The Empty Business Model – Is it Plans or Assets?     

“I think that the pivot is now on. The Duty, 4.4% bank rates are readily available; client portals causing clients to take the wrong actions; 7% + annuity rates, and these are scenarios that post RDR no one has experienced. Hence, the fee being anchored on the plan.” – Anom, Oct 2022.

Here’s our current assumption. All the value lies in assets under management. The financial planning model might be good for the client, but commercially it’s an empty business.

Create a centralised investment proposition. Set up risk-balanced model portfolios on a distributor platform. Buy research to create asset allocation. Use fund research to select funds. Run an investment committee. Use low-cost, diversified passive funds. Review periodically and change the proposition on review. A management fee of 1% per annum is lower for larger clients.

Spin the yarn that you beat the markets.

After building up AUM, several years later, search around for a buyer paying a high multiple of recurring revenue. Retire, or move on to the next venture observing non-compete clauses as required.

It’s called asset gathering or hoovering.

That was the strategy I pursued to recover a failing network in 2005. I was the business development director; we had 750 advisers and £7bn assets under management. I had to abandon the project and sell out to a more extensive network when an investor pulled out at completion as part of a refinancing deal. There was an FCA deadline to meet, and I needed to preserve adviser licenses and save jobs. I had to act fast and move on.

It’s a little at odds with the strategies we sell to our clients (we tell them to invest in pensions to grow their wealth – then include their assets in the gathering to grow ours).

But it’s a solid business model with content. It is the only place market participants make money these days in the AUM.

Here are some thoughts on it.

We all know churning assets to shave basis points off charges and optimise asset allocations is one thing. But fund picking and timing markets are another matter. It pricks our conscience. 99% of the time, we don’t beat the markets after charges. It’s a bit amateur and clunky. We must convince ourselves of the story to sleep at night. And truthfully, we have zero control over investment outcomes.

I think CIPs – Centralised Investment Propositions – have hit a bump in the road under Consumer Duty. I’m unsure how they meet value assessments, given they don’t work.

But there’s still a healthy market for consolidation. That’s where the money is to be made today. Hungry consolidators are saying they can do better and cheaper with economies of infrastructure and scale.

Then there’s regulatory pressure. And a growing awareness amongst savvy investors. Dawn is breaking into a new era for financial advice.

“The Duty, 4.4% bank rates are readily available; client portals causing clients to take the wrong actions; 7% + annuity rates, and these are scenarios that post RDR no one has experienced.”

There’s downward pressure on ongoing charges. A growing need for transparency. Consolidators acquire consolidators. Margins are tightening.

The planning is discarded. The asset harvesting of immediate short-term value has a high price. Eventually, all those multiple payouts take their toll. The last one holding the asset loses.

Bit of a Ponzi scheme for the last consolidator.

Here’s the thing.

There’s a part thrown away in consolidation. It’s seen as the empty bit. It has no value to the consolidator; it is a cost. And that’s financial planning.

The consolidator will pay for the investment, but that planning must stop.

The consumer goes from quite a thick level of service to a skinny remote and impersonal level of service in this exit strategy.

Keep the investment advice. Throw the financial planning away.

The thing is.

With all the tax savings, behavioural psychology, estate planning, and asset creation strategies, all the value add for the consumer lies in financial planning. In any commoditised market, there is no value in advice, recommendation, and intermediation. And indisputably, the investment market in recent years has become commoditised.

Today, advice-only financial planning firms can run a wealth business as a side hustle, and two-thirds of revenues can be recurring and on the financial planning side.

Where there’s muck, there’s money.

What if there was a financial planning consolidator on the block?

The exiting IFA sold their financial planning to another company to continue. At first, the prices paid would be low. But as consumers appreciate the value-add in ongoing financial planning, there becomes a market for financial planning consolidators.

Asset consolidators would welcome the news, as they get a higher price for their bounty. So would clients who enjoy the continuation of planning service post-retirement of their advisers.

Plus, financial planning is not regulated by the FCA (unless done to give investment advice). Without FCA regulation, operational costs are lower. It’s more enjoyable for planners. And consumers.

In September 2020, Christopher Woolard, the then interim CEO of the FCA, said in preparation for Consumer Duty:

“The overwhelming majority of retail investors are best served by readily understood, well-diversified and low-cost investments which are already available from a range of providers, but many retail investors don’t choose these. We are seeing some progress on reforms of governance and a focus on making investments better value for money, but progress is still slower than we might like.”

What if financial planners outsourced investment advice to the consolidators? What if retail investors did choose themselves? Would we even need the FCA?

Is the pivot on, and is the fee now anchored on planning, not assets?

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