Why consider diversification

We all agreed on the need. But it is, of course, easier said than done. There are a lot of unanswered questions remaining. Diversify into what types of advice? And how? Will I need further education? Will I need to get a licence? What will it cost and what is the opportunity? And what if I don’t want to become a financial adviser? Who can help me decide and implement my decision?

In this article we’ll try to answer a few of these questions. In particular, we will outline why you should consider diversification and what benefits you should hope to achieve. But first, a bit of background on some changes taking place in the industry.

Industry changes

The accounting and financial planning landscapes already overlap in a number of ways, including in terms of the clients, the nature of the advice provided and the business models to deliver that advice. Self-managed superannuation fund (SMSF) establishment advice is a good example of the interface between accounting and financial planning, and would fall into the area of overlap in the diagram.

A combination of consumer, regulatory and other commercial influences are driving further convergence. Perhaps most importantly, consumer preferences are changing in a number of ways, such as these:

• Time-poor consumers are increasingly looking for a one-stop-shop solution for their tax and financial advice needs.

• The increasing sophistication of many clients, coupled with the rising complexity of the advice required, means that specialist skills are becoming more highly valued than ever.

• The types of advice sought are becoming more nuanced. For example, some clients seek strategic advice only; others are looking for a coaching relationship for their investment decisions.

• Attitudes toward financial advice are changing. Following the Global Financial Crisis there was a crisis of confidence about some conflicted advice models. Quality advisers, supported by leading dealer groups and the broader Future of Financial Advice (FoFA) reforms, are emerging and rebuilding consumer confidence and engagement around unconflicted fee-for-advice models.

• With the continued rise of SMSFs – a key area of overlap between tax and financial planning advice – more clients need advice covering both aspects.

A win for consumers…

From a consumer’s perspective, the prize is substantial. Only around 20 per cent of the adult population currently receive financial advice. This has resulted in, among other things, a substantial underinsurance problem across the country. The FoFA reforms aim to increase the proportion of the population receiving advice, which in turn will help address this underinsurance issue.

…and business owners

Small business owners are a good example of an under-advised, underinsured segment. With an estimated $3.5 trillion worth of family businesses estimated to change hands over the next decade, and with only 22 per cent of business owners indicating they have a formal succession plan, many need assistance to ensure a good transition. Buy/sell insurance is often an integral part of the solution, which can be delivered as part of a broader succession planning service.

Regulation plays a role

Convergence is also being driven by regulatory changes. For example, the proposed removal of the accountants’ SMSF exemption and the inclusion of limited recourse borrowing arrangements as a financial product, both of which are moving the accounting profession towards licensed advice. In response, some accountants are seeking limited licences to continue to provide this advice, but others are either becoming fully authorised financial advisers, or are seeking to work with someone who is.

On the other side, financial planners are going to come under the same tax regime as accountants. We think it is unlikely that many will seek the training beyond what is necessary to provide incidental tax advice, therefore necessitating a referral to a qualified tax accountant. In addition, the new FoFA world with best-interest duties, fee-for-advice models and codes of conduct are more akin to those historically applied by accountants. With the two advice models more closely aligned, the ability to work together to provide a consistent advice proposition to clients is enhanced.

Finally, as Andrew Conway discussed, the declining profitability of traditional compliance work is making it imperative for some accountants to consider alternative revenue streams.

Seize the day!

The outcome from these changes is that there are more opportunities and reasons for accountants to provide their clients (directly or indirectly) strategic and/or specific financial product advice. With their trusted adviser relationship and understanding of their clients’ needs, accountants are well placed to identify those needs and to serve those clients who have not sought advice from traditional sources.

Let’s be clear, however. Not all accountants should become planners nor will the two industries become one; it’s just that in the future the two will have more reason to work more closely together than they have historically. Depending on how you view it, change means uncertainty and threat, or it means opportunity.

Why diversify?

There are a number of reasons you should consider an integrated model. As discussed, one is that it helps your clients get the advice that they are looking for.

From a business perspective, depending on the nature of your practice and clients, there is an opportunity to substantially grow and diversify your business, enhancing its profitability and value.

For example, if you provide succession planning services and associated buy/sell insurance advice to just 10 business clients, that could result in around $80,000-$100,000 of additional revenue. Advice in relation to insurance in super for 10 individual client groups/families may generate a further $30,000-$40,000. In addition there is an uplift in the value of your practice associated with any ongoing revenue and advice. It is also a bit of a defensive play, either in response to new licensing requirements, or to protect existing client relationships. Ultimately, if you don’t offer financial advice to your clients, someone else will. If you have offered some of these additional services then your relationship will be protected and enhanced. Not only have you better satisfied your clients’ needs, but you have moved into a more pro-active, value-added relationship, as well as increasing the number of touch points with your clients.

More than one approach

We don’t believe there is one right approach. The right approach for you will depend on a range of factors relating to your business and your clients’ advice requirements. Becoming authorised to provide the advice yourself is one option.

Alternatively, someone else can provide the advice, whether as part of your business (by employing a financial adviser) or separately via a referral arrangement or joint venture. We will discuss these options in subsequent articles.