[The Wrap] Five predictions for 2020

We pretty much know this once venerable backstay of the financial services industry will disappear; but the question is who will buy it and will it sold in one lot or broken up?

While there has been speculation this week Kiwibank wants to buy BNZ, don't be surprised if they end up a suitor for AMP. The other local business not to be ignored as a bidder is Fisher Funds Management, which TSB Community Trust owns.

One of the little ironies of the demise of AMP, is that the old AMP Advisers Association, now Wealthpoint, is arguably the best placed dealer group or aggregation group as advisers head into the new FAP regime.

2. Some advisers will be homeless in July

Only 54 FAP licences issued so far....and the clock is ticking. The current dealer groups, which plan to have their own FAPs, are going to be "inviting" advisers to join their groups. This means there will be a culling of some of some advisers. These FAPs are taking on significant liabilities when they become responsible for the advice given. Advisers shouldn't be complacent around the cost of joining a group. In the mortgage space we have heard the figure of $20,000 per adviser annually, and one group in the investment and financial planning space even suggested the number could be four or five times that. Their view is that risk in managing financial plans, investments, trusts and other entities is much higher than in the mortgage and insurance spaces.

Don't be surprised if at least one of the existing dealer groups decides to close up shop. One has already gone.

3. Other advisers maybe chucked out

While a lot of the focus at the moment is on going regulatory changes and getting businesses through the licensing regime, not enough advisers are focussed on the commercial risks in the new FSLAA world. In this world product providers, particularly life insurance companies, are going to be checking the quality of advice being given on their products.

They will be doing this as the regulators breathe down their necks with well worn mantras already. Customers best interests; Show use don't tell us. The message is simply "we're not going to tell you what to do, but you bloody well better get it right."

4. Banks exit the advice game

It's already happening; even though banks deny it. The days of building up teams of advisers to help customers with their wealth management are over (for now). Following the Royal Commission in Australian banks aren't remotely interested in the additional risk of advice; nor the potential for brand damage. Perhaps the most telling comments came from Westpac chief executive Brian Hartzer last year:

He said more compliance costs raises the costs of advice businesses and makes them more challenging. "The incremental focus on record keeping and compliance and so forth around financial planning, for example, was definitely challenging the economics of that business."

This exit may even extend to the mortgage market. Maybe this will be the year mortgage advisers will account for 50% of home loan originations?

It's good news for independent financial advisers as there will be well-trained people looking for a new home.

It also helps end that dreaded vertical integration. (Ironically some of the KiwiSaver providers are moving down that track and building up their advice teams).

5. Investment markets will do what they do best

I'm not silly enough to make a prediction about markets. Markets will go up; markets will go down. Especially when you guys like Donald, Boris, Vladimir are running the world and the Middle East simmers. We're lucky down here, and the choice between Jacinda and Simon isn't too bad compared to what voters in other countries have had to choose from.

Comments from our readers

On 11 January 2020 at 1:48 pm w k said:

phil: prediction won't be too far from the bull's eye.

further down the track (mid-2022 onward?):

1. may not be easy for the below $100k (maybe $200k?) investors to find an investment adviser - only a handful willing to take on the job will exist.

2. life insurers may revert back to tied-agency system.

3. it will be harder to recruit independent financial advisers. anyone interested to be a financial adviser will most likely operate under a tied-agency system (as above #2).

On 13 January 2020 at 9:57 am Pragmatic said:

I love a good prediction - and couldn't help myself (albeit with some fairly boring same-old-same-old forecasts):

Advisers: I reckon that some will group together under a common FAP, whilst the majority will suck up the new regs and operate under their own FAP. After all, who wants to risk their house through the actions of a non compliant adviser? Bottom line, I don't believe that there will be any mass exodus of advisers from the industry, just another level of compliance / regulatory hoops to jump through. The Regulator's ambitions of compressing the industry into a handful of FAPs (and thereby providing a largely homogeneous service to consumers) will probably not occur.

Platforms: Despite massive investment in this space, platforms are a technology commodity whereby price is the key differentiator. Advisers won't make any wholesale changes in their providers until they are confident of a). obtaining a massive price advantage, b). receiving a massive technological advancement, c). both a & b. I reckon that this space is due for a correction, and anticipate both a & b to occur within 2020.

Funds: With plenty to choose from, and more to arrive the industry will become increasingly reliant upon screening services to help narrow the choices. Those funds who provide index-like returns for an active-like price will be quickly replaced by low cost beta solutions (think single bps in cost). Those funds that provide unique capabilities to deliver alpha will continue to charge handsomely for the privilege. My wild-card in this space relates to the sale / closure of at least 1 domestic Manager, as domestic equity prices continue to be unrealistic, and the local folks struggle to effectively compete with offshore talent. Also - watch out for disintermediation as some Managers look to eliminate those pesky advisors from the equation by advertising / going to the consumer direct.

Markets: All the smart folks tell us that there are bubbles in the majority of markets... and yet they continue to rise (despite a myriad of geo-political events, threats etc). I can't help thinking that the average local investor has limited choice for their wealth, and will continue to pour money into equities and property regardless. Whilst this concept delivers very shaky investment fundamentals, the ongoing weight of money will no doubt continue to deliver positive portfolio returns for the foreseeable future.

Consumers: A valuable lesson has been learnt following the retreat of large institutions from the advice industry. It is hard (impossible???) to profitably 'McDonaldise' the cottage advice industry. Consumers will increasingly pay a premium to obtain a bespoke wealth solution that is unique to them, with a significant universe of orphaned institutional customers now on the market. Add to this the rising Kiwisaver balances, uncertain markets, poor term deposit returns and you have yourself a perfect storm for dispensers of advice.

...but then again, I could be wrong...

[The Wrap] Five predictions for 2020

It's the start of a new year and a new decade. While it's 2020, Philip Macalister looks ahead and makes some predictions around what may happen in the financial advice sector this year.

Friday, January 10th 2020, 6:30PM 2 Comments

1. AMP will disappear

2. Some advisers will be homeless in July

3. Other advisers maybe chucked out

4. Banks exit the advice game

5. Investment markets will do what they do best

Comments from our readers

www.GoodReturns.co.nz