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Why Westpac walked away from advice

It was a disarmingly simple question at the Financial Services Royal Commission. Michael Hodge QC, the baby-faced senior counsel assisting Commissioner Kenneth Hayne, leaned forward and asked, “Do you think that high quality financial advice is ever going to be something that is affordable for ordinary Australians?”

Brian Hartzer, CEO of Westpac Bank, shifted uncomfortably in his seat. He must have known that his testimony on that 22 November 2018 morning was being viewed in real-time by a legion of lawyers, financial advice licensees and financial planners, all waiting with bated breath on his answer. “I think potentially, if it’s done through technology,” Hartzer replied.

He then elaborated:

So there are a number of developments around the world in what’s sometimes … referred to as robo-advice which is where the customer essentially self-serves by putting in their information, taking tests around their risk appetite ...”

“I think developments in that regard are going to become more available and – and be more scalable for ordinary people.”

And there it was. Perhaps not a mea culpa exactly, but an acknowledgement nonetheless that the economics of financial advice had ceased to be viable for the majority of clients, the so-called mass affluent, that bank-owned licensees had traditionally served.

Fast forward to 19 March 2019 and Brian Hartzer was once again in the spotlight, this time announcing Westpac’s decision to effectively walk away from the provision of financial advice. BT Financial Group was to be folded into the bank’s Consumer and Business divisions, and its financial advisory business sold to non-aligned advice licensee Viridian Advisory.

In remarks to the media, Hartzer suggested that the impetus for Westpac (and other banks) to offload their advice arms had predated the Hayne RC, although there can be no doubt that it hastened proceedings. Hartzer said:

“I think the trends in financial advice have been well underway for a number of years, so I don’t think this is the direct result of the Royal Commission. We were already thinking about the sustainability of advice for a number of years.”

An unsustainable business model

In exiting advice, Westpac was merely acknowledging what ANZ, CBA and NAB already had.

It was an environment with remuneration models opaque to the end client, and a legal environment where the best interest duty makes justifying expensive or poorly performing in-house solutions increasingly problematic. Providing advice to clients of more modest means with a reticence to pay its true cost delivered an inadequate risk-adjusted ROI to the advice provider. That much had already become clear to me.

Some weeks before the Westpac CEO took the stand, my co-founder Sahil Kaura and I bunkered down in a meeting room and stared at the blank whiteboard before us. Our mission – to build out the entire value chain of the financial planning process. Our aim – to find an answer to one question – “Can financial advice be profitable for non-HNW (high net worth) clients in a post-FoFA, post-FASEA, post-Hayne RC world?”.

As we mapped all the actors involved, the legal environment, the contingent liability incurred and the fee appetite of the average advice recipient, it became apparent to us that financial planning already was, and would only increasingly become, marginally viable without a significant injection of technology into the process.

I explained some of our thinking shortly thereafter in the Cuffelinks piece Roboadvice’s role in financial advice’s future. My thesis was simple: financial advice today is too costly, too complicated and too untrustworthy for the 48% of adult Australians who say they have unmet advice needs to engage with the advice industry. Eight days later Hartzer took the stand at the Royal Commission.

Cost management and the journey toward viability

Nothing I’ve written thus far should come as any surprise to the legion of licensee principals, dealer group boards, executive committees or their consultants, searching for a way forward through the morass. The issues are known knowns.

How does the advice industry find a path forward to sustainable profitability? To my mind, it can be summed up in just two words: cost containment.

Is anyone remotely surprised that the average Australian might baulk at paying several thousand dollars for a comprehensive financial plan, and then several more thousand dollars each and every year thereafter in ongoing service fees? Survey after survey generate the same finding; that the fee appetite of Australians can be measured in the hundreds of dollars, not in the thousands.

HNW clients have no such problems justifying the true cost of the advice they receive. But their advice needs are significantly greater, often with business planning, asset protection, tax planning, aged care and inter-generational wealth transfer in the mix.

At the opposite end of the market, the advice models of the big banks were predicated on the assumption that advice could be delivered to the mass market profitably, either on its own or cross-subsidised by the sale of in-house platform, investment and insurance solutions.

If the implementation of FoFA hadn’t already dealt this assumption an almighty blow, the furore surrounding the fee-for-no-service scandals and the Commission’s final recommendations has sounded the death knell.

In mapping the entire value chain, it became apparent just how many humans are involved in the process. Apart from the adviser responsible for the relationship there are para planners, client services officers, internal compliance staff, practice managers, external (licensee appointed) compliance staff … and this list goes on.

Receiving quality financial advice now is akin to entering hospital for major surgery. A lot of the people involved won’t even register in your consciousness because they aren’t there to do anything to you, but rather to sit in the background ensuring that standard operating protocols are followed.

Viewing the financial advice value chain thus, it quickly becomes apparent that advice was never a low-cost proposition and the costs (and consequences of non-compliance) are only ratcheting higher.

I believe this is what Brian Hartzer was alluding to when he conceded that the only probable path forward in providing advice to average Australians is via technology doing the heavy lifting traditionally done by support staff.

Digitally-enabled ‘hybrid’ advice is a way forward

Given the cost of delivering advice today relative to the fee appetite of the average non-HNW client (now bearing the entire cost and painfully aware of its quantum), the road ahead for advice looks rocky in the absence of robo-advice technology.

But that term itself has outlived its usefulness. It was a pejorative expression connoting some dystopian future where ‘the machines’ have put all advisers out to pasture, and unfortunately it stuck.

In actuality, digitally-enabled advice is a more accurate representation of the true potential of robo-advice. These technologies, of which Clover.com.au is but one, are tools that can automate and facilitate myriad interactions along the value chain.

From the ‘fact find’ discovery process to risk tolerance assessments to product selection, advice generation, acceptance and implementation, AML/CTF checks and order execution, digitally-enabled advice tools will be part of every advisory practice, undertaking mundane, repetitive but crucial tasks in a highly scalable, systematised and compliant manner.

Potential two-tier value proposition

It’s not a future pipe dream either. One of our advisory clients uses our digital technology to power a two-tiered value proposition; a high-touch bespoke service for prospective clients wanting, and able to pay for, holistic advice, and a low-touch, digitally-enabled scaled investment advice solution for those without the capacity to meet the cost of holistic advice.

In a recent interview with btcn asia in Singapore, I shared a view that, rather than impinging on their territory, robo-advice technologies will allow licensees and their advisers to reach out to, and engage, more individuals with a value proposition that resonates and is sustainably profitable.

The alternative is a back-to-the-future scenario whereby the financial advice landscape contracts to a handful of high-end firms dealing exclusively with multi-millionaire clients who meet the Sophisticated Investor (Wholesale) test.

It should not be the case that only those with six-figure incomes and seven-figure portfolios are able to access quality financial advice.

 

Harry Chemay is a Co-Founder of the digital advice provider Clover.com.au. This article is general information and does not consider the circumstances of any investor.

 

4 Comments
Jim Hennington BComm FIAA DipFP
July 01, 2019

Good article.

Having worked in 'Fintech' in both the UK and Australia for the past decade, I have seen tens of millions spent by banks and insurance companies on unspectacular digital advice efforts.

I believe the core issue is 'empathy'. Robots can't do it yet. Advisers can (if you can afford one).

People who look at digital advice tools often:

- don't really understand what the tool does and doesn't do for them
- can't understand the inputs, outputs or the results
- don't really understand what their advice needs actually are. They know that they 'don't know what they don't know'(!)
- struggle to develop trust. Who built the tool? What if it's wrong? What can I do if I hit a problem?


Perhaps there is a role for high integrity advisers who simply help 'mum and dad' clients to select and use the right digital tools for their needs. I agree that for 'mum and dad' clients their investment mix is only a small part of what determines their overall financial outcomes.

Long term cashflow and managing/allowing for life events are the big ones. What matters most can be vastly different from one client to the next.

Kym Bailey
June 24, 2019

Not having dealt with the "mass market' at any meaningful level, my introduction to it was via the FASEA Industry exam that all advisers must undertake by January 2021.
If the profiles indicated in the case studies provided are indicative of this end of the market, tech enabled 'advice' is going to have to be more sophisticated than where it sits at the moment.
If you don't know what you don't know, but a machine steers you along a path, sure you get a solution but, as said by others, it is the Adviser's comprehensive skills that often results in the solution that is better for the client than they first imagined.
Financial Advice isn't about product solutioning but this has been the basis for the remuneration for the advice, so that is what it seems to look like.
Just as legal advice is out of the reach of many, financial planning advice is also.
Models not based on the level of investment capital need devising and perhaps, as with any industry failure, the government needs to step in.
Legalaid doesn't work to provide all those that need, but can't afford, legal advice... perhaps rather than a government funded business model, the support needs to be in the form of a Tax Rebate - direct to the consumer.
We know people benefit from good financial advice so it probably is in the realm of a public good that requires some part of the government transfer system to provide to all. However, unlike the broken Medicare type models, it has to be means tested, the public purse is not a money tree and universality should not mean at any cost.

Richard Brannelly
June 21, 2019

No doubt over time technology will improve the delivery of advice and the efficiency with which it is delivered but we need to stop confusing genuine "advice" with investment solutions. I have always felt Robo Advice is a complete misnomer.
Financial advice is so much more and deeper than just the investment piece yet most Robo Advice offers I have looked at over the years just deal exclusively with investments. Harry you appear to have a great tech enabled MDA product but it is not a full substitute for the real advice that humans need when they are worried about their money.
It is refreshing that you acknowledge that and recognise that your solution is only part of what consumers need and not the whole like many of your contemporaries. All power to you as we need more innovation and more collaboration if we are to add more value to more consumers.

Peter Worn
June 20, 2019

Thanks for your article Harry.

At a higher level, the main reason the banks are exiting advice is the principle-agent problem that exists in delivering advice. Mis-aligned incentives, information asymmetry and bank executives who had no understanding of the downstream consequences of their strategy.

Let's be thankful that they were not successful in deploying robo solutions. It gives correctly structured business models a fighting chance to win over those who could otherwise not afford advice.

The Royal Commission also exposed just how hopelessly out of their depth the regulator has been on these matters. Will reactionary overreach torpedo the types of innovation that are being put forward in this article?

 

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