OPINION: Why a financial planner's low-value clients could be their key to survival

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Are you thinking about selling off your low-value client books before FoFA kicks in for good? Think again. AllMyFunds GM Robert Manityakul explains why today’s C&D clients could be the A&Bs of tomorrow.

FoFA has created an environment where many financial advisers have been rushing to sell their books of lower-value clients.

Concerned with FoFA reforms increasing the compliance requirements for each client, regardless of the value of the client, smaller clients serviced under traditional planning and compliance models are seen as being simply not profitable.

But advisers need to look at the cost of acquiring clients, the current value, and the future value that could be realised from C&D clients. FoFA brings with it some exciting opportunities to increase revenue streams through increased client engagement and client growth.

And, with the two-year lag between the FoFA go-live date and the ASIC regulated codes of conduct, implementation of a cover-all-bases approach is best.

Advisers’ current perception of the low profitability of C&D clients comes from many small-balance clients being serviced through out-dated and expensive legacy products, as well as being subsidised by higher-balance clients. FoFA changes such as fee disclosure and opt-in mean that things need to change. A strategy of nurturing-up rather than offloading clients who are not interested in a broader service offering is possible.

Moreover, a typical business over a five-year period may lose as many as half their existing customers. Acquiring a new customer can cost six- to seven-times more than retaining a current customer.

That said, financial advisers have less retention issues but higher dissatisfaction problems. A recent report by ASIC states that the industry estimates the cost of providing comprehensive financial advice traditionally ranges from $2,500 to $3,500, however the average consumer currently believes that a financial plan should cost them $300.

In ASIC’s Access to Financial Advice in Australia report, this perception chasm is summarised succinctly:

“The relatively low amounts that consumers are prepared to pay for financial advice, and the sizable portion of people who are not willing to pay anything at all, suggest that many consumers do not fairly value professional financial advice.”

Think holistically

With FoFA reforms assisting the transition of financial planning to a fully-fledged profession, rather than financial product distributor, a more holistic nurturing client relationship stance needs to be embraced by advisers.

Today’s low-value C&D clients will become tomorrow’s A&B clients. The overall value of young-aged, low-balance clients can be maximised. The focus of advice needs to align with each various stage of the client’s life.

The first demographic generation of clients, many of whom make up the bulk of A&B books – the ‘war generation’ – are now transitioning from wealth creation to wealth distribution.

The war generation (67 to 90-year-olds) are placing new demands on advisers, as they have a strong desire for capital preservation whilst still drawing an income. This demographic also has a health management requirement as they are concerned about becoming sick, losing their mental capacity and they have significant mortality concerns.

Advisers need to manage and communicate with their war generation clients to nurture them through aged care and succession planning. Advisers need to be in frequent contact and reporting regularly – six monthly rather than traditional annual reporting is better.

Boomer time

Baby Boomers (47 to 66-year olds) are transitioning into retirement at a rapid pace. With such a large volume of Boomers, advisers will see a significant amount of activity. Boomers are making a last run at wealth accumulation and have significant planning requirements.

Older Boomers, many who have been small business owners, will begin to sell their assets. Planners will need to manage the transition of Boomers’ assets, external property investments and family trusts. Boomers will be aware of the well-publicised requirements, and will be receptive to planning advice.

Frequent reporting and assessment is crucial to ensure that this lucrative segment of A&B clients are not lost to other advisers.

This period of change will also see many C&D Boomer clients transition to become A&B clients, with the sale of assets and businesses. By encouraging this demographic to complete regular SoAs, the change in financial position can be addressed.

Gen X to rise up

Within the next 10 years Generation X will be the largest wealth accumulators. Many will move from industry and retail funds that had been in many instances assigned via default for the majority of their career. Research indicates that Gen X will move to SMSFs.

There is already a portion of Gen X that is entrenched in SMSFs and employ advanced strategies with the assistance of their advisers to maximise the tax benefits of super. They also use various property development strategies and strong accumulation investment strategies. They see negative gearing into super as a big opportunity.

Generation X is very self-directed and independent in regards to financial advice, but generally time poor and willing to pay for advice. Online engagement, modelling and relevant reporting is a must to continue to build this demographic’s value as a client – and also to ensure that SMSF advice opportunities are captured.

Don’t ignore Gen Y

By 2018 Generation Y will make up 28% of superannuation. They will be as significant in volume by numbers as the Boomer generation. They will have the children, mortgages and the largest superannuation of any group in history at their age – but they don’t like paying for advice.

Planners need to begin to engage with Gen Y now to establish engagement and trust. Unlike Gen X, this generation will look to, and take advice from, their parents.

Given that Gen Y by nature will be inclined to create SMSFs, engagement with this demographic – perhaps through family financial reporting and regular SoAs – will create the foundation for a secure, lucrative, client base in the future.

Using technology to service the reporting and compliance requirements is an efficient way to maintain C&D clients, and enable time to be spent in direct client engagement with A&Bs. Whatever generation advisers are engaging with, regular and relevant reporting is paramount.

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