Industry trends financial advisers should know
With Andrew Inwood, Principal of Coredata.
Matt Heine: Hi and welcome to this episode of Between Meetings. Today we've got yet another industry legend coming in to speak to us.He's been in the industry for over 30 years, but 20 years ago he decided to set up his own research shop Coredata. In this chat we'll discuss a whole range of things spanning from advice models overseas and domestically, as well as some tips for those looking to service high net worth clients. It's my pleasure to introduce Andrew Inwood.
Andrew Inwood: It's great to be here, Matt.
MH: Now Andrew. We won't necessarily spend a lot of time going back 30 years, but what was it, 10, 20 years ago, that you decided to set up a research shop? Was it something that you'd always wanted to do or was it just at the right time?
AI: It was really something that I'd always wanted to do. The problem that I'd had working, I spent most of my working career working in marketing and economics roles for Rothschild Asset Management and AMP. The thing which used to consistently bother me was that the customer was a loosely held concept. Absolutely to Rothschild, because they were a distributed sales force, they talked only to advisers and then they persistently talked only to the advisers they liked. They didn't get a broad view of the world. At AMP, I thought, and this may have changed, that the world stopped at the front doors of 33 Alfred Street. They spent so much time focused on each other, practising a kind of vertical apartheid, that they had no clue what the client was doing. I'd consistently see millions wasted after a marketing campaign or experiment went wrong because the customer was abstract and filtered through a fine lens. So what I wanted to do was build a business which took that away, which allowed people to see very clearly what the demand was.
MH: What did the product development lifecycle look like back then? It's obviously very different to what it is today.
AI: That's a really interesting question because one of the big things that I did when I was at AMP, and worked really hard on, was take the product development lifecycle from 200 days to 90 days, so that we could test and learn much more quickly with products. Product development tended to be driven by sales force desire rather than market need. Or someone had been on an overseas tour and seen something and come back and said, "We need one of these."
The strike rate, frankly, was about one in four. One in four absolutely works. AMP was in the lovely position and still is in a lovely position where it could seed all its own products. The minimum viable size for a product inside AMP was decided to be $20 million. So they funded them all themselves. In my 12 years there, there would have been half a dozen which went really well. But many, many, many, which will be still struggling along, and still alive doing not much.
MH: Sitting in the dark back books of a legacy product.
AI: Sitting in the E-unit.
MH: The E-unit.
AI: Which is where they hid everything. The E-unit itself was kind of mildly profitable because of the way the fee structure worked, which in itself was interesting.
MH: So having shortened the lifecycle of the product development, understanding it was really, it should be about the client, you set up CoreData, and AMP was your first client there, I think.
AI: They were. So I set it up and I rang up the guy who was running marketing at the time and said, "I've returned from the UK. I had been working for Virgin Direct. I set up this business." And he said, "Excellent. I've got some work for you." That was a trap for young players because it was a big contract and so for the first year, I was really just working for AMP again. And then I grew up and started to expand it and invest in the business and do those types of things.
MH: You've got a big team now, you're spanning lots of different parts of the market. What's your bread and butter these days?
AI: It ranges from country to country. There's four streams to the business. There's content marketing, which is where we take large, abstract groups of data and develop a narrative for fund managers and financial planners and businesses like that. There's customer analysis and segmentation, which is hardcore research, which really derives pretty meaningful outcomes for people. There's big data analytics, we have an entirely separate business called Janus Analytics which works mostly for super funds doing next-most-likely purchase behaviour modelling. There's straightforward customer research where we're looking at customer satisfaction, customer behaviour and doing those types of things.
The thing I'm really interested in, the work that I'm doing, is starting to drive out the segments of behaviour and understanding how each of those segments are behaving. Not just end customers, but also in the planning networks. So planners for a long time have been treated as an amorphous mass, as a large group. There's 24,000-odd registered planners in Australia. If you use Price's Law, that means 144 people are doing most of the work. Understanding which ones of those 144 are, how they're behaving and what they're doing, becomes critical to the industry.
In this podcast series Matt Heine, Joint Managing Director of Netwealth, chats to industry professionals and thought leaders on what opportunities and challenges they see for financial advisers and the wealth industry as a whole.
MH: So before we jump into the adviser segments, you mentioned you're doing quite a lot of work with the industry funds on next best action. How do the industry funds compare to, say, some of the retail providers that you're working with? Are they miles ahead when it comes to understanding the customer? Is everyone starting to do these sort of things? Where's the industry actually at?
AI: So the industry funds is a very diverse universe. Two or three of the funds that we're working with, and they're big funds, are red hot on the segmentation analysis and the way in which they're working. And the work we've been doing then for the past few years have fundamentally reduced their churn, fundamentally increased their uptake into new products, fundamentally increased their ability to keep the person post-retirement, which is the big issue facing most of these funds. So they range from better than anyone else in Australia to woeful. There's so many. There's 212 of these things. They range from multi-billion dollar funds, to 300 or 400 million in the back box of Campsie. So they do behave very differently.
Obviously, there's going to have to be some sort of change in that area. The work which is being now done by now APRA and they've produced a heat map of who's who and what's what. That's obviously version one. It's like anything version one. It's the working first draught. That'll get refined and refined.
You've got to start to work out what's best for customers. There's a couple of interesting measures you can start to think about. Customer satisfaction is an interesting measure. Best possible retirement, I think, is the critical measure and we're doing some really good research on that now.
MH: As in asking the customer what their desired retirement is? Or trying to actually help them understand what it could be?
AI: Both of those things. You're exactly right, Matt. So understanding what their best possible retirement is, given how much money they've got and where they sit. So what does that look like? And also helping them make decisions which, earlier in the lifecycle, to derive their best possible retirement. I think that's the goal of the super fund.
So size doesn't determine it. Size turns out to be irrelevant to that. There is a little bit of an advantage of the funds which are attracting huge amounts of money because they can use the cashflow to hide all sorts of problems. But for those who don't have big inflows, there's a lot of funds in outflow, then deriving the best possible retirement for people is very interesting.
MH: The tools that they're developing or the way in which they're working with their customers, is a lot of that self-service? Is it outbound offers and phone? How do industry funds actually interacting best with their customers?
AI: So the really good ones have worked hard to develop really good customer segmentation and using the tools of the customer interaction with them, developing data tools which allow them to say what is going to be the tool, the device, the communication, which is most going to satisfy this customer? And increasing the frequency and type of communication and targeting the communication to the people that they're talking to.
Customers, you can talk about behaviourism, if you go back to that Jungian idea of behaviourism and divide people up into three or four cohorts or 16 cohorts, as many cohorts as you like. We've met industry funds who have 28 cohorts, which is kind of meaningless. Any more than five and then it's just too hard to manage. If you manage your cohorts as independent groups, then you're much more likely to be able to satisfy them.
We're late to this as an industry. The car industry figured this out 200 years ago. You can buy a $32,000 Mercedes or a $2 million Mercedes. They worked it out. And they worked out what satisfies people. We're still getting to it and that's a really interesting outcome for me.
MH: So age is an obvious cohort segment. Wealth is an obvious one. What are some of the more interesting ones that you're seeing?
AI: So we don't see age as a cohort. That's interesting but it turns out to be not important. Demography is not important. What's really important to us is behaviourism.
AI: Yeah, well, it's beyond attitudinal. It's the hard wired behaviours. If any of the listeners out there or you have more than one child, you know that their behaviours are hardwired and their satisfaction measures are hardwired. So once you derive the satisfaction measures, then you can start to derive the communications and the way in which people talk and act. As soon as you understand that, you can stimulate them into much more positive behaviour.
The goal of the super fund is to allow their customers have the possible retirement. To a certain extent, people can't define their best possible retirement because so much of that's about deferring pleasure. Very few people are hardwired to defer pleasure.
MH: When you said that, I was thinking about my four-year-old son and his good behaviour chart, where he picks the toy that he wants and then he has to obviously do the right thing for two, three weeks. It's really easy over time to see what's going to get him to do the right thing and what's not. So it's probably just an advanced version of that.
AI: You're 100% right. I had the same issue with one of my children. I hesitate to say which one. He's an interesting cat. You couldn't smack him, you couldn't yell at him, you couldn't do anything, but you could deny him pleasure, and then he would change his behaviour. You could run him through a statements, "If you will, then I will," statements and he would absolutely buy into it. Anything else just didn't work.
MH: Let's hope he's not listening and he's now worked out that you can control him.
AI: He's 19, six foot five, and 120 kilos. I can't tell him to-
MH: Best to leave him alone.
AI: Yeah, he can do anything he likes, Matt.
MH: So with the industry funds, so they're obviously going to keep investing fairly heavily into this area. They don't have big advice forces at the moment, although they're absolutely growing. Do they see digital as really the panacea moving forward?
AI: Most of them have tried and failed at digital. So that's a really interesting question. Again, there's a bunch of people out there trying to sell digital to them as a panacea. But the experiments that they've done in that space so far haven't really yielded significant results. At the end of the day, there's a really interesting part of the human characteristic is that about 20% of the population can use digital to make a purchase, but 80% of the population, they need their hand held. They want their hand held through the process. They need someone to trust.
MH: When it comes to financial matters? I think the-
AI: When it comes to financial matters.
MH: ... majority of the population's very comfortable buying something on eBay or Amazon these days.
AI: That's because they can define value. So you can define value through price, but in financial matters, price and value are not correlated. So here's the really interesting thing. For the 20% of people who can define value in superannuation, they're already doing it themselves. They like doing it themselves, they have a hedonistic bias towards doing it themselves. The industry funds are getting some of their money, but they're getting it in their low-cost experiences.
Here's another really interesting thing. Three or four of these industry funds have got really good self-managed tools. Tools that allow people to manage their money themselves with incredibly low take-up. Some of the best in the country. I use one of them because it's really good and it's really cheap.
MH: For asset allocation or what sort of tools?
AI: Asset allocation, directing your investment, understanding what's going on with your investments. They exist and they've been running, in the case of two of them, for more than five years. But there's almost no penetration.
MH: And presumably, that's because people that are self-aware and financially literate, aren't going to use an industry fund to implement?
AI: You're 100% right because we've got a big database, we've got the Hunter and Bligh database, 155,000 Australians, let's say 85,000 of those are in industry funds. We can segment to those with guys more than a million dollars. We've got about 1,700 of those. We researched them and said, "Why aren't you using them?" "Didn't know about it," or, "I wouldn't trust an industry fund with the money." The most common answer was, "Didn't know about it. If I had known about it, I would have used it, but now I'm somewhere else, so too late."
AI: Yeah, they're really good tools. Better than most going around, but their uptake is low.
MH: So moving back to advisers now, so you're just about to get started on the different segments that you've come up with in the adviser market. Things are changing rapidly, we've got a changing of the guard, we've got lots of advisers leaving. What's the state of play?
AI: In every storm, you get this moment of quiet where nothing's really happening. The first movers have already moved and they've made the decisions and they've made some serious decisions.
MH: As far as moving out of licensees and-
AI: Either moving out of the licensee or moving out of the industry or trying to sell their industry. There are a lot of businesses which are quietly for sale. Valuations, of course, have tumbled and tumbled dramatically for the average business. We are seeing the first move of the set people changing to their second licensee, move to the first one, unhappy, the promises made haven't been delivered on. So we're starting to think about moving to our second licensee. There's big numbers. These are the fish... it's an old metaphor. It's the rats that can swim that leave the ship first. So they've moved to licensee one, and they're already not happy, already people are talking to them, saying well-
MH: And this is the big practises you're talking about, primarily?
AI: Yeah, big practises with $300 or $400 million under management, starting to think about, "This is not what I was promised."
MH: And based on your research, what were some of the things that they were promised that they felt weren't delivered?
AI: Warmer management, fast responses to queries, product problem resolution was to be quick, business development was to be fast, and helping with the compliance issues was to be robust and intimate. That's the one which they're most commonly falling down on. "He can't see you this week. He can't see you this week. We're on meeting four which has been shifted or changed." And the person sitting with the compliance issues which they're trying to fix. There's silence coming from the licensee.
MH: Yeah, I didn't actually think about that second marriage or the second licensee. I think many of them, to your point, before the big ones moved, probably close to three, four years ago now. You have the Royal Commission in the middle which would have amplified probably the issues that they were feeling in their old licensee.
So the ones that are going to win in the future, what are they delivering? The opposite of what they weren't getting? Or have the needs changed?
AI: The needs are changing fundamentally. So the licensees that are going to win in the future are really, really rushing towards the digitisation. They're taking the work out of the practise. If I look at what happened to the UK, who are probably four or five years further along the curve than us, the ones who have been successful have really digitised the streams, made life a lot smoother, allowed record keeping to be fast. There are people here developing those systems. Some are further ahead than others, but that's the thing which is making the real difference. So it's allowing the planner to be much more intimate with the customer and much more hands-on and taking that piecework out of the business.
MH: The fact that you just said allowing the adviser, I think's interesting because a lot of these dealer groups, certainly that we've been working with for a couple of years, have tried to implement digital fact finds and a whole range of initiatives. It's actually been the advice firms that have been slow to adopt as opposed to the licensees putting up barriers necessarily to using these digital tools.
AI: I think you're right on that. I'm going to say, without fear or failure, that I've seen a lot of these tools. A lot of them are hasty puddings. They don't quite work. They get 90% of the way there, the UI looks great, the effectiveness is okay, but you still have to do a lot of work yourself and spend a lot of time and energy. There's still manual workarounds for a lot of these.
Two of the new ones that I've seen coming out now are red-hot. Really good. The ones in the UK that I was looking at were absolutely fantastic, to the point where if a person was making even written notes in a meeting, I sat with two businesses for a couple of days and watched what they do, the planner or adviser, depending on your nomenclature, would be taking a photograph of the written notes with a tool on their mobile phone, which was scanning it immediately, uploading into the file, so that nothing was ever lost.
MH: And converting it?
AI: Converting it, straight into text. It wasn't 100% perfect but it was good enough. So what they were creating was this kind of really powerful digital wake of information. Now, some of the businesses in Australia are up to speed on that, but many are a long way behind.
MH: So where do you think the biggest efficiency gains are, given what you've seen overseas? What aren't we doing in Australia?
AI: There's a really complex part of the Australian marketplace and I'm not really sure how to talk about this without being pejorative. The advisers that I think are doing it best, are homogenising the advice offer, to the point where they're kind of productising what they're doing and allowing the customers to feel comfortable inside that.
The people that worry me in Australia, are the financial planners, and there's not many of these, but there's enough to be significant, who gain strength from being a fund manager, who think that they are a stock picker or that they are able to blend products or blend services to allow the customer to derive a great advantage. Now the maths on this are pretty clear. Every now and again, every generation, there's some genius stock picker, but he's unlikely to be a financial planner. It's possible, but it's unlikely.
The advisers' alpha that we've been tracking for the past, I guess, decade is about 3% per annum. We've got a whole bunch of mathematical reporting around that.
MH: Adviser alpha being things like relationship, making sure that people stick to their plan.
AI: Sticking to the plan, being fully invested in the market, taking money off the table when the market's hot, being sensible about the way they're investing, making sure that they drive the prices down in what they're doing, and doing it all, and being a good coach, that adds real benefit. That 3% per annum is interesting in the first year but if you compound that out over a lifecycle of investments-
MH: It's huge.
AI:... then it's a really significant number. We can prove that pretty easily. We've been tracking this for 20 years.
So that's the bit which I think is the most important. I think the future in Australia is really around finding a way to allow customers to take market risks which suits them, at the lowest possible cost. Now, in the US, there's already those funds at 0%. They're already out there, Schwab, Vanguard, BlackRock, have both got zero percent funds. They make money on their cash, so the cash they hold overnight, because the fund flows are so extraordinary that they're able to do that. Their favourite day to receive money is Friday after 11:00 AM because they get to hold it for-
MH: Hold it for the weekend.
AI: Yeah, exactly. When they told me that, I was like, "How much are you making on that?" Then they told me and I thought, "Really. That's really interesting." These are big numbers by Australian terms. That's kind of the future, but-
MH: Just on that point, presumably that's the same for the zero brokerage that they're all now being driven down to?
AI: Exactly the same, yeah.
MH: Race to the bottom, what's happening over there is quite extraordinary. There can only be a couple of winners, presumably.
AI: Well, we've all played Monopoly. That's a really interesting outcome. There will only be a couple of winners, but what happens in that time, when there's a couple of people starting to dominate the market then, in every industry, all over the world, something changes and someone finds an advantage. They're starting to emerge now.
Didn't meet many start-up firms in the US and mainland Europe. But I met a couple who are doing really interesting thing and it's all at the edges. So it's giving people access to things that the other people can't give them access to. That's starting to become quite interesting, particularly to the rich.
MH: And not having big margins that they're stuck with that they can't easily let go of.
AI: The margins are very transparent, yeah, you're right, quite like-
MH: Innovator's dilemma.
AI: Yeah, exactly. Yeah, 100% right. We watched Telstra do it, we watched Telstra try and make as much money as they could out of having copper in the ground for 10 years, when they could have dominated the storage, wireless, all those spaces. But they didn't because they tried to pillage the 100 million miles of copper they already had in the ground. So it is quite interesting.
There's a kind of compression though. Advisers are moving down and starting to play some of the roles of the platform. They're trying to enter that space. Platforms are moving up, they're starting to play some of the roles of the adviser. Fund managers are moving down and going direct to clients, starting to offer some of those services where people are able to buy on price-led decisions. So that compression is not going to go away.
The client intimacy piece is going to be something which, Australian advisers currently enjoy. They really do. Every piece of research we do which talks about people and their relationship with their adviser, it's very strong. But how you capitalise that when trust fell so steeply, post-Royal Commission, it has been rebuilding quite quickly. It's not to escape that. It's going to be very interesting-
MH: What did it get to at its worst, based on your metrics?
AI: 0.28. So what you're looking for is zero in Australia is 0.6. So six out of 10. All the countries in the world behave differently. If you had a trusted relationship in Germany, it's four out of 10, because the Germans expect everything to be terrible. In Australia, it's six out of 10. So if everything's fine, it's six out of 10. If everything's fine in Germany, it's four out of 10, which is quite interesting.
I did a speech in Germany to a whole bunch of German economists who through the presentation, afterwards, were stone-faced, to the point where I thought, "Am I actually speaking? Is this making any sense?" But then afterwards, we went to a bar and they became un-stonefaced very quickly, which was interesting. They know about our Royal Commission, they do not understand it.
MH: They think it went too far? Or they don't know why it had to happen at all?
AI: Things aren't solved like that in Germany. That's not how Germans solve things. They don't solve them in public and they don't solve them through the courts and they don't solve them that way. Germans specialise in portmanteau words, pushing words together, and they have a word which means death by lawyers. They think that's what's going on, it's death by lawyers. Lawyers can't solve this, they're not business people. They're not going to sort it out. They are what they call tree-killers. They'll just produce huge amounts of legislation, kill a thousand trees, and nothing will change.
MH: Whereas not that far away, the UK had a very different experience, far closer to our own.
AI: The UK, yeah. So the mis-selling in the UK, the pension mis-selling, I was working there for some of the time that that was going on and understood the schemes. They weren't great, to be perfectly honest. Their door-to-door sales techniques and the way in which they were selling product and the way in which they were moving it was wrong.
MH: I think it was six to 10% commissions.
MH: On funds, and that was the competitive advantage.
AI: Yeah. So the commissions were extraordinarily high, up to 10% on particular funds. They had really complicated funds, which justified having really complicated and extremely high commissions. They were unreasonably complicated.
There was a product push to try and get rid of that, a whole bunch of tracker funds launched. But the drive of sales where people make big commissions is such a powerful driver of human behaviour. People will sell stuff they make a lot of money on. That's human nature, I-
MH: Which is fundamentally what sat at the core of the Royal Commission as well.
AI: There was a really interesting part of the Royal Commission. For those people who watched it, and I often work on big data tables, so I often had it running while I was working on big data cubes. It was the best television I've ever seen.
MH: RC TV.
AI: Was unbelievable. I thought that the lawyers were extraordinary. I thought that most of the people there did an extremely good job of trying to do it. I felt for a lot of the people because they were talking about things that they hadn't done. They were things that they'd inherited and they were trying to explain it away. They were literally, should have been saying, "I don't know, mate. I wasn't here." They were also trying to justify behaviour which had existed.
The reality of this, which is curious, and you would be aware of this, is that this was happening in plain sight. Everyone knew what was going on. The fact that it was able to go on for so long was ridiculous, really. There was no transformation of the industry and the industry was given multiple times to transform itself. One of the things that we kept saying at CoreData is, "Unless you start transforming yourself, you'll be transformed." That's what's happened.
MH: It's happened. Now, we're moving around a little bit.
MH: No, not at all. So we talked about the advisers that you believe are going to be successful in the future. You've talked about those that are servicing mass affluent, by the sound of it, where their product ties, if you like, the client relationship. That's, in some way, goes against what ASIC would like to see, which is that advice is tailored and personal and individual for the client.
AI: So that happened in the UK, but what happened was an immediate uplift in cost. Cost rose by 15% directly to the client. So that required a new sales effort from the adviser to make that work. Most-
MH: I think we're starting to see that here already.
AI: So there's a couple of reasons for that. First is RDR, Retail Distribution Review, which actually stripped through and made them stop charging what they were charging, be much more transparent. Then they had method two, which moved through and changed the way they had to do it. Then they had GDPR, which is about how they hold information, what they do with information and those types of things.
One of the unexpected... unwelcome... no, unexpected outcomes of the Retail Distribution Review is that the advisers, and they were candid about this when I was there, they could no longer hire high-school graduates, bring them in and train them up. They had to hire university leavers, who want a lot more money for their job. So one of the companies that I spoke to, who I've known for some time, they have done something really interesting. Before RDR, base advice fee was 911 pounds. It's a random number generated which happens to be a prime number which allows them to make people think it's been thought through. That's now 3,600 pounds. So they've had to increase their first fee by four times to make this work and they've done it.
MH: Purely just to cover salaries, by the sounds of it.
AI: Cover salaries, cover costs, meet the fees. The other thing which is really interesting about that firm is that the guy who started the firm is no longer the CEO. He's moved onto the second generation and he's adopted some pretty clear principles that, because I brought this company from point A to point B, and we're now going from B to C, I can't be the person to take it from B to C. He's put in someone younger, university-qualified, much more structured, who's taking a much more product-and-process style of thinking to the business. It's no longer just about the warm relationship and our clients love us, they've dived down deep into their processes and made everything smooth. It's really interesting. The amount of work they've taken out of their business is just extraordinary.
MH: Was that primarily driven because of efficiency or because they actually wanted to provide a better, frictionless experience for the client?
AI: Like all things, there's an economic driver. It was efficiency. To be able to service the clients in the way that we want to service the clients, then we need to take out a lot of rework and a lot of costs. We need to digitise this entire experience. We need to take everything and turn everything into a process.
There's a book which was published some time in the late '90s called The E-Myth, which talks about how simple to make process. So everything has to be a process. They've unconsciously swallowed that. I don't know that they've read it or they hadn't read it. They certainly didn't talk about it. They tended to quote Harvard Business Review papers when I was there talking to them, but everything from onboarding a client to what happens when the client walks through the front door, is something that is well-understood by everyone in the organisation.
They've done something which is really interesting. The girl who was running it said, "We haven't wasted this crisis. We've made all the changes we needed to make and we've made sure that everybody is on board." Now not everybody in the firm made it. To be candid, some of the guys left, when I say that, I mean women and men, just said, "This isn't for me anymore." They said, "Well, that's fine. But this is the future."
MH: How long ago was that, out of interest? How many years after RDR was implemented?
AI: Two years. Two years. I don't know to the day and I'd be lying to say that I knew to the day, but Leslie's had the job for just over two years now.
MH: Yeah. Because I think we're starting to see that in our industry is practises where they see this as the biggest opportunity they're ever going to have and others that are saying, "I'm out, this is all too hard."
AI: It's really interesting, Matt, because the two guys who started it, it was a father and son. They now sit as chairman and executive chairman. I think they come in three days a week. Everybody else runs it. So they're still involved, they're still shareholders, the biggest shareholders, but they're not there day-to-day. I spoke to the guy on the phone because he said, "If I was still there, the people would be coming to me and asking me to do things the old way. I have to be able to say, "Leslie's in charge. She's running it. This is the new model. If you don't like it, there's lots of other firms.
I knew him in the middle '90s when he first started the business, and he referred to it as, the claret-drinking days are over. The days that we went to the pub on Friday and didn't come back. They've gone. This whole firm is so much more professional now. It's run by people who are much more professional in running the business.
We see those in the Australian marketplace. We have this name for them. We call them cruisers. They work Tuesday, Wednesday, Thursday. They've got great golf handicaps, their sailing times are amazing. But they're working 150 days a year. So they're charging for 200 days a year, which is their working days, but-
MH: It's lifestyle.
MH: Will they be able to survive?
AI: I think the death will be slower than we think. Certainly they'll be able to adapt and adopt. The ones I've met that are good advisers, they've just been able to get away with the Tuesday, Wednesday, Thursday and up to two months' holiday a year in the past. But the argument is that, "My phone's always on." Which I don't think covers it anymore.
MH: So I've see a charter or matrix that you've done recently, which picks up on that theme around the four types of advisers you see. You've got the cruisers. Who else have you got?
AI: Islanders, they tend to be people who are by themselves, running it by themselves. There's no reason that the islanders should disappear if they're running professional businesses and doing a good job. The problem with them is they tend to be under-resourced.
MH: Or high revenues and no overhead.
MH: High profit margins.
AI: Very high profit margins, but the way in which they've been making their profits is changing and a lot of their profit is now outlawed. So that's going to be challenging and how that works will be challenging. Some, I think, will make it because they'll be able to just say, "Well, we're charging you differently now." Because they have good intimate services with rich clients. We've met plenty of those who I think will be fine. But we've also met plenty who think this is not going to work.
You've got the cruisers, the islanders. Then we've got a group which we call the oxes. They're large businesses and they've been around for a while. They tend to have a number of partners. They're good revenue businesses, some are well-organised and some are badly-organised, but they survive on the money which comes in each month from their relationships. While some of that's going, that's going to be a problem for it. The challenge with the ox business is that they often have young partners and old partners. The old partners are trying to drive value out of the business and the young partners are trying to drive value into the business. How they manage that is going to be the biggest challenge for that group.
Then we've got the really interesting group, which are the foxes. Two or three-partner businesses, they're very digital, they're well-organised, they understand what they're doing, they know how to make money out of the business. It's not defined by age, but there is some suggestion that they're younger, they might be 45 rather than 55. But they really understand how to service their client and they're very good users of technology. They use services like yours really well, they do as little work on the business in terms of the funds management as possible, they do the most work they can on acquiring, servicing and satisfying clients.
MH: Have they come from larger firms where they were working with oxes, or where have they come from?
AI: The majority have come from larger firms working with oxes. Matt, that's a really interesting point because some of them we know personally and they were dissatisfied working for large firms and started their own firms, and taken a big bet, mortgaged their house and off they go. They tend to be licenced and they tend to congregate around a small number of licences. That's going to be really interesting.
Some of them have come from the banking organisation. Some of them have come from being in private banks and have simply left the private bank and started their firm. But the overwhelming feeling that you get to them is that they're well-organised and that they run their businesses well. They make the most out of the relationships they can.
There's this kind of famous, he's not an economist, he's a statistician, a guy called Edwards Deming. He was a farm boy from Polk, Indiana. He was the guy who rebuilt Japan economically after the Second World War. He suggested and he has this still kind of 14-point thesis, that one of the best things that you can do if you're trying to grow your business, is take out variation as much as you can. And form relationships with single suppliers. Form deep relationships. Don't argue too much with them about price. Argue hard with them about quality. And the price will take care of itself.
MH: I can't argue with that.
AI: It's a really interesting outcome. So I was going around all these successful businesses in the US and the UK. The US ones are not relevant to us because the laws are so different. What was going on was so different. In Australia, would be flat-out illegal. But it's not in America, so it's not. I was with one of the members of my firm, who kept coming out of the meetings and saying, "That's illegal." I say, "It's not in America, mate. Just get over it. This is the way they do it here."
But in the UK, the ones that have been successful had really set up their business to adapt, had decided that everybody's on board and they've got to be on board, and that if you didn't want to do it, then you had no place in the firm. And were really making sure that they drove the best value they could out of their relationships and almost outsourced as much of their business as possible and drove up the quality relationship.
MH: Do the foxes become bigger and bigger over time, or do they need to stay small and nimble? I think if you look back over, probably since inception of the industry, there's never been a big individual household brand in financial planning. I'm not convinced we're necessarily going to see one.
AI: I don't think we'll see one. I think that they reach management span control. You might see some sort of franchising. That's happened in other industries. Happened in accountancy and a few other areas. Could-
MH: Limited success.
AI: Yeah. Could potentially happen here. But you get that kind of span of control issue. The Romans figured this out. That you can't manage more than a hundred people. You can only keep your hands around the neck of a hundred people. Once you've got more than a hundred, then it becomes really problematic. Something we're facing at CoreData. We're through that number now and I often hear about projects I've never even heard of, that are going on, that we're spending money on. I'm not sure-
MH: It's the old tribe theory as well, where you need to be able to know everyone within your tribe.
AI: The cognitive shift? That's a really-
MH: I think that was a hundred as well.
AI: It's give or take a hundred, which is why we have a century, which is why we have a centurion. So I did a whole bunch of work in this from some post-graduate work I did back in the '90s and sent it to my father, like every child looking for affirmation. He sent me a book written by a Roman general saying, "This is not news." It's like, "Thanks, Dad."
So what you're talking about is something which is really interesting. It only happens in humans. I'm doing some post-graduate work on this and it's the cognitive shift which is how we act as a group and how we can act as a group in behaviour. It's only the extraordinary person and there's two or three a century who can get that cognitive shift beyond a hundred people. Most people, it's 100 people, and then they have to devolve responsibility down through the chain.
We’ve developed a suite of resources to help you navigate this changing landscape – our Change/Chance Series. This selection of guides and articles delve into topics that are front of mind for advisers, now.
MH: Probably something I hadn't connected the dots on. The average number of clients an adviser can look after tends to be around 130, 140. Is that connected, do you think? Because ultimately, you need to have deep relationships with those clients to create a long lasting-
AI: I did a lot of work on this back in the day. I've actually run big experiments and projects on this. So the extraordinary adviser can do 200. The average adviser can do about 100. To meet the needs as decided by the government now, then having 100 really defines your working day. So you get quickly down to this and I was doing some work on modelling this over Christmas on what your daily, weekly, monthly contact, engagement, meeting goals had to be. You can model it out.
MH: At 100?
AI: At 100.
MH: You'd be busy.
AI: You are flat bickie at 100. So there's a couple of ways of talking about that. One is that you drive the value of 100 up. Or you find ways to take the work out of the relationship. And you segment.
So the old model was that people had 500 or 600 clients, but they had As, Bs, Cs and Ds. And the As numbered between 80 and 100 candidly. But using some pretty simple mathematics, that was 70 to 80% of their revenue. The rest did not much. So-
MH: And when you look at the fees being charged to high-net-worth families, which are probably double or triple that, it makes sense why they can only take on 30 or 40 clients.
AI: So high-net-worth families fall into two groups. You are probably well-aware of this, is that high-net-worth families who want nothing to do with the funds management or the financial manager of the business. They want a monthly report from you and not much else. Then there's high-net-worth groups who will be on the phone to you every day and talking about what's happening and what's going on. What are you doing? What have you done? They're very clear types of behaviour. The families often exist within two groups.
I'm very friendly with some of the family offices, the big family offices here. They will tell me there's groups that they've serviced for 20 years that they barely ever hear from and then there's Mrs. X from Bermagui who inherited 60 million when she was 21, who rings up once a week to have a conversation with them. So how you charge for that and how you make money out of that is kind of interesting.
The problem in Australia is the high net worth's aren't growing. So we're flat on high-net-worth growth.
MH: How do you define high net worth?
AI: So there's a couple of ways that we're looking at this. There's an income measure, which you say, if this person's earning more than half a million dollars a year, then their behaviour starts to change. And then there's fund under advice measure, which is not property, but funds under advice-
AI: Yeah, investible. We think that our research shows that the behaviour change is about two-and-a-quarter million dollars. When we started the business 20 years ago, it was really $750,000 to a million dollars, that behaviour started to change. That's not the case anymore. It's going up and up and up. And the behaviour doesn't start to change in Asia until it's over $5,000,000.
MH: The behaviour change being that they're actively seeking advice as opposed to comfortable doing it themselves or outsourcing to industry?
AI: Exactly. The other part about this is how long you've had the money. If you've had $10,000,000 for 10 years, then your engagement changes. If you've had $10,000,000 for one year, you're all over that and talking about it all the time.
The thing which is common about people who have got more than two-and-a-quarter million dollars in the market investible is they're making longer-term decisions. They're not looking for that short-term decision anymore. But they are conscious of what the average return is.
One of the things that struck me, I was talking to a West German high-net-worth individual on my latest trip, they knew how much was being exported from West Germany. They could tell me how many containers, full containers, were leaving the West German ports and they knew it was down. That struck me as really interesting. That wouldn't be the truth about Australian high net worths understanding how much coal or oil or gas was leaving Australia, but these guys were on it. They were candidly saying, "We think the consumption era of high-value goods may have flattened out now. The Chinese have bought enough German cars and enough German tools, that we're not going to see this growth and we're going to have to reinvent what we're doing." They were onto it. We now have to become a technology player.
MH: Which presumably, though, comes down to the personality or the attitudes of the patriarch or matriarch in those big families, as opposed necessarily the balance, I would have thought.
AI: It's a really interesting-
MH: Presumably lots of ways you can slice and dice it.
AI: There are. You're exactly right. But the one which is interesting to me at the moment and some work that we're doing for someone else is this intergenerational shift. Because we're, in Australia, really facing our first intergenerational transfer.
MH: Which is 2.7 trillion, I think, over the next 10 years?
AI: Yeah, depends how you model it. We've got it out to... yeah, so 2.7 is the base case. Our models and I think the government's model show 3.2. So who knows, right? It's within tolerance-
MH: Over what period, same, over decade?
AI: Yeah, over a decade. So that's on the march. So it's 3.2 if you include property. So if you take property out, you're right, it's 2.7 trillion. So the kind of interesting part about that is that the next generation bifurcates in terms of engaged, understanding it, interested in doing it, and a whole bunch of people have got no idea what's going on. That kind of intergenerational wealth piece is very interesting. The people who've made money in Australia, they tend to have made it from very narrow resources. They've either been property investors, there's a small number of people who've been-
MH: In tech.
AI: ... in tech, there's a small number of people who have been professionals like surgeons et cetera, et cetera. Beyond being a surgeon, they've invested in things, but it's mostly business owners. And the business owners are from all sorts of places. We've met people who make electrical conduit boxes, who've made $200 million making boxes for buildings to swap electricity around. That generation behind them is nothing.
MH: So where that 3.2 trillion, which I think what you're saying, is historically sitting within businesses, it's now actually going to be floating in the market as investible cash?
AI: It will moving into the market as investible cash-
MH: Or paying down mortgages potentially.
AI: Potentially. We've done a lot of research on this and there's the people who've built the business have a series of big fears. The first big fear is that the money ends up as a Ferrari in someone's driveway. Because they've built that and they don't want it to happen.
The second big fear is that it goes to the tax department. Somehow they pay too much tax on it. They really don't like paying tax.
The third big fear is that someone they don't like gets the money, whether it's the husbands of their daughter who's the inheritor or the grandchild who's a waster. They want to steer and control that money beyond the grave effectively.
MH: And preserve it for as many generations.
AI: Yeah. We had a case recently, where a guy, he's a plumber from the southern part of Sydney, he arrived in Australia 1950, seems to have bought a house a year since 1950. He's got a lot of money and he's got a very successful plumbing business. He's got two daughters and four grandchildren and his biggest fear is that his sons-in-law get their hands on the money. Because the money is for his daughters and for the grandchildren and not for them. I have no idea whether his sons-in-law are hopeless or good or otherwise. They seem to be pretty sensible guys, but-
MH: They're not blood.
AI: Yeah, they're not blood. And he's an old Italian guy who's not giving it to them. He's bought his house, he's bought each of his daughters a house in Melbourne because they live down here with their husbands. He's bought each of them a house in Noosa because that's where they like to go to holidays. But they're not in anybody else's name but the daughter's name. Which is really interesting. It must be so annoying to be his son-in-law.
MH: Some amazing opportunities out there. That would be just an example of many type of family situations that I think desperately need advice over the next decade. We're running out of time. What would be a couple of words of wisdom that you would leave us with? If you're an adviser sitting there at the moment, what are some of the best things that you can do or be thinking about?
AI: There's a couple of things. I thought about this before I came in. I was trying to look for the correlated pieces of success that I was seeing in the 15 businesses which are doing very well in America. The ones that I saw that were doing the best is that they had really built a new philosophy for their business. They'd abandoned the old philosophy and said, "We have to adopt and embrace this." To use, I'm not sure who said it, it might have been Paul Keating, "Never waste a crisis." They used the crisis, they drove the change in their business and everyone got it. Everyone got that they had to adapt and understand.
They focused on quality at all points of the business. This quality focus was something which is really curious to me and I hadn't really seen it before in financial services. Something I've seen in manufacturing, my family are involved in manufacturing and agriculture businesses where the quality control is well-understood all the way through, and that process engineering at every part of the business is well-understood. That process engineering is starting to enter into this industry.
The next part is choose your partner. Choose someone who has the same intentions as you and they're going to be around for the next five years.
The businesses that I saw which are really interesting in the UK were entering into long-term contracts with their customers. This had a really interesting effect, it both locked the customer in and locked the valuation in. Now, the contracts don't really mean anything, right? A person can leave at any given time, but it does mean that you can sit down and value your business in a really interesting and different way. They were constantly focused on driving value and driving value into the purpose and anchoring value with the client. We don't do that enough, I think. Financial planners in this country are transformative. There's a time before you've seen a planner, and a time after you've seen a planner, and we routinely fumble away that. We've got to stop doing it. We've got to anchor the value every time that we do it.
This year, most financial planners have delivered their clients really good solid returns. They've got to anchor that, but they should also be saying, this mightn't stay. Yes, we expect the US market to continue to grind up. Western Europe is looking choppy, but post-bushfires, post-China, I doubt that we'll be delivering another surplus. We have to be really ready for it and it would a poor government that did that. They should be reaching into their coffers to smooth the way in which they work through that.
The next bit that was really interesting to me is that they've embraced strong leadership. Now leadership isn't an accidental thing. It can't be done just by strength of personality. People actually have to believe. They have to set out a clear vision, lead to it, set the KPIs and transform the business to those KPIs. And start, what gets measured then gets done. So many Australian businesses and I say this liking very much the people who are running them, run them on strength of relationship, on personality, but that time may be over. To the point you were making earlier about span of control. Now it may be about customer satisfaction, net new customers, and running businesses on the numbers.
MH: Andrew, there's a huge amount of things to think about there. That's been incredibly insightful. Thank you very much for your time. Just before we finish, is there any of your research available on your website or anywhere that our listeners can have a look or have a read?
AI: Yeah. There's two spaces you can do it. We publish papers on the CoreData website which is coredata.com.au. There's a tab there. One of the things that I like to do and encourage the people working for me to do is that we have this effect all the time and I think every research business has it. We have what we call junk data, our accidental findings, of we weren't looking for that but we found all that stuff. We have a website called New Model Adviser, which is pushing up information to allow people to read it, so that we can publish the things that we can see in a way which allows people to access them.
AI: You're seeing it. There's an unfortunately named café two doors down from you, it's called Sargon. I'm sure you've seen it. I took a photo of it this morning and sent it to all my staff, saying, "This last-ditch attempt to raise capital seems to have floundered." With all the will in the world, they were trying to do the right thing and doing all those sorts of things, but there's still choppy data out there for this industry and I think more will come out as time goes on.
MH: Andrew, I'll be having a look at that website and thank you very much.
AI: Thank you, Matt. Lovely to be here.
Views expressed are of the interviewee and may not be the opinion of Netwealth or its related companies.