The evolution of advice

This convergence has occurred in many ways: some brokers have chosen to become fully-fledged licensed planners, some have brought in a professional to work as part of the team, and others have developed strong referral partnerships.

In a joint initiative, The Adviser and its sister publication, Independent Financial Adviser (ifa), surveyed our combined readership to determine the rate at which mortgage brokers are converging on the financial advice sector, and how many planners are offering broking services to their clients.

The inaugural 2014 Financial Services Convergence Report gives a clear understanding of the evolution of the industry in this area. What is of most interest is that of the 289 financial service providers surveyed (respondents included mortgage brokers, financial planners, finance brokers, accountants, risk advisers and para planners) over 30 per cent intend to integrate financial planning or risk advice/mortgage or debt advice into their business in the next 12 months – and a huge 49.5 per cent of respondents have already, sometime in the last five years, integrated financial planning or mortgage broking into their business.

Breaking down the report further, of the 148 financial service professionals surveyed by The Adviser, just over a quarter refer their clients to financial advice specialists but would rather provide a comprehensive service themselves, suggesting there is a desire from some brokers to converge their businesses.

Furthermore, the survey found that over 20 per cent of the respondents with integrated financial planning business are offering the service personally, since they are financial planners, and 33.6 per cent of them are RG146 compliant (the necessary requirement to be a financial planner).

For those who are not financial planners but have integrated financial planning into their business, 16.4 per cent indicated they have already recruited one, and 13.7 per cent have employed someone who is RG146 compliant.

Meanwhile, of the 143 financial services professionals who participated in the ifa 2014 Financial Services Convergence Report survey, over 70 per cent believe convergence is feasible, and 44 per cent believe most planners will offer mortgage and debt advice over the next five years.

THE TRENDS

But where did this trend start? According to Peter White, president of the FBAA, he is seeing his members interact more and more with the financial advice space.

“Without issue, there has been a lot of activity with our members who have been looking at financial planning and moving into that sector to diversify their income,” he details.

But he says this is not a new phenomenon.

“For a long time, this sort of integration, cross-polarisation of product and services has existed,” he explains.

“The banks are doing this all the time; it’s almost like a McDonald’s factor – ‘Do you want fries with that? Do you want planning with that? Do you want insurance with that?’ And it goes on and on.

“But there is a reason for it; it makes economic sense and it is a good business model because your client is not wondering off elsewhere.”

However, Tim Brown, CEO of Vow Financial, clarifies that brokers who are working in the financial planning sectors are offering restricted services.

“I think we need to understand that financial advice in the broker world normally means more around life, risk, super, income protection and potentially doing debt for super,” he says. “It is not your debt, equity and investments and estate planning. It is really more associated with protecting assets and protecting the client.”

Mr Brown’s comments are consistent with the report’s findings that show less than 10 per cent of The Adviser surveyed financial service professionals claim they offer financial planning. Instead, almost 20 per cent of mortgage brokers who offered financial services said they offered risk products or advice and SMSF advice.

Omniwealth managing director Matthew Kidd, who offers a multi-service business, believes convergence is on the rise in the financial planning sector. He says this is driven by increased regulation and the client’s desire to have all their needs met in one place.

“This is where the industry has got it wrong for so many years,” he says. “What are we in business for? We are in the business to service the client.

“We’ve got to make money of course, but the client needs to benefit the greatest because that is why we do it. To turn your back on that is negligent because it means the client must work harder to get a result. It is really your job to make it easier.”

THE NEED

According to the report, there seems to be a need from clients for this type of convergence. Over 24 per cent of The Adviser surveyed financial service professionals said they were ‘frequently’ asked by their clients if they are able to provide financial advice, while almost 45 per cent said they were asked the same question ‘occasionally’.

Tania Milnes, general manager of Mortgage Choice Financial Planning, says clients are seeing the benefits of getting specialist advice in a convenient way.

“I think more and more clients are seeing the value of getting specialist advice and they also want the convenience of the one-stop shop,” she explains.

Mr Brown puts it simply: “Convergence exists because it just makes sense.”

“When you are sitting down with a client you have pretty well done 75 per cent of a statement of advice needed to offer financial advice. All the broker/planner needs to do then is identify if the client has life or income protection and then it is quite an easy sell from there. It is in the broker’s interest to make sure a client is protected because you don’t want the mortgage going into arrears at any stage,” he says.

At the same time, the drivers behind the decision of financial planners to integrate mortgage broking into their businesses are varied, but 53.6 per cent of respondents indicated that building deeper client relationships is their key reason.

The next big driver was to increase revenue (44.8 per cent), followed by the desire to build a strong fee-for-service business model (32.8 per cent), the ifa survey has shown.

“Whenever planners find it difficult to generate upfront revenue by selling investments, they move to selling commission or in this case, selling loans,” says Waterfall Way Associates’ Dacian Moses.

“I think preservation of revenue is one driver.

“I’d like to think that’s not my motivation. My motivation is I actually want to make sure that services are provided in-house where we have the capacity to do that effectively.”

According to The Adviser’s surveyed financial service professionals, nearly 20 per cent of the respondents with integrated mortgage broking business are offering the service personally, since they are qualified mortgage brokers, and 20.7 per cent of them have a Cert IV in mortgage and finance.

For those who are not a mortgage broker but have integrated mortgage broking into their business, 33.3 per cent have indicated they have already recruited a mortgage broker, and 16.4 per cent have employed someone who has a Cert IV in mortgage and finance (FNS40811).

Furthermore, 17.1 per cent of the respondents are planning to do a Cert IV in mortgage and finance and get themselves qualified as a mortgage broker.

THE MANY FACES OF CONVERGENCE

What appears evident from the report is that both mortgage brokers and financial planners are increasingly offering converged services and products to their client bases. The question that remains, however, is how do they do this?

Ms Milnes says the company recognises that diversification is the way of the future and thus Mortgage Choice has created two franchise systems that sit perfectly together.

“We see diversification as the way of the future and we think that both types of businesses are going to continue to expand their services going forward,” she says.

“The big difference under our model is the fact our mortgage brokers and financial planners can’t wear two hats, so they need to be a specialist in their own area.

“Under our model, we have set up a separate financial planning franchise system that sits alongside the broking system. They have a dedicated adviser that they either bring in as an equity partner or as a salary adviser that is providing the financial advice.”

According to Ms Milnes, the Mortgage Choice brokers and financial planners all sit under one roof, enabling an easy one-stop shop for the customer, while offering advice from a specialist in each area.

This is just one convergence model, however. According to the report, over 24 per cent of financial planning and mortgage broking respondents said they plan to personally qualify with the appropriate licensing and qualification in order to offer integrated services in their offices, and over 37 per cent of the same respondents say they will recruit a qualified professional.

VALUE FOR THE CLIENT

An overwhelming 78 per cent of respondents believe having an integrated product and service offering improves relationships with clients, and Mark Woolnough, head of third party distribution at ING DIRECT, agrees.

He says when it comes to financial service transactions, trust between client and broker is of paramount importance.

“Under the convergence model, the client is building a trusted relationship with an individual person or a brand,” Mr Woolnough explains.

“There is also the added benefit of a broker knowing their client’s history and current circumstances and also having that knowledge of future goals and objectives.

“I think it would definitely help the customer, knowing they have a relationship with a person or a brand that will be able to support them and assist them for 10, 15, 20, 30 years, rather than thinking ‘I’ll see a broker to get my mortgage, I’ll see a financial planner to build up my superannuation, I’ll see an insurance broker to help me with my insurance’,” he says.

According to Mr Brown, the move to a convergence model means more protection for clients.

“Under this model, a client who is talking with a mortgage broker can be confident they have a specialist looking at their income and asset protection too,” he says.

“In the past, this might have just slipped by, and we were seeing plenty of examples where clients have been unprotected and they’ve lost their homes and their livelihoods.”

Mr Brown says brokers who offer a multi-service business are benefiting in two ways.

“It is a really good value-add for a broker to be offering this. Firstly, they are guaranteed their ongoing income because the client is protected, and secondly they are giving a great service to the client because a lot of clients don’t think about protection until the situation happens, and by then it is all too late,” she says.

RISK VERSUS REWARD

While the financial planning sector is now subject to extensive regulation under Future of Financial Advice (FOFA) reforms, that does not mean a mortgage broker could not flourish in the sector. In fact, over 60 per cent of all surveyed respondents claimed they believe it is feasible for a financial planner or mortgage broker (with the appropriate licensing and qualifications) to offer a converged model.

Mr Brown says the reward of convergence outweighs any risk, as long as a broker restricts themselves to giving certain financial advice.

“I don’t think it is risky for mortgage brokers, especially if they are not going too far outside their realm of experience and knowledge,” he explains.

“I think getting into equity, investments and estate planning are products and services a mortgage broker should stay clear of. I think the problem is that you can only be a specialist in so many areas; if you start broadening too far, you could risk becoming a generalist.”

THE FUTURE OF CONVERGENCE

It seems evident that the convergence multi-service business model is here to stay. When asked, ‘Do you believe most mortgage brokers/financial planners will offer mortgage and debt advice/financial advice in the next five years?’ over 40 per cent of all the surveyed financial service professionals said ‘yes’.

However, the FBAA’s Peter White warns it is not for everyone.

“I don’t believe it is the right thing for everybody to do,” he says.

“It really comes down to how you work within your business model – do you sell yourself as being the expert in a particular area? Then convergence might not be for you.”

Shore Financial’s Ben Warnes predicts the financial sectors will experience a more converged environment over the next few years.

“There is a huge opportunity for both sides of the relationship to create synergies,” Mr Warnes says.

“I can see a lot of mortgage brokers merging with planners, or simply having a referral relationship in place.

“I know some advisers will do mortgages themselves. It’s not for me. I don’t want to be a jack of all trades and master of none. I just want to do the best I can in my space and then refer to brokers who can do what they do best.”

Similarly, Mr Moses is an experienced financial planner who is well on his way to becoming a qualified mortgage broker – but he still understands the value of referrals.

“You can wear a number of hats as an adviser,” Mr Moses says, “but I’m going to encounter situations where my mortgage broking expertise is not up to the job.

“In that situation, I will refer my client to a broker with more expertise.”

According to Mr Kidd, there are synergies between brokers and planners that make convergence inevitable.

“At the end of the day, regulation is going to push the two together,” he says. “That is unavoidable.”