Insights
Update: Winning the long game for practices and licensees
The original version of this paper was written in August 2018 – however, we have included new content to reflect likely impacts from the Hayne Royal Commission Final Report (RC Report).
Post RC, financial services firms will continually need to look at the long game to ‘future proof’ their businesses and continue to deliver trusted advice through a system free of product and conflicted purpose; and one founded on three foundations of trust…
Part I: A Professional Sector needs a professional structure
Financial Planning as a Profession and birth of the Advice Groups
Over the last eight years, financial planning has been through myriad inquiries and legislative changes. Yet one of the most significant chapters still lies ahead, with the commencement of the new standards body, the Financial Adviser Standards and Ethics Authority (FASEA). Many commentators have rightly pointed to the vital importance of this body in the development of the financial planning profession.
But is it enough? In my view, NO.
Winning the long game for practices and licensees
Financial Advice businesses and Advice Groups playing the long game successfully
For financial planning to take its place as a profession, stakeholders need to look at the long game and explore a system free of product and conflicted purpose, and one that is founded on three (3) foundations of trust.
Further, there are five (5) core tenets that advisers, practices and advice groups need to aspire to in order to ‘win’ the long game.
Part II: A Professional Sector needs a professional structure
Individual Certification of Advice Professionals
When I wrote my first paper May 2017, I argued that a true profession has an underlying structure supporting its professional mission. It currently doesn’t! You won’t find any profession where the professional operates under a licensee, often with commercial interests, which in turn is accountable to the regulator (ASIC in this case). The financial planning sector can only take it’s place as a profession under the Professional Standards Legislation if it’s structure and culture reflects other professions.
Since the first paper many people have asked technical questions, but also what it means in a broader business context. This paper addresses both these areas.
AI in Financial Advice: Bridging the Accessibility Gap
Artificial Intelligence is revolutionizing the financial advice sector, offering promising solutions to make quality advice more accessible to everyday Australians. As the industry grapples with increasing demand and accessibility challenges, AI-powered tools are emerging as vital allies for financial advisers.
Tom Reddacliff, CEO of Encore Advisory Group, emphasizes that while AI applications in financial advice are in their early stages, they represent a significant opportunity for the industry. "These solutions will typically work with advice-specific tech tools and prioritize tech stack connectivity," Reddacliff explains, highlighting the importance of integration with existing advisory processes.
For practices considering AI implementation, Reddacliff outlines a strategic approach. The first crucial step is engaging the team in documenting current processes thoroughly. Following this foundation, AI can be leveraged to streamline these processes, with the potential to reduce existing workflows by up to 50 percent.
This efficiency gain could be transformative for the industry. By reducing the cost base, practices can make financial advice more economically viable for a broader range of clients. Additionally, Reddacliff suggests these technological advances could create new opportunities for entry-level advisers, potentially addressing the industry's succession planning challenges.
The impact of AI adoption could create a significant competitive advantage. "We see a big divide in top line growth and profitability in businesses who seek to invest and scale," Reddacliff notes. "They will invest in AI and the gap will widen." This observation suggests that early adopters of AI technology may gain a substantial edge in the market.
Perhaps most importantly, AI integration promises to enhance the client experience significantly. Reddacliff points out that AI technology connected to front-end client systems has the potential to transform client interactions, making them more interactive and efficient in executing tasks.
However, the transition to AI-enabled advice delivery requires careful consideration and planning. Practices need to approach implementation strategically, ensuring their teams are properly prepared and processes are well-documented before introducing AI tools.
As the financial advice sector continues to evolve, AI appears poised to play a crucial role in bridging the advice gap. For practices willing to embrace this technology, the rewards could be substantial – not just in terms of operational efficiency, but in their ability to serve a broader range of Australians with quality financial advice.
*This article draws insights from "It's a different scale': Koda deal won't set industry standard" which appeared in Professional Planner, December 2023. Read the full article: New kid on the block: AI steps in to close the advice gap - Professional Planner
Beyond the Koda Deal: Understanding Value in Financial Advice Businesses
The recent acquisition of a 25 percent stake in Koda Capital by US-based Emigrant Partners has sparked discussions about business models and valuations in the Australian financial advice sector. However, according to Encore Advisory Group executive chair Tom Reddacliff, while the deal demonstrates the potential value of advice businesses, it shouldn't be seen as a template for the broader industry.
"It's a different scale, client and type of buyer," Reddacliff explains, highlighting the unique position Koda occupies in the market. With $10 billion in funds under management across 40-50 businesses and a focus on wholesale and high-net-worth clients, Koda operates in a distinctly different space from typical financial planning practices.
The path to establishing a business model like Koda's isn't straightforward. "You don't just wake up in the morning and decide to replicate the Koda model," Reddacliff notes. The business requires substantial infrastructure, including internal investment capabilities, sophisticated investor structures, philanthropy services, and expertise in complex tax arrangements.
Success at this scale demands significant investment and intensive operational requirements. "To set up a firm like Koda, it's quite a high-cost base and intensive," Reddacliff points out. "Paul and Steve know what they're doing and why they set it up. It's not something I'd recommend a firm just to decide to do."
For most advice businesses, the focus should remain on developing their own value propositions within their target market segment. Reddacliff suggests that typical successful advice businesses operate at a different scale, often with $2-3 million turnover and considerably less funds under management than Koda's billions.
The distinction becomes clear when considering international investment interest. "You have to be at a certain scale to get on a plane to New York and have those discussions," Reddacliff explains. "They were talking to players that aren't well-known here at all in the Australian market."
For the majority of advice practices, success lies in understanding their market position and building value propositions that serve their specific client base effectively. Rather than attempting to emulate Koda's high-net-worth focused model, businesses should focus on developing sustainable models that align with their capabilities and target market.
The Koda deal, while significant, represents a specific segment of the market rather than a blueprint for the entire industry. It serves as a reminder that there are multiple paths to success in financial advice, each requiring its own unique approach and strategy.
*This article draws insights from "It's a different scale': Koda deal won't set industry standard" which appeared in Professional Planner, May 2022. Read the full article: It’s a different scale’: Koda deal won’t set industry standard
Active Advice: The Future of Financial Planning
The financial advice landscape is undergoing a significant transformation, with active advice emerging as the dominant model for successful practices. According to Encore Advisory managing director Tom Reddacliff, advisers who deeply engage with their clients' financial lives are best positioned for future success.
"Active is the only viable business model," Reddacliff asserts, pointing to recent regulatory changes that have reshaped the industry landscape. The abolition of grandfathered commissions and the transition from biennial to annual opt-ins are driving this shift toward more engaged advisory relationships.
These regulatory changes are more than just compliance requirements – they're reshaping the fundamental nature of adviser-client relationships. "If you don't have an active, valuable relationship then that form of revenue is dead in the water," Reddacliff explains, highlighting the critical importance of maintaining meaningful client engagement.
The impact of this shift is already evident in practice valuations. Reddacliff notes a significant disparity in how the market values different types of advice businesses. "A revenue book where a buyer is concerned about future 12-month opt-in is being discounted to a two or below revenue multiple," he says. In contrast, practices with proven, engaged client relationships are commanding valuations "somewhere in the high twos."
This valuation gap underscores the market's clear preference for active advice models. Businesses that can demonstrate strong client engagement and consistent value delivery are being rewarded with higher valuations, while those relying on legacy revenue streams face increasing pressure.
Looking ahead, Reddacliff predicts that the adviser population will contract to approximately 15,000 by 2023. However, this reduction, combined with growing demand for financial advice, could create favorable conditions for remaining practices. "There's every reason to be optimistic that there's some greener pastures ahead," he notes.
For advisers navigating this shifting landscape, the message is clear: building and maintaining active, engaged client relationships isn't just good practice – it's essential for business survival and growth. The future belongs to advisers who can demonstrate ongoing value to their clients through regular, meaningful engagement.
*This article draws insights from "Active advice 'the only model in town'" which appeared in Professional Planner, February 2021. Read the full article [here](https://www.professionalplanner.com.au//2021/02/active-advice-the-only-model-in-town/).*
Navigating the Changing Licensee Landscape: Expert Insights
As the financial advice industry undergoes significant transformation, selecting the right licensee or business partner has become more critical than ever. With major players entering and exiting the wealth management space, advice practices face crucial decisions about their business partnerships and future direction.
Industry Megatrends and Market Dynamics
In this timely webinar, Tom Reddacliff, Executive Chairman and Director at Encore Advisory Group, delves into the industry megatrends reshaping the advice landscape. With the licensee market in transition, understanding these trends is vital for making informed decisions about business partnerships and future growth strategies.
Key Focus Areas
The session explores several critical aspects that advice practices need to consider:
Industry Megatrends
Tom examines six key megatrends currently shaping the industry, providing insights into how these changes affect advice businesses and their choice of licensee or service provider.
Essential Partnership Conversations
Learn about the four crucial conversations every advice practice should have with potential suppliers or licensee partners. These discussions are fundamental to establishing strong, sustainable business relationships that align with your practice's goals.
Strategic Partner Selection
Discover the key criteria for selecting long-term licensee partners and solutions providers. Tom shares practical strategies to help practices efficiently create a shortlist of suitable suppliers, saving valuable time in the selection process.
Market Impact Analysis
Gain valuable insights into how current market turbulence affects the licensee landscape and what this means for advice practices. Understanding these dynamics is crucial for making informed decisions about business partnerships.
The webinar also examines the current financial market environment and its implications for advice businesses, providing a comprehensive view of the challenges and opportunities facing the industry.
Expert Guidance
Drawing on his extensive experience in the financial advice sector, Tom Reddacliff offers practical insights and actionable strategies to help practices navigate this period of industry transformation. His expertise provides valuable guidance for practices seeking to make informed decisions about their business partnerships and future direction.
*For more detailed insights from Tom Reddacliff on selecting licensees, asset consultants, and tech providers, visit the Netwealth Insights hub: Best practices in selecting a licensee, asset consultant or tech provider
Vertical Integration: The Missing Piece in Quality of Advice Review
The exclusion of vertical integration from the Quality of Advice Review's terms of reference raises important questions about the future regulation of different business models in the financial advice industry. According to Encore Advisory managing director Tom Reddacliff, this omission could hinder efforts to address both advice affordability and market clarity.
"If someone's operating a vertically integrated model like AMP, Insignia and others out there that are privately owned, we're better off knowing exactly what those business models are or aren't," Reddacliff explains. He emphasizes the importance of clear distinctions, noting that these aren't independent models and such clarity would benefit both advice affordability and market transparency.
The Challenge of One-Size-Fits-All Regulation
Reddacliff points to the limitations of applying uniform regulations across diverse business models. Drawing comparisons with more developed markets, he highlights how the UK has successfully implemented clear labeling and segmentation of different advice segments.
"In the UK they've clearly labelled or segmented their advice segments and that's what we should do here," he notes. "A classic example is risk specialist advisers; that's a clear segment of advice but it's operating under the same set of rules and education standards as a stockbroker giving advice."
Impact on Market Segmentation
The absence of vertical integration from the review's scope could have far-reaching implications. Reddacliff warns that without addressing different business models, it will be challenging to properly segment the advice market and, consequently, tackle the crucial issue of advice affordability.
This concern is particularly relevant given the industry's ongoing struggles with making financial advice more accessible to everyday Australians. The current regulatory framework's failure to distinguish between different business models and advice segments may be contributing to these challenges.
Looking Forward
The discussion around vertical integration remains crucial for the industry's future development. While the Quality of Advice Review addresses many important aspects of financial advice regulation, the omission of vertical integration considerations could leave significant questions unanswered about how different business models should operate and be regulated in the Australian market.
*This article draws insights from "'Big oversight': Vertical integration notably absent from advice review" which appeared in Professional Planner, March 2022. Read the full article: Big oversight’: Vertical integration notably absent from advice review
Clear Labels, Better Outcomes: Learning from the UK Advice Model
The Australian financial advice industry could benefit from adopting a UK-style regulatory approach that clearly differentiates between different types of advice providers, according to Encore Advisory executive chair Tom Reddacliff. This insight comes as part of a joint submission to the Quality of Advice Review from Encore Advisory, Finura Group, and Tangelo Advice Consulting.
The UK Model: A Blueprint for Success
"The UK model clearly delineates between restricted advisers and independent advisers," Reddacliff explains. "It's the concept of making it clear to the client what model they're engaging with and where it is the restricted model or the independent model."
This clear labeling system helps consumers understand exactly what service they're receiving and from whom. The approach could address current disparities in the Australian market, where consumers can have vastly different experiences receiving advice from relevant providers versus limited scope advice through superannuation funds.
Creating Fair and Proportionate Regulation
Reddacliff advocates for an appropriate regulatory environment that provides distinct guidelines for each model. "The [holistic advice] model should be under a best interest duty, but it's also making sure that what the restricted model has is fair and proportionate and not massively different," he notes.
The potential benefits of this approach extend beyond mere clarity. Without implementing a restricted advice service similar to the UK's, Reddacliff warns that Australia risks limiting the supply of advice. "That's not a good client outcome either. Too often in the industry we don't start with the client and this is an opportunity to start with the client and work out how they want to engage with these services."
Streamlining Documentation Requirements
Drawing parallels with other professions, Reddacliff points to the accounting industry's more straightforward regulatory regime, despite handling significant business liabilities. "When they're documenting their advice to the client, rather than listing every single thing they considered in their head in a massive document, all they end up doing is summarising the conclusion," he notes, suggesting a similar approach could benefit financial advice.
A Collaborative Approach
The joint submission represents a unified perspective from three consulting firms with complementary expertise. This collaboration brings together operational compliance, technology, and business coaching viewpoints to present a comprehensive case for reform.
The proposed changes align with broader industry goals of increasing advice accessibility while maintaining high professional standards. By adopting clearer labels and more proportionate regulation, the Australian advice industry could better serve consumers while supporting sustainable business models.
*This article draws insights from "Follow the UK and give advice clearer labels" which appeared in Professional Planner, September 2022. Read the full article: Follow the UK and give advice clearer labels
The Rise of Multi-Partner Super Firms: The Future of Financial Advice
The financial advice landscape is evolving rapidly, with multi-partner "super firms" emerging as the dominant business model of the future, according to Encore Advisory Group director Tom Reddacliff. This shift represents a significant departure from the traditionally prevalent single-owner practices that have characterized the industry.
Current Market Dynamics
Reddacliff identifies two distinct types of advice businesses operating in today's market. The first category comprises businesses experiencing robust growth with abundant client opportunities. "Managing growth" challenges in these firms are what Reddacliff describes as "the good problems to have."
However, these growing practices face their own set of challenges. Reddacliff identifies three critical areas requiring attention:
Human resources capabilities
Consistency of processes
Strength of balance sheets
"What I would see often in the advice business is that different advice pods operate differently which creates a lot of challenges for the back-office staff and tests systems," Reddacliff explains. "They are growing on the top line but it is not turning into the profitability they want bottom line."
The Emergence of Super Firms
"The ultimate business model [what we are dealing with now] is the emergence of privately owned, big solid multi-partnered scalable firms and that is the business model of the future," Reddacliff asserts. This evolution mirrors trends seen in other professional services industries, marking a departure from the traditional single-owner model that still characterizes nearly half of advice businesses
These super firms typically feature:
Solid balance sheets
Multiple partners
Scalable operations
Interest in acquiring other businesses
The Challenge for Single Practices
While single-adviser practices continue to exist, they face increasing operational challenges. These smaller businesses often struggle with rising costs and need to focus intensively on operational efficiency and cost management. According to Reddacliff, these practices need to operate "really sufficiently" and focus on "managing your costs really well."
Looking Ahead
The trend toward larger, multi-partner firms reflects the maturing of the financial planning industry. As the sector continues to evolve, the super firm model appears poised to become increasingly dominant, offering benefits of scale, operational efficiency, and enhanced business resilience.
For practice owners and industry participants, understanding this shift is crucial for making informed decisions about their business's future direction and potential partnership opportunities.
*This article draws insights from "Rise of the multi-partner 'super firm'" which appeared in Professional Planner, February 2024. Read the full article: Rise of the multi-partner ‘super firm’
Annual Opt-In Legislation: A Watershed Moment for Financial Advice
The financial advice industry faces a transformative shift with the introduction of new legislation requiring annual ongoing fee renewals and explicit disclosure of non-independence. According to Encore Advisory Group CEO Tom Reddacliff, these changes mark "a watershed moment for financial advice," with far-reaching implications for practice valuations and client relationships.
Impact on Practice Values
The transition from biennial to annual opt-in arrangements could significantly affect practice valuations, which are already under pressure from other regulatory changes. "Practice values will go much lower for revenue where you can't demonstrate probability the client will opt in," Reddacliff explains. "The vast chasm in revenue valuations will open up even more."
Emphasis on Active Client Relationships
The new legislation places greater emphasis on client engagement and value demonstration. Reddacliff highlights that advisers will need to maintain a more "open and active" relationship with their clients. This aligns with Commissioner Hayne's vision of ensuring clients make informed assessments about the value of their advice relationships.
Key Changes and Timeline
The legislation introduces several significant requirements:
Annual written disclosure of past and future fees
Written consent for fee deductions from client accounts
Five-year record-keeping obligations
Explicit disclosure of "lack of independence" for advisers accepting insurance commissions
Business Model Implications
The changes necessitate substantial adjustments to business practices, including:
Updated compliance systems and documentation
Restructured client meeting schedules
Enhanced engagement strategies
Revised fee disclosure processes
Looking Forward
These regulatory changes signal a new era in financial advice, where transparency and active client engagement become increasingly central to successful practice management. For advice businesses, the focus must shift to demonstrating clear value proposition and maintaining strong client relationships to ensure sustainable practice valuations.
The introduction of these measures represents not just a compliance challenge, but an opportunity to reshape client relationships and business models for greater transparency and engagement.
*This article draws insights from "'Watershed moment': Annual opt-in, independence disclosure bills released" which appeared in Professional Planner, February 2020. Read the full article: ‘Watershed moment’: Annual opt-in, independence disclosure bills released