking compensation. And rightly so. And that’s where professional indemnity insurance often kicks in. So in Australia now, our professional indemnity insurance is about two and a half percent of the revenue that each firm produces. Which in Australia is about ten times what an accounting practice pays for their professional indemnity insurance. So all of this is kind of added complexity, added cost to running a financial services business. And that doesn’t even touch on education and what we’re going to have to do as a result.
Hannah: So, okay.
Paul: We’ve got to catch our breath here.
Hannah: Yeah, I know.
Paul: This is depressing me talking about it.
Hannah: I know. I’m like oh my goodness. So we talk about how important advocacy is here, and how important regulation is. And this is really kind of highlighting that. So tell me about the education piece. And that was the piece that I knew, I knew that had changed.
Paul: Yes. I’ll try and relate it as best I can to the standards you’ve got here. But I’m new to the standards. Yeah, so excuse me if I get some of this slightly wrong. But in Australia, to qualify as a financial advisor… So the term financial advisor, financial planner, are interchangeable and they’re enshrined in legislation. But that said, to be a financial advisor, the bar to entry was relatively low.
Paul: And that bar to entry could be… And I’m not talking CFP standard here, I’m just talking about being able to put your shingle out and call yourself a financial advisor. You could come from pretty much any profession, and you could undertake a course that would last you three months. And you’d get somebody to agree to employ you as what’s called an authorized representative. And with probably another six to twelve months of training you could be sitting in front of a client, talking to them about their world savings. So that was a pretty low standard.
Paul: To be a CFP in Australia, you needed to have a degree. It could be from any profession. And then you’d you do your professional qualifications, your CFP program. And you could hold yourself out to be a CFP.
Paul: What’s changed now is that there’s a new regulator FASEA, F-A-S-E-A. And they are now responsible for the education standards of advisors. The minimum requirement for a new advisor today to be able to put that shingle out and call themselves a financial planner is that they must have a degree, and that degree must be in financial planning. It can’t be in a related field. It must be in financial planning. They then must undertake one year of professional mentoring. A Professional Year it’s called. So they need to find an experienced advisor that’s prepared to take them on and to mentor them. And then towards the end of that year, that year of mentoring, they need to complete a three hour exam that again is set by FASEA. So it’s at the regulatory level, not at an association level. And if they pass that exam they then can be a financial advisor.
Paul: So the standards of what an advisor needs to have by way of education is similar in lots of ways to what you need to be a CFP in the U.S. now. Admittedly you don’t have the Professional Year. So that’s for new advisors.
Hannah: So are existing advisors having to go back and go back to school to get this degree in a financial planning, having a major, a degree, in a financial planning topic or area?
Paul: Yes they are. That’s probably the real change that’s going to occur, is that you’ve got advisors of my vintage who have been advising clients for over 20 years, and when we started there were no professional qualifications. In fact the first university course you could do was a diploma, and that came into existence in the late 90s, 2000, around that time. So most advisors have been around for a long time with plenty of experience. They’re probably doing absolutely the right thing because it’s the absolute minority who doing the wrong thing. And now being told that in order for them to remain in practice, by January 2024 they need to go back to school. Between now and then. And they need to get an appropriate degree. Or if they’ve got this diploma that I talked about, an additional graduate diploma on top of it.
Paul: So the bare minimum you’re talking about advisors that, as I say, are highly experienced, needing to go back to university on a part-time basis for two years. Take a day a week or thereabouts to study. At a cost of about 20,000 U.S. dollars to complete it. The consequence of that is a lot of advisors are rethinking their future and whether or not they’re going to invest that time and effort. And the numbers that we’re seeing is something between 30 and 35% of established, experienced advisors saying that post-January 2024, they won’t be an advisor anymore.
Hannah: Wow. A third of the advisors.
Hannah: Are just looking at stepping out.
Paul: Yes. Correct.
Hannah: It’s more than just one regulatory change, because of really one regulatory decision.
Paul: Yeah. Yeah. Certainly the regulator or FASEA who’s responsible for the education standards have tried to make that transition period for existing advisors, I won’t as easy as possible, but they’ve tried to take into account the CFP standing, for example. So you get a couple of credits. So you have to go back to school and get eight units of credits. The CFP program in Australia gets you two. So you’ve still got to go back and do six. But they’re standing very firm on the fact that they want this to be a profession, as all of us do, and education is the key to that. So that’s not surprising. I think the writing’s been on the wall for a long time. I just think it’s a shame that a lot of really great advisors who know how to engage with clients and are fantastic at what they do will be leaving the industry a lot earlier than otherwise they would have.
Hannah: Well and it’s fascinating. We’re talking about the advisors, but the clients are going to be losing who they have been working with as well.
Hannah: I mean it’s a double-sided coin on that.
Paul: Yeah it is. It is. What, once upon a time, we haven’t even really touched on this, but once upon a time, made financial services businesses attractive which was to be able to sell the recurring revenue stream-
Paul: To another advisor. Most of that recurring revenue stream is now disappeared.
Hannah: Because you have to do year to year.
Paul: Yeah, correct. So we’re seeing financial planning practices now start to sell for one and a half times revenue, which is much more like an accounting practice would. One accounting practice is slightly less. Whereas once upon a time it was two and a half to three times. And so value in a lot of established businesses, for some advisors these changes… And this has to do with removing what’s called grandfathered recurring revenue. The decision is being made to remove that with very little consultation or thinking about the consequence. And there are advisors out there that two years ago went and borrowed significant money, for example, to buy these businesses that have recurring revenue streams that as of today won’t have that recurring revenue stream. But still have the debt. This is a real massive concern. And we’re seeing depression and suicide rates in advisors jump.
Paul: So it’s having a huge consequence.
Hannah: Yeah we heard about that depression rate and some case figures with Aussie planners, and that’s something that’s being brought up, is the weight of all of this regulation. Which has been… Not surprising but-
Paul: It’s a lot to think about.
Hannah: It’s a lot to process, yeah.
Paul: I think it’s a lot to think about when you’re sitting here today and you’re thinking about taking on board all of that additional responsibility in running a practice, where the financial model and the proposition, your value proposition, is changing as an advisor. So even without having to go back to school and reeducate yourself, getting our heads around what is the future of a financial planner-
Paul: In Australia is hard enough. But then when you couple that with being a parent, trying to raise a child-
Paul: Having a massive debt, going back to school. I think that’s the problem, is it’s just so overwhelming. But I think financial advisors and the advisor community in Australia is really strong and we’ve got some great associations that are leading the charge in representing us. And we rally together pretty well and we’ll come out of it fine.
Hannah: Yeah. Yep.
Paul: We’ll certainly come out of it a lot better. But it’s certainly, sitting here now, the clouds are pretty dark.
Paul: And I think it’s going to be an interesting time.
Hannah: Well one of the things that you were talking about earlier, which I think are so applicable to where we find ourselves in the U.S., is this idea of these fee-for-services. So really, you’re talking about financial planning fees. I know that is definitely the trend of doing financial planning fees. X number of dollars a month, or a year.
Hannah: But when they did the Royal Commission, they found that there weren’t being services. What’s interesting to me is I know that we struggle on how to define financial planning and how to define financial planning in practice.
Hannah: So what I’m hearing, and correct me if I’m wrong, is that really what the Royal Commission was looking at was what is… It was almost a question of what is financial planning and how are we delivering it.
Paul: Correct. Yeah.
Hannah: So I’m curious, was it just that they weren’t having the meetings? What did that look like? What should have been done that wasn’t done?
Paul: Yeah, well, I think it’s a great question. And it’s one that personally we as a business have looked at a lot. What do we do? What do we deliver?
Paul: What’s valuable about what we do? And whilst we as a community, we come to functions and events like this, and we are all very proud of our role, and we think we’re very important in life, and everyone needs a financial planner. I think we’ve got to become a lot better at articulating what it is that we do. And I think we need to start thinking potentially a bit more broadly than just selling products or investing money for clients. Because else… The need for what we do is a lot broader than that.
Paul: So I think, yes, to answer your question, there were promises being made about the number of meetings that they would be having with their clients, and something as simple as that, they weren’t being done. There’s promises being made about how portfolios would be monitored, or clients would be informed of changes to regulations that would affect them that weren’t being passed on. So I think there was lots of things not happening.
Paul: The advisors’ back office, and their systems and processes, and the way they communicate with their clients, and how do they deliver services en masse to remain profitable but to tailor it to clients is a real big challenge for advisors I think everywhere.
Paul: But it’s sharply in focus in Australia because we’re being pushed down that, we’re heading down that path of charging a fee-for-service, so we better be really clear on what that service is going to be and we better deliver it.
Hannah: I’m so fascinated. So you could still charge an AUM fee or fees on investments. Do you find that a lot of these planners are doing that? Or are they doing just the fee-for-service or just these financial planning fees?
Paul: I don’t know if I can speak on behalf of what-
Paul: Financial planners are doing broadly, but certainly what we see. And we see… We were ran a practice that had to make decisions around-
Paul: How we’ve charged for what we do. And I think the key message is… You’ve got to make some promises to a client about what it is you’re going to do to help them. And those things need to be of value to them. They can’t be superficial. And I know I made the joke earlier on about sending out birthday cards, but once upon a time, that was part of our value proposition and it probably still is for lots of people. But really, I don’t know how much value clients get out of that. Maybe it’s part of building the relationship with them, but I think there’s so much more we can do.
Paul: So if part of what we are doing is we’re managing a portfolio of money for a client, then charging a fee to manage that portfolio is perfectly fine. There’s no problem with that. But you start to then encroach on this world of an investment manager. And I think the danger that I’m picking up now is that there’s a lot of advisors in Australia starting to move be, to call themselves investment advisors because it’s an area where there’s fees being charged, at the moment by a fund manager. And they’re fees that potentially a financial advisor could help reduce and potentially receive part of if they take on that investment management role.
Paul: So they better be good at it. Because I think investment management’s not something that is easy to do, as most of the fund managers would attest to. And I think to be a financial planner one day and an investment manager the next, and not have actually done anything by way of training to get yourself there, is kind of a bit dangerous. To say the least.
Paul: So fees can be charged in different ways. The key is that you’re transparent in what it is you’re going to charge and how it’s calculated. And then you deliver the services that you’ve promised you will deliver for that fee. And to that end in Australia one of the other compliance requirements is that once a year we need to write to a client and tell them the fees that we have charged them. So this is now the responsibility of the advisor to do this, not the fund manager sending them a statement saying your advisor received $1,000. We need to, as advisors, write to our clients, explain to them what we charged them in the past year, what we delivered for that service, or for those fees, and what we promised, said that we would deliver.
Paul: And this is called an annual fee disclosure statement. And even just that administrative overlay on top of keeping track of how much you’re charging the client and what you’re doing, is adding compliance time to our operation that we just, once up on a time, never had to deal with.
Paul: It was interesting. I sat through a Vanguard presentation this morning where there was a chart on the wall that explained, or that showed Vanguard’s research on where advisors are spending their time here. And there was one massive wedge missing from that chart from my perspective that I know in Australia is a large percentage of an advisor’s time. And that was compliance.
Paul: Morningstar produced some research in Australia recently where close to 25% of an advisor’s time is spent on compliance matters. So no revenue, just dealing with the compliance requirements. And in that Vanguard chart there was nothing represented. So I don’t know if that’s actually true. There must be some compliance time spent here.
Hannah: You mentioned the ten billion dollars that’s going to be paid back to the clients. Are advisors, I mean I guess it’s their E&O that’s on, the professional insurance? Or who’s paying?
Paul: Yeah, who’s picking up the tab? It’s a great question.
Hannah: Are advisors having to front that money and going out of business? What is that-
Paul: I’d like to be a lawyer in Melbourne.
Hannah: You could make a lot of money there.
Paul: The legal profession would be amazing. So yeah, it’s a good question, who… In the first instance the banks are ultimately responsible for the advice that their advisors have given. So the buck stops there to a degree. So, certainly from the regulator’s point of view, they’re saying it’s up to the banks to compensate their customer for the losses experienced by clients. But what then the banks or the financial services divisions of the banks then do, with regards to chasing compensation from the advisors who had some responsibility to deliver these services, is yet to be seen. I just don’t know how that will end. But it is certainly a concern from an operator’s point of view. A business operations point of view. Because all I see is additional compliance, which is more staff being employed to do things that sometimes work and sometimes don’t work. And certainly an increase in professional indemnity insurance. And that just gets passed through to our consumers.
Paul: And, touch wood, as a firm we think we do the right thing. We’re transparent in what we do. We keep the promises we make to our clients. And we’re having to wear the cost of all this added compliance. And compliance to a degree, giving individuals more paperwork for them to read before they make a decision, disclosing more information to them prior to them making a decision, has got to the point of being quite ridiculous in Australia. Where the documents, the compliance documents, the financial reports that we provide to clients, can be 60, 70, 80 pages long. And there was a finding published by, again, the regulator ASIC the other day where they had a look at the impact that these additional documents have had on consumers and they’re realizing that a lot of them aren’t producing the result that they were intended to produce.
Paul: So clients are being more overwhelmed. They just don’t get the time to read it. And I think what illustrates that really quite nicely is an example, a client example, that I had. Which was, I have a client who is a litigation lawyer. And so as an advisor you’re a bit nervous when you’re dealing with a litigation lawyer. You’re making sure you’re doing everything you should do, as you should anyway. I presented to this lawyer what’s called a Statement of Advice, which is what our document is called, our financial plan, it’s called a Statement of Advice.
Paul: And I slid it across the table to him and I was about to take him through it and his response to that was, I thought, really quite insightful. And it was, he said, “Paul I understand you need to give me this, and it’s a requirement of the law that you do so, and I appreciate you putting it together. But if you wouldn’t mind just telling me in your own words why this advice you’re giving to me is good for me and is in my best interest.” And so I told him. He transcribed that onto a piece of paper and he slid that piece of paper across the desk and put it in front of me. And he said, “I’m just wondering if you wouldn’t mind signing and dating the bottom of that. Because,” he said, “with the greatest respect, this document you’ve given me here I won’t read and I won’t understand it.” And that one little piece of paper there, is all I need to support the recommendation you have made.
Paul: And I thought that was really interesting from a lawyer who’s involved in this-
Paul: This type of activity. And I agree. I think some of these compliance documents that we are being asked to produce at the moment are really, they don’t help the consumer make a more informed decision.
Hannah: Oh I love that story too. And I love that, just the context of it. Of how do… It’s fascinating. How do clients process information?
Hannah: We can give them all the reports in the world-
Hannah: But does that actually-
Hannah: What does that mean?
Hannah: Yeah. And what-
Paul: And certainly the big banks, what they’ve been guilty of, and the advice firms associated with them, is they’ve got compliance departments-
Paul: That are coaching these advisors, and they’re paranoid about not providing all the information that they’re legally required to provide. So they tend to err on the side of… Well they err on the side of caution, they don’t tend to.
Paul: So that’s why these documents become so big and there’s every kind of disclosure in the world in there.
Paul: And the poor consumer picks it up and looks at it and just says I don’t even know where to start. And as an experienced advisor, it sometimes takes me a while to work out how to read these reports the consumers are meant to read and understand.
Hannah: Yeah, it’s not easy at all. So we were talking over lunch, and one of the things that you said that I immediately had a reaction… I mean I was like, “Oh my gosh, I can’t imagine that happened.”
Paul: Sorry about that.
Hannah: No. No. No. It’s more of an indictment on how things are in our world. You talked about these, you called them the supers, super?
Hannah: And you talked about how they’re invested by private companies. And I was just like, “Oh my gosh, we could never do that here in the States.” I’m thinking now to the 403(b) rules, that were just set. That’s our teacher retirement fund. Where they just removed the cap on the total fees. It was already at like two and a half or something percent.
Paul: Right. Yeah.
Hannah: They just removed the caps on so you can charge even more on those internal expenses on these fees, and that is a really big problem here in the U.S. So I’m curious, how is that structured? So you said nine and a half percent. Employees are required to put nine and a half percent into these supers.
Hannah: Are investment companies managing that? What does that look like?
Paul: Yeah, there’s sort of two broad way that this happens, but in Australia we have what’s called industry superannuation funds. These are non-for-profit organizations. There would be maybe 50 or 60 of them in Australia at least. There’s three or four really big major ones that look after the majority of individuals. And they are… They go in at an employer level and they set up a relationship between themselves and the employer and they receive these contributions, these monthly contributions or quarterly contributions, to superannuation that the employer is paying and is mandated to pay.
Paul: So the relationship is really just between the industry super fund and the employer. Often no advisor is involved. There’s staff from these big industry super funds running workshops-
Paul: And information evenings for employees. And then depending on that industry’s super fund… Some of the smaller ones don’t have the capacity to manage and invest the money themselves, or sorry, invest the money themselves. So they will sign mandates to hand that money to investment managers. Our biggest superannuation fund in Australia, called Australian Super, is of a scale now where about 18 months ago they made the decision to bring the Australian equity component of their investments in-house. And they employ now 150 people. And they’ve done that because they believe, again, they’re of a size where by bringing in-house it’s going to be less expensive for them to manage it.
Paul: And being a non-for-profit organization, anytime they get bigger they get more efficient. Their cost of running their business reduces and they pass that through to members. To give you an example in terms of costs for that type of a product, for a individual, you’re probably paying a fee of about .75 of a percent to have your retirement savings managed. And you have a very limited range of investment options to choose from. But that said, it’s probably adequate. And their performance is exceptionally good, and has been consistently.
Hannah: Seventy-five basis points is for the cost. So it’s not like Vanguard level expenses.
Paul: No, it’s not. Correct.
Paul: And the reason is it’s not at a Vanguard level is there are some reporting requirements that these organizations have. So there’s a little bit more involved, But the fees are certainly being driven down in that world. In Australia. Not up.
Paul: It’s now very odd to find a retirement savings investment, a superannuation fund, with fees over two and a half percent. It would be really odd. So they’re all sort of sub one and a half.
Paul: So that’s one area. And, as I say, often financial advisors like us are not involved in those products. And that’s a historical, because of historical reasons. And the reason was financial advisors could not embed their fees though these products because these industry funds never paid commission to advisors.
Paul: That’s changed in the last three, four years. Industry, because financial advisors are changing, a number of these big industry super funds are now starting to partner with… Partner’s probably not the correct terminology, but to understand financial advisors more. And we can be seen in the same room occasionally having conversations. Because as a fee-for-service business, which our business, WealthSpan, is, we ultimately… Financial products, superannuation funds, there’s no shortage of them. So instead of coming to work on a Monday and think, gee, I hope I can find a superannuation fund for a client, there’s literally hundreds and hundreds and hundreds of them. So I’m really after just a great contract for a client or a great investment for a client, low fees. And that’s what a lot of these industry super funds can deliver.
Paul: Likewise, there are your traditional superannuation funds, we call them retail superannuation funds. They’re run by firms that you know of here in America. So we’ve had Prudential, Perpetual run them. Those organizations are no longer in Australia, but those organizations were running those types of superannuation funds. The fees are inevitably slightly higher, because they are usually for-profit organizations. So they have to pay profits through to shareholders and so the fees are slightly higher, and they tend to be a lot more sophisticated products. So instead of having eight or nine investment options available to the individuals who are saving for their retirement in these products, they sometimes can have 6-700.
Paul: And when you’ve got that many investment options, you need an advisor to help you made some decisions. So it’s fair to say that the majority of advisors in Australia would be using those retail-type of superannuation funds or a slightly lower-cost version of those retail funds.
Hannah: It’s such a foreign idea of me to have these big massive companies that are not-for-profit.
Hannah: That are running investments. Which I think is such a really, really cool way of doing it. But it again, it kind of just shows my perspective is limited in the U.S., you’re right.
Paul: Well you’ve got… Vanguard is your best example.
Hannah: Vanguard is the best example. Yep.
Paul: And Vanguard’s got a great footprint in Australia. And their structure’s probably not exactly the same as these industry super funds but it’s the same philosophy.
Hannah: Yeah. Yep.
Paul: Vanguard in Australia, much smaller than in the U.S. in scale, and your fees are incredibly low. Vanguard in Australia’s management fees are about .25 of a percent. Twenty-five basis points. So not zeroes and five basis points.
Paul: But I think if you think of how Vanguard operates here, then that’s kind of a similar model-
Hannah: Similar model-
Paul: To what these industry super funds have. And in those investment options for clients, or in those superannuation funds, clients have their insurance. So their life insurance, TPD insurance, they could have salary continuance insurance in there as well. So there’s some pros and cons about dealing with industry super funds. Lots of advisors… You could interview another advisor from Australia here and they would say that they’re very awkward to deal with, and I agree with them. They’re not really geared up to work with advisors. You wouldn’t see them at the FPA conference. They just don’t do that sort of thing. So it’s quite a different beast to deal with. And I think coming back to the discussion of what our value proposition is now, when our firm started to charge clients a fee for our services and not rely on any product for remuneration, you start to think more broadly than just those organizations where you can earn your revenue from the product.
Paul: You start talking to different organizations. So I think that’s really something exciting to look forward to is, you’re going to start to see other organizations, other fund managers, other investment managers, that maybe don’t pay remuneration to advisors, starting to encroach in the advice space here and helping advisors grow their value proposition.
Hannah: It’s so neat watching how financial planning is growing in Australia versus how it’s growing in the U.S. And I think there’s definitely lessons that we could be learning from-
Paul: When you say growing, I’m thinking we’re about to retract in terms of number of advisors. And it’s certainly, from a business point of view, it’s really hard to find good financial advisors. So if you want to be a valuable resource, being an authorized financial advisor in Australia, you suddenly become a lot more valuable. And with the new entry requirements and that mentoring in the first 12 months, it’s going to be a lot harder for people to start. So for some advisors, who are prepared to kind of go through the education and the pain, I think it’s a really really exciting time. For consumers it’s a sensational time. And I think, if we’re sitting here in five years’ time looking back, I’d be really watching what’s going on in Australia closely.
Paul: Because I think it’s the model we need to all get to. It’s just that we’re, yeah we’re having to hack the path as [crosstalk]
Hannah: How do we get there?
Paul: Yeah. How do we get there.
Hannah: So I am also fascinated by these super funds. Am I saying it right?
Paul: Yeah, super funds. Perfect.
Hannah: By these super funds. And we have Social Security here in the United States, so you kind of have this guaranteed… One positive that I see of that is that there’s no, people don’t have the option, it’s not invested in anything. They don’t have the option to pull the money out. Some of the behavioral things are pulled out from that.
Hannah: But I’m curious. So an individual can go in and make investment decisions on their super funds.
Paul: Yeah, they can. In Australia, we don’t have defined benefit funds anywhere near like you do to the same degree. We did have, but they’ve been phased out. We had a really progressive prime minister in the 80s who said that everyone needs to save for their own retirement. But we also realized that this is a behavioral finance aspect that we’re terrible about, thinking about saving for the future. So really, the smart thing that was implemented then was this requirement that employers pay money into superannuation on behalf of their staff. At a cost to employers, but over time they’ve absorbed it-
Paul: And we factor it into the pricing of our fee models. That started at three percent of someone’s salary. It’s now up to nine and a half. And it’s about to go up to twelve.
Paul: That money’s then put into a defined contribution fund. So that’s throwing all those responsibilities of how to invest the money, managing risk, and then later on managing longevity risk and how much do you withdraw, at what rate, back to the individual.
Hannah: So there’s no social security. There’s no-
Paul: No, there is. There is.
Paul: So we have really three. They call it the three pillars process, which is superannuation, employer putting money in for employees retirement, an individual is expected to top up and add to that retirement savings themselves. And as advisors we’re… All advisors in Australia would be involved in helping clients to understand that nine and a half percent’s not adequate. You need to save more than that. The number’s probably closer to 15 percent for your lifetime that you need to be saving.
Paul: And the third thing then is the government pension, which kicks in at the age of 67 in Australia. But it’s of a level where you would not want to have to rely on it. It’s a real basic standard of living. So it’s equivalent to about 15,000 U.S. dollars a year per person.
Hannah: Oh wow. Which is well below the poverty line here.
Paul: And it’s well below the poverty line in Australia as well.
Paul: People who are living purely off the Australian Age Pension, or Centrelink Pension, are struggling to pay the bills. They’re not turning the heaters on in winter. So you need to have some other resources, ideally.
Hannah: So with giving all of this ability for individuals to direct their retirement, and we have that in the U.S. in the 401(k) and specific retirement plans. Are you seeing that… Are individuals making a lot of the behavioral finance mistakes that we would anticipate that they would make?
Paul: Absolutely. So that’s one very interesting thing. As advisors, we sit opposite clients and we have conversations with them every day. And I think there’s, certainly in Australia, there’s somewhat of a disconnect between the academic research that’s going on in that behavioral finance world and what advisors are able to take away from that. So a lot of the academic research is at a level where advisors can’t really process it. We can’t really use it in our businesses. But we’re starting to see behavioral finance become something that is talked about a lot more. There’s several great sessions at the conference, this conference, on behavioral finance. So it’s becoming more of our repertoire, I think, as advisors.
Paul: But certainly we see clients walk into it all the time. There’s a simple of example I gave where… Well there’s actually a lot of examples of behavioral finance things that clients have done. But one was, a client came to see me. He had inherited a portfolio from his dad. And you see this a lot when people inherit a share portfolio. They really attach a lot of emotion to it, for various reasons. But he came in. He’d inherited a portfolio from his father. It was about 400,000 Australian dollars. And it was a terrible portfolio. And it had performed terribly for 10 years. And he had concerns about it, in terms of whether he should maintain it or not. But because his dad had left it to him in his will, he had an emotional attachment to it. And I made some suggestions about potentially selling some of the stocks that he held in there, and maybe adding some diversification to it, and the sorts of things that we get involved in helping clients with. And he was very reluctant to do anything about it.
Paul: I then reframed the question. And framing, in behavioral finance context, we talk about framing a lot. But certainly I think as advisors, if we can think sometimes how to reframe a question, we get a different answer, which is quite interesting. So I reframed this and I said to him, I can’t even remember the guy’s name, but I said, “Jim, if you had $400,000 in cash sitting on the table here, and we were going to put an investment portfolio together for you today, would you go out and buy those stocks you’ve got today?” And he said, “No way. There’s no way I’d buy that portfolio.” So that is ridiculous that on the one hand he’s saying I’m not prepared to sell it, because my dad left it to me. But if I had it here as a pile of cash on the table, I would never go and buy it in a million years.
Paul: People are attaching emotion to this money that they shouldn’t be doing. And his dad wasn’t around to care. Maybe he thought it was disrespectful to his dad to sell it. But I think that’s very interesting that people are like that. So we see it, absolutely. We see it a lot.
Hannah: Well it’s so interesting because you talk about you can’t really… Well I guess I’m making a broad statement that’s not entirely true, but it’s not… But you can’t really charge on the assets, the AUM fees that we’re so used to here, on all of them. And I know you said that that’s changing. But yeah, that’s where so much of the planning and the relationship is needed.
Paul: Yeah, correct. And in that case if we, just to clarify that, if we were managing that portfolio, so $400,000, the way we as a business structure, that relationship, is we know that that portfolio is going to need some love and care. And we’ve got some choices. We could put it into a Vanguard index fund and set and forget. We could… I don’t mean set and forget forever, but you know-
Paul: We don’t have to be terribly involved. So it’s pretty hard to justify a fee of $4,000 a year when really not a lot needs to happen for the investment management part of it. But if the same person is one that’s got a lot of other things going on in their life, we need to give them advice around budgeting, setting aside some money to put into superannuation, to contribute to their retirement, they may be needing strategies to repay debt. So there’s a lot of other things that we all do to help them. But the investment management part, you’re right. There’s maybe not a lot and we don’t charge a lot.
Paul: But for other clients where they want a direct equity portfolio, they want some obscure investments, they might want an investment property or a buy-to-let type of investment, which we can have in certain superannuation funds in Australia. You can have residential investments. Then there’s a lot more work involved and we will certainly charge a fee for that. We could charge a fee based on how much money we’re managing, that percentage of the portfolio. It’s getting rarer that that happens. And the logic or the argument for why it’s becoming rarer is, if you charge a percentage of funds under management and somebody’s got a million dollars, do you charge them twice as much to manage two million dollars? Because it’s not necessarily twice the work.
Paul: So you can have sliding scales, and you can deal with caps at the top, and caps at the bottom. It starts to get a bit blurry.
Paul: So where we have chosen to go as a firm is to… We know what we’re going to deliver. We know how often we’re going to catch up with the client. We know what services we need to provide by way of research, portfolio construction, reporting. So we put a price on that. And we say to the client, to do that it’s going to cost you $10,000 a year. If then the client turns up next review meeting and they’ve got an extra $200,000 because they’ve inherited some money, it doesn’t take a lot more to absorb that. It means that when we’re giving advice to a client, when the fee we’re charging is not linked to the amount of money that they’ve got invested, I think that our… There’s less chance of us being biased.
Paul: So if the best advice for that client with $400,000 is to pay off their mortgage-
Hannah: They pay off their mortgage.
Paul: They pay off their mortgage. And as a firm we charge them for that piece of advice, even though there’s no financial product that we’re going to benefit from or receive remuneration from. To me it’s still advice that they hadn’t thought of anyway, or they hadn’t come around to deciding upon themselves.
Paul: So as a firm we charge for all of the advice we provide, irrespective of whether there’s a financial product involved or not.
Hannah: One of the trends, or things that I’ve seen in the U.S., is that they’re charging a retainer based on the net income. That’s factoring in and it’s very much, on income or net worth. Is that something that you’ve been seeing in Australia?
Paul: So rather than being as a function of the capital that they’ve got invested, it’s a function of the income that the portfolio produces.
Hannah: Yeah, income or the net worth. Yeah. It’s a factor of-
Paul: Again, I think there’s a number of firms in Australia that certainly charge that way also. I come back to, I don’t think it really matters how you charge-
Paul: As long as one, the client knows exactly how it’s determined, and secondly they know what you’re going to be delivering for that-
Paul: And thirdly, you deliver what you said you’re going to deliver for it.
Paul: And as long as that’s transparent, whether a client chooses to pay us out of an investment product for advice that we’re doing that covers their broad situation, honestly, what I say to a client is, I honestly don’t mind. I just want you to pay the bill.
Paul: We’re going to give you an invoice, and as long as you pay it, I really don’t care whether it comes out of your superannuation arrangement, your insurance policy, your pocket, your employer’s pocket, your auntie, I really don’t mind.
Paul: And that works fine. People go, “Yeah, fair enough.”
Hannah: As we’re wrapping up, I have a twofold question for you.
Hannah: So one is, is why did you fly half way around the world to come to this conference? And then the second one is, as you’re here, and as you can reflect on what we’re doing in the United States, what are the observations that you would make? Observations or, especially knowing that this podcast is targeted to young planners, what would be observations or advice that you would give, with a filter of what you’re seeing in Australia?
Paul: Okay. Two big questions. Well the first one’s pretty easy actually. I’ve traveled from Melbourne, in Australia. So that’s a 24 hour trip door to door. It’s a big trip. 18 hours sitting in a plane. But it’s an opportunity that I was given. We entered a financial planning competition and we’ve never entered financial planning competitions in the past. It’s not something that’s really got me going terribly much. But this financial planning competition is run by Plan Plus. And it’s a competition that critiques financial planners on real financial plans that they’ve given to their clients. And it critiques them on the scale of the value that’s been created. And that’s something that is really close to my heart, is the value we create for clients.
Paul: We entered this competition last year for the first time and we did reasonably well, so we got a bit of a head of steam up and a bit of a ambition to try and take out the top prize. We came runner up last year. And this year we entered the competition again and we had a wonderful client case that, a really complicated set of circumstances where individuals really needed financial planning advice. An enormous amount of value to be created for them. Wonderful human beings. So we entered the competition again. It was kind of fortuitous we had these clients come through the door that year. And entered the competition again and we took out… We compete in three regions. The Plan Plus competition is over three regions, the Americas, Asia, and Europe. And Australia’s been slotted into the Europe region, not Asian. And that’s because of the compliance. Regulation is much more like Europe than it is Asia.
Paul: So we took out first prize for the European region. And as part of that they flew us here. And put us up for a few days. So I couldn’t say no to that. Even though it’s daunting, coming across the other side of the world. So that’s the reason we’re here.
Hannah: Well congratulations on winning.
Paul: Thank you. Thank you.
Hannah: Winning that competition.
Paul: It was an absolute thrill. And certainly I’d encourage advisors to find out a bit more about it. The feedback you get from the judges and the value that that creates. So you’ve got independent peer reviewed… Oh sorry, you’ve got independent judges, peer reviewing your work. And they come from all over the world. So that’s probably the most value component of the competition. You need to finish in the top few to get that direct feedback, but that said, there’s plenty of advisors who have competed in the competition who would be happy to share their experience and their knowledge. And I think to compare your work to other advisors is really helpful. There’s the gentleman who won the American region, Michael, comes from upstate New York, and his work is of the highest standard. So you’ve got people in your own backyard that are doing some awesome work. So I encourage advisors to have a look at that.
Paul: The other part of your question? Sorry I’ve forgotten. Though it’s a harder one, I remember that.
Hannah: No. Well it’s, as you are looking at the U.S., what are your observations or advice, especially around younger planners, or newer planners as they’re entering into the profession?
Paul: It’s always easy to jump to conclusions. What I’m trying to do this trip is just to find out, ask questions, do exactly what you’re doing to me. Because, you know you hear things. So in Australia we hear about, we’re miles ahead of the rest of the world. And then we go somewhere else, and we’re miles behind. And I did some work in the U.K. once, and again, the same kind of comments are going on. I think we’re all so competitive. We all want to know where we are in the pecking order.
Paul: I think the reality is probably more along the lines of we’re all probably dealing with exactly the same issues. Education is important across the borders. There’s no question. Advisors are becoming more sophisticated and better at what they do, thank goodness. And that’s great. And I think you’ve got an organization in the FPA here that is being led by some incredible people.
Paul: So one observation I would make is that you certainly have an incredible organization. And you have some incredibly intelligent people at the senior end of that. And in Australia we don’t have too many individuals involved in financial planning with PhDs. I could probably count them on one hand. Whereas here you’ve got a number of them represented in the board, and that’s fantastic. And I think the connection between academic research and how that could be applied to an advisor’s business and ultimately to the benefit of a consumer, is something that is definitely miles ahead here in the U.S. and I look forward to taking back to Australia because we still have a couple of the major universities in Australia that just don’t even want to entertain financial planning. And I just think that’s really terrible. There’s a lot to be gained by involving financial planning in these universities. And so that’s my ambition, is to go back and fly the flag and try and get a bit more academic rigor put around the work that we do in Australia.