A puzzling feature of the financial services landscape is that large-scale professional services firms, like those found in law or accounting, don’t exist the same way in financial planning.
The new financial planning business co-founded by former MLC chief executive Steve Tucker and former JBWere chief executive Paul Heath is an attempt to address that, and represents what the founders describe as “a market solution” to perceived conflicts in current business models.
“If you look at the landscape of wealth advice, what we’ve seen in the traditional structures of the last 30 years or so is that whilst there’s been independents and there’s been vertically integrated businesses, over time the lines continually blur and then separate, and then blur and then separate,” Tucker says.
“Those structures have actually done a pretty good job. They’ve provided good and robust advice to millions of Australians, and they provide good product outcomes.
“But because they are so entangled, the challenge of regulating them to make sure customer interests are put first, or of a government legislating – as we’ve seen with a few rounds of FoFA – is very complex. There are lots of different moving parts in that traditional structure.”
Tucker says professional services firms, that exist solely on fee revenue generated from clients, have existed in other professions for generations. But they have not taken root in financial planning.
“There are two good reasons for that,” Tucker says.
“One is, the structures of the past are very difficult to move away from, because they have worked, and people have become very embedded with the idea that [advice and product] can live side-by-side in a vertically integrated model. It’s been working pretty well. There have been challenges and scandals and so on. But the challenge of disentangling this is much greater than the benefit, is the view of the system.
“The professional services firms – why haven’t they moved into wealth advice in a substantial way? Well, because they run audit practices and various other things and so it’s difficult for them to do that.
“Why not try and replicate the independence of a professional services firm, the culture of a professional services firm, the notion of partnership, in an economic model that generates revenue only from the client?
“The million-dollar question is can you make any money out of that, because everyone tells you that you can’t. So how does PricewaterhouseCoopers make money?”
A simple idea
Tucker says the idea behind the firm’s structure is simple: “Get highly professional practitioners in the advice space, whether it be from private wealth firms, whether it be from traditional financial planning firms; bring them together in the Koda model where they are partners in the firm and they own equity in the company; and generate our fees and revenue from the clients.”
“At at a certain point in scale we can sustain this business by bringing in new talent; over time retiring partners; and creating, essentially, a professional services firm which fills a gap that the high-net-worth end is looking to be filled, around independent high-quality advice,” he says.
Heath says advances in technology have allowed Koda to set up with relatively low fixed costs. It will use Powerwrap for investment reporting and execution.
“What has changed is the ability to access low-cost, high-quality products and platform technology,” he says.
Participating in growth
Koda’s advisers will participate in the growth and the profitability of the business, and this will form part of their overall remuneration. Heath says that advisers will receive “the same economic return” as advisers in other financial planning or wealth management businesses, but the structure aligns them with the success of the business.
“We can genuinely make money by giving advice rather than making money by selling product,” Heath says.
“Giving good advice to private individuals is a noble cause and we share the view that we think it should be a profession.”
Echoing Tucker’s view that Koda represents the market response to conflicts in financial planning, Heath adds: “As an industry, we should not stand around waiting for the regulator to tell us how to rebuild trust with clients.”
Tucker says it’s up to the market to sort it out because repeated government efforts have failed.
“We’ve had CLERP6, we’ve had FSR, we’ve had FoFA – we’ve had two governments have a crack at FoFA,” he says.
“We’ve had the regulators have a go – they’ve looked at educational standards, exams, and so on. Murray has had a look at it. And these are very credible, very smart, very experienced groups of people looking at these things, and it’s very challenging for them.
“So the reality is that we now need to look at a market solution. That’s simply because the consumer is now well and truly aware of the opportunity set, which is: vertically integrated model – good job, know what I’m going to get, though, is associated with the firm; or the independent model. We think that quite quickly now the market will move on, regardless of FoFA outcomes, and fill that gap, and the client can decide.”
The final step?
Tucker says addressing structural issues might be the final step in convincing the public that financial planning has arrived as a profession.
“We know that financial planners are in the main very well qualified – regardless of what people say about three-day courses, that’s not true; they are very well qualified,” Tucker says.
“They are expert and professional in the advice they give; they do have their clients’ interests at heart; and most of them live inside a vertically integrated structure. So if the first three things are true, what’s holding it back?”
Tucker says vertically integrated structures are here to stay, because the cost to both institution and client of unwinding the structure outweighs the potential benefit.
“We’re not saying that [structure] can’t exist; we’re saying the new type of firm, the firm of the future, the professional services firm will emerge; and possibly by breaking that nexus between the product and the advice, we start to see the last thing that’s holding the profession back falling away,” Tucker says.
“We only get revenue from one source, and that’s the client,” Tucker says.
“Fees paid by the client. You can collect it any way you like, but very simply the only source of revenue for Koda will be revenue generated from the client. Se we don’t have any rebates from platforms, we don’t have any margins on certain products.”the nature of the fee paid will be “determined by the services that the client wants, and how they go about using the Koda services”, Tucker says.
“For those clients that re predominantly investment clients, it will tend to be based more on a percentage of assets; some will be fixed-dollar fees,” he says.
“It’s neither here nor there whether it’s an asset-based fee or an hourly fee or a project fee; the key determinant here is that it’s paid for by the client.”
Realigning adviser remuneration
A key to making the Koda model work is restructuring adviser remuneration.
“If you look at a private wealth adviser, in most of these firms they’re getting paid a split of revenue which is, in our view, quite high for a profitable industry,” Tucker says.
“But the reason those businesses exist is because they are also distribution opportunities for the firm.
“If you look at the financial planning sector, the fees that most advisers pay to the licensees don’t actually cover the costs of the licensees, but there are other ways that money is derived. So they’re the same problem. It’s an economic problem that’s been embedded in these businesses years and years and years.
“The reason Koda can exist is not because we can bring the fees down in terms of what the adviser will receive in terms of their revenue, but it's because advisers own equity in the firm and they will receive dividends, which means their overall income, when we’re profitable, will be more than it is today, but we’ve broken the nexus between having to receive product revenue to get to profitability.
“There’s obviously new technology which keeps our costs down; and there’s no legacy issues in this business. So the economic model is much more able to exist today than it was able to exist 10 years ago.”
Opportunity and participation
Tucker says Koda’s founders and its backers have seen “both a commercial opportunity in terms of a gap in the marketplace, but also an opportunity to participate in the next evolution in the industry”.
“We spent a long time thinking about it and preparing it and getting a lot of views on what people would like a business to look like,” he says.
“When you actually sit back and think about it, you’ve got an opportunity, you’ve got the timing, we think the consumer is ready, and you’ve got a good gap…it’s an idea whose time has come. Why wouldn’t we want to part of that, and proudly part of that?
“We want to prove that the world is not flat. Thinking is embedded, and it’s wonderful to have an opportunity, having been part of that – and proudly so; I still think they’re wonderful organisations – to have a think about what you’d do if you had a blank sheet of paper. Is there a way to try something different? It might not work. I think it will.”
Read more at professionalplanner.com.au