The answer is loud and clear. Fee-for-service businesses with a clearly-articulated value proposition, streamlined client bases and with few unencumbered clients will thrive.
"If you are uncertain who your clients are and you've got more names than relationships, things are only going to get more uncertain," Strategic Consulting and Training (SCAT) managing director Jim Stackpool says.
Now and into the future, client relationships built on a strong foundation of structured communication that frequently reiterates the customer value proposition (CVP) will be paramount.
But there also is an X factor. According to Encore Group managing director Graham Peatey, a business's ability to make money under FOFA will also depend on their personal and business confidence.
"It's about the opportunity. It's about competing, not about compliance," Peatey says.
Businesses must be confident in their profession and operate as business managers with an integrated back office.
Best practice: two-year opt-in
Of biggest concern to financial planners of all the FOFA provisions is the opt-in provision.
From 1 July next year, financial advisers will be required to send all new retail clients a renewal notice every two years as well as an annual fee disclosure statement.
It is hoped such measures will enhance the level of engagement some clients have with their adviser, but practitioners say the cost and administration of this added obligation will force them to focus their retention efforts on clients with higher balances.
According to Stackpool, it is completely justifiable to question the level of engagement a financial adviser has with a client in a business that has 200 to 250 name clients per adviser.
"They are getting more money every year from people they do not even know or see," he says.
For businesses that have strong relationships with their clients, complying with opt-in is not expected to be too onerous.
For example, Stackpool says for businesses with less than 200 name clients, it is a matter of an annual or biannual conversation around: "This is the situation, does this represent value for you?"
He says it is a conversation that SCAT's business clients actually like to have with their clients. "If you haven't been having it, then it's tough," he says.
Business Health founder and partner Terry Bell agrees and says opt-in should be looked at as part of an overall business communication program.
"Frequent, continual reiteration of your CVP works. If you do that, clients won't be considering opting out," Bell says.
He says in practice this means communicating at least 10 times a year with your A clients where you continually remind them of your service offer.
"Our data shows that those businesses who contact their clients 10 times a year, double the profit per owner compared to those who contact their clients less than five times," he says.
Bstar executive director Scott Monotti says advisers need to get better at highlighting the features of their service. "You have got to communicate the wins you're making for clients. It's not always about investments," Monotti says.
Top tips for opt-in:
Develop a communication program for 2012, which is delegated to a specific staff member in your practice.
Develop a standard statement that explains what you do and use it in every communication you have with clients.
Best practice: annual fee disclosure statement
To prepare for the annual disclosure statement obligation, Russell Investments practice development manager for intermediaries John Nolan says businesses can start to get the bugs out of their data systems. This means ensuring data is up-to-date and reliable.
While it seems commonsense, experts say advisers are not good at it. "Some clients don't even have their [clients'] addresses," Peatey says.
For those businesses working with high-touch clients it won't be a problem. But there will be clients that are hard to find or on holiday and you don't see them.
Peatey says failure to ensure good contact with clients could mean commission refund businesses, such as MyMoney and YourShare, as well as 2020direct, which offers investors direct access to managed funds without fees, will attack those client bases of businesses that are not on top of these details.
Another cost saving measure in preparing for the annual disclosure statement obligation is to conduct a thorough internal audit as to what fees and services were charged and delivered over the past 12 months.
Ensuring systems talk to each other and are collecting the right information will make this process more efficient.
And although technology should provide some solutions to the administration concerns of opt-in, including the chasing up of paperwork and signature dilemmas, it is not clear yet from the government what will be accepted.
Nolan says the word 'written' had not been used in the draft legislation, so it was recommending to practitioners that compliance could be achieved via phone call or file note. However, he says in the bill read in the House of Representatives, this was changed to written.
Monotti says planners will ultimately have two options, "either to incorporate costs into the provision of advice and it becomes a disbursement, so to pass it on, or look at ways technology can help".
Nolan says: "The reality is some clients will opt out. You need to be covering the cost of advice upfront."
In this way, Peatey says planning businesses should really want to move into an opt-in environment irrespective of the detail of the legislation.
This is because it forces businesses to ask themselves whether they are a price maker or price taker. If they are the latter, they are simply relying on the insurance companies and fund managers to essentially set their price.
Top tips for annual disclosure statements:
Ensure client data is up-to-date.
Do a systems check to ensure information on fees and the services provided can be easily produced.
Best practice: Rebates
Licensees should be talking to their providers to confirm what approach they will be taking post 1 July 2012.
"Current thinking is that existing relationships can remain in place," Nolan says.
More of an issue for licensees, Stackpool says dealer groups are starting to say: "Where do we make our money going forward?" The answer to this question comes down to how they are going to replace the revenue stream. Monotti suggests getting more involved in product manufacturing.
In such an environment it is predicted that models such as netwealth, which provides dealer services without having an aligned dealer licence, will attract more planners.
"For advisers who are impacted, increasing the services provided and therefore fees charged could help to address this revenue gap," Nolan says.
He says using high-tech solutions to appear high-touch is one strategy.
Further, look for other benefits that are not exempt from the soft dollar ban, such as adviser education and IT administration services.
Top tips for rebates:
Be clear on the services your dealer is providing and at what cost.
Consider other services as a way to fill the revenue gap.
Best practice: best interest
Practice management experts say they are comfortable most advisers are already clear on their responsibilities to their clients.
"The vast majority of practitioners are doing it for their clients intuitively anyway," Bell says.
Nolan suggests a more comprehensive approved product list (APL) could help accommodate the best-interest amendment.
"If a client had a particular need and a product wasn't available on an APL, it might allow more answers to more questions," he says.
In this regard, advisers need to be prepared to say no to some clients.
Further, in the case of a breach, the focus will be on the advice process itself rather than just the product recommended, so advisers need to understand the process they should follow. Clarity and direction from their licensee is a must.
Top tips for best interest:
Understand how to best demonstrate adherence to your best-interest obligations.
Check your APL to ensure it has the right scope of products for your target client.
Best practice: limited advice
To make money from the limited advice opportunity, an adviser must decide they want to operate in this space.
"You have got to decide where you want to play. If your ideal client is to walk through the door, who are they, what industry do they work in?" Peatey says.
Nolan says: "You can't go in half-hearted."
Client segmentation and the cost to serve clients must be conducted prior to making the decision.
Pricing effectively will be an important part of providing limited advice because practitioners won't be able to rely on ongoing fees. Separating out initial, implementation, ongoing and relationship fees is a must.
Businesses will need to calculate the price for doing the advice and make a decision on what to charge a client. Communication will need to then be maintained on the chance that in another five years there will be the opportunity to provide another piece of major advice.
Scale will be needed for profitability.
Smaller practices will be forced to focus on their A grade clients as they will be more profitable. By elevating the service offering, practitioners will be able to charge higher fees while also simultaneously trying to push the B clients up.
"A lot more at risk is the C clients who will go to scaled advice," Nolan says.
The old practice of higher value clients cross-subsidising the lower clients will be forced out and all clients will need to add value.
Business databases will become exceptionally important and they should be seeking up-to-date contact details from clients regularly.
Top tips for limited advice:
Do it only on the basis you introduce the client to the advice journey and take them up the value chain.
Be prepared to charge the right amount for the initial meeting.
Best practice: relationships with accountants
The industry is still waiting to hear whether the government plans to make it mandatory for accountants to have a licence to provide financial advice, but the expectation is they will.
Stackpool says from his work with accountants, it will not be strategic for them to provide financial advice on top of their other services.
As a result, "there is plenty of opportunity to work with [accounting] clients and make money", Nolan says.
He says the other FOFA reforms should provide some comfort to accountants. Opt-in should give them confidence their clients are being looked after.
Further, a banning of commissions and rebates means an adviser can now sit down and say to an accountant, "I charge the same as you".
But practitioners still need to educate accountants on what they do. They also should send their accounting partners a report on any referred client they service.
"I would love to see advisers who have aligned partners briefing accountants on FOFA. You need to reach out to centres of influence and discuss how it impacts on the business," Bell says.
This provides a terrific opportunity for financial advisers. "Accountants are missing the total financial planning opportunity. Our industry has prospered because they have not seized an opportunity," Monotti says.
He says of the 260 accountants Bstar works with, only 40 per cent have a partnering relationship with a financial planning business.
Top tips on working with accountants:
Ensure accountants understand your value proposition, what it is you deliver and the process of delivering advice.
Formalise your communication with centres of influence.
What will the cost of FOFA be?
There has been speculation that the cost of becoming FOFA ready will cost practitioners anywhere from $11 to $250 a client. But ultimately the cost to a business will depend on its book of business, target market, the quality of its database and systems and level of engagement with clients.
Nolan says issues such as opt-in have a two-year lead time after their introduction from July next year, so the cost of this can be spread out. However, the cost of generating annual disclosure statements will be felt sooner.
Peatey says the best strategy to combat costs is to establish a target client and to build a client value proposition around it. Further, businesses need to identify the five things they do really well and how they benefit the client. «
Top five ways of absorbing the costs
Integrate opt-in into your business review process and iron out the bugs in your data and pricing systems.
Segment your client base so the segments are treated differently, but the same within each segment.
Make sure the initial fee is not a loss leader.
Check if your licensee is talking to technology businesses to get group deals before approaching them yourself.
As the cost to service increases, look at developing a more diversified business or using model portfolios to keep costs down.
12 ways to make money under FOFA
Revise your value proposition and be able to articulate your value.
Decide if you are a product or service specialist or a broad consultant to clients.
Determine who your clients are - past, present and future.
Test the true price of your service on your clients and work out what they are willing to pay.
Avoid cross-subsidisation of your client base.
Have a base level of service for each client.
Structure your communication program.
Beware of distressed sales from other advisers as the acquired clients may lose their grandfathering status.
Focus on A-grade clients, elevate service, charge larger fees and try and push up B clients.
Ask for referrals - 87 per cent will give you one, but only half of businesses ask for them.
Engage your client and provide them with a road map to create an ongoing client.
Supplement profit shortfalls with other products and services such as aged care and mortgages.
