Behind the ongoing saga of adviser departures is the plight of their clients. A few years ago it was not uncommon for advisers to have client lists of over 500, although the very size of those client books meant that many were not well-serviced and some not at all. This contributed to the fee-for-no service (FFNS) debacle uncovered through the Royal Commission and subsequent regulation around removal of grandfathering, introduction of annual opt-ins and best interest duty (BID).
Today, advisers are streamlining their client books for financial survival while others leaving the industry are invariably contributing to a growing pool of client “orphans”.
Our first figure highlights the potential advised wealth that is in transition from the advisers that have left the industry over the last 18 months. This special feature looks more closely at this orphaning trend amongst advisers remaining in the industry.
Drivers To Streamline
It is too simple to say that financial pressures are causing this orphaning trend. There is no question that rising costs to stay in business are translating to higher fees for clients. While maintaining profitability is absolutely the central motivation for many advisers, the underlying reasons depend on the nature of the advice business itself and are often a combination of those listed below. They include:
Value justification - Due to client circumstances, advisers are not adding value so can’t justify continuing to charge the same fees.
Flat fees - Switching from commissions to flat fees creates a sticker shock that clients can’t accommodate.
Capacity - Increased regulatory burdens (from ASIC and/or licensee) takes time away from facing customers and limits capacity to handle client volumes.
Risk - Some clients represent unacceptable risks due to their needs and the extra regulatory / compliance hurdles potentially imposed by the licensee.
Business focus - Slimming the business to focus on specific areas or taking time off to deal with mental health demands a smaller, more targeted client base.
Client mix - Taking a proactive approach to reaching a better mix of profitable clients by jettisoning legacy and chasing new.
Demographics - Adviser departures force replacement of experienced advisers with younger, inexperienced ones. This creates tension with clients and requires strategies to deal with.
Types of Clients Orphaned
The types of clients that are being orphaned are consistent with the drivers described earlier. They are typically lower value in terms of funds under advice (FUA), although for lower FUA clients it may still be possible to justify the fees if the client is highly active or has dynamic, changing circumstances.
Orphans also tend to be older clients that have gone through the full advice journey and neither side sees value in continuing. Equally, legacy clients that don’t fit the current (narrowed) business focus of the advice firm, or legacy clients in grandfathered commission-based products where the commission-to-fee discussion and the work to switch under BID is not economically feasible.
Orphaning “Benevolently”
Smart businesses are “benevolently transitioning” their clients away from full service. This involves finding a range of potential solutions, from remaining a (scaled-back) client to simply remaining in touch, while ensuring that clients are not entirely abandoned if at all possible. These include:
- Treatment of clients on a transactional basis for major or complex one-off events and remaining in touch through newsletters or other ongoing communication. Of course, there is no guarantee that clients will return to the same adviser for an occasion that may be many years in the future.
- Directing clients to their super fund for “full service” under the intra-fund advice provisions.
- Introductions to digital advice solutions, although this alternative may not be suitable for every orphan who has previously relied upon a face-to-face relationship. This also provides the opportunity to incubate at arms-length and return the client to a full-service relationship once they grow into the adviser’s sweet spot.
Digital Partnering
The digital investment cohort is probably the most ubiquitous of the robo tool sector, although cashflow / budgeting robos like MoneySoft and MyProsperity are more advanced in partnering with advice and accounting firms. Some investment robos are aggressively pivoting away from B2C to also focus on partnering with face-to-face advice businesses to provide B2B2C services to consumers. This solution may be appropriate for transitioning orphans, as well as helping to build funnels to attract new clients at the start of their investing / advice journey, including the offspring of HNW clients or deceased estates.
Our second figure has examples of digital tools for B2B2C servicing of clients and showcases three investing robos (Clover, Nucleus Wealth, and SixPark) that are generating traction with advice firms to help in a range of circumstances.
While they take different approaches, some key fundamentals for success include:
- Getting the right fit. Ensuring advisers are genuinely aligned to this new approach.
- Being in control. Generally, businesses that have their own license and are the right size to execute.
- Tech savvy. With these robos offering white-label solutions, it is important that the advice business has sufficient tech capability to engage and execute.
- Retail focus / higher client numbers. Having a sufficient number of low-value retail clients making the transition effort economically viable for both adviser and robo.
Meanwhile, the more comprehensive advice robos like MapMyPlan, and new ones being imported from offshore, present even greater opportunities to partner with advice businesses to handle simple client needs this low-cost way, while concentrating the adviser’s skills and talents on complex cases.
While these tech providers may not be a suitable solution for every orphaned client, advisers would do well to investigate opportunities in this space in order to ascertain the potential benefits on offer for both themselves and their clients.
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Comments4
"When the banks exited advice, they simply turned of client fees and said "call us if you need us". That caused me pause......either they were diengenuously reviewing clients simply to get a fee (overservicing) or those client have now been abandoned when they need advice......equally egregious."
Gavin Lamb 11:55 on 10 Sep 20
"Well said Bill. I have been a riskie for 18 years - I used to love what I do, but now compliance, the 2 year clawback, and the 'damned if you you - damned if you don't' ethics debacle really has me wondering where I will be in 2026. I really do care about my clients and I wonder what will happen to my poor clients if I cannot sell them or pass them onto a caring adviser."
Steve 21:39 on 09 Sep 20
"Very interesting piece. I'd be very interested to see how prepared - or not - the product providers are to deal with the boom in 'unadvised' clients. Given the sheer volume of administrative work advice practices do in their position between clients and the providers, that will have to be done by somebody in the future. And it won't be advisers doing it for free anymore. "
Jordan 17:20 on 09 Sep 20
"No one knows for sure how many risk clients will be orphaned when the GREAT RISK ADVISER EXIT is complete in 5 years. Those client bases that were sold will still lose 25% plus if the departing adviser is not involved, That's a proven industry fact. Many risk books will just be abandoned, for various reasons. The drop off of existing retail clients in the absence of any adviser to service clients could reach 50%. Neither APRA or ASIC appear to be concerned The insurers clearly have not considered that revenue drop-off in the next 5 years in their enthusiasm to retain LIF at 66/22. Some will think it will be good to clear the books of legacy policies and maturing clients, but I submit the revenue from those clients is "money for old rope" - few will claim, and those that stay, less those exhausted by the current premium-increasing daylight robbery of existing clients, will all retire without ever having claimed. Statutory Number 1 Funds need a constant influx of NEW fully underwritten YOUNG lives. New business has dropped over the 3 year period of LIF by nearly 50%, but no one will actually admit it. So a combination of a lack of advisers willing to write NEW BUSINESS for a pittance at the capital risk of a TWO YEAR CLAWBACK, added to the revenue lost when advisers retire and existing policies lapse, should see even less life insurers surviving past 5 years.And COVID will add to that problem. The time to act is know, but try telling ASIC, or its captive Government, the obvious. The solution is simple- restore LIF to 88/22, reduce the claw-back to ONE YEAR, and introduce separate and simplified education and professionalism requirements for RISK ONLY SPECIALISTS. And if that means I will have to call myself a salesman, not an adviser ( whatever that is) I will cop it."
Bill 15:36 on 09 Sep 20