Transcript

Matt Heine: Hi, Mike. Welcome to the show and thanks for joining us.

Michael Blomfield: Thanks, Matt. It's a pleasure.

MH: Mike, our first question is where are you today and how are you dealing with the current COVID-19 situation?

MB: Well, unusually today I'm actually in the office. A very lonely office of one. But yeah, I've been at home like most of us through... In fact, we went pretty early. This is the end of seven weeks of working from home for us. I think everyone's going to come out of this in one way or the other, which is either fitter or fatter. I'm trying to concentrate on my fitter approach, for the time being anyway.

MH: Yeah, it's a good observation at the moment. I think I'm on the fitter side, which has been great, but it's very hard to keep away from the fridge.

MB: It certainly is.

MH: Has the team adapted well to the new norm?

MB: It's adapted beautifully, mate. We're really pleased with our team. I don't think they'd mind me saying we have some advantages. When you work with a team of mathematicians and statisticians, their ability to sit in front of a screen and stare at data is pretty high. The imposition of not having to come into the office and not having to be social I think hasn't always been problematic for them, put it that way.

MH: Yeah, I've heard that from a few people, actually. Different departments are certainly enjoying their time at home, and I think there's no doubt, certainly reading the papers this morning, that we're going to see work from home becoming a big part of how we work in the future but even just as part of the situation unfolds, I think it looks like it'll be another six months at least.

MB: I think you've got to plan that way and I think for us, we've always worked the same way, we have a morning meeting every morning so we have five of them in a week and we have a close out meeting on a Friday afternoon, and doing this virtually versus doing it in person is just not that big a deal, particularly for a business that has had people in four different locations anyway.

 

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MH: Exactly. Now, before we jump into investment trends and some of the great work that you're doing there, you've got a fascinating background and you've covered a whole range of different areas in your life from broking to banking, as well as wealth. If you can just indulge us for a moment and maybe tell us a little bit about your background, how you got into the industry and some of the interesting things you've done along the way.

MB: Oh, well, I'm old so I try and do it in short order. And I got into the industry completely and utterly by accident. Most people don't know this but I studied literature at university and writing, and I got this contract gig to go and work at a company in the very, very early '90s called Bankers Trust. And this is a true story, I'll never forget this. The day I arrived at that firm, literally the lift doors opened and I was hit physically by this wave of energy. It was astounding. I said to myself at that moment, I don't know what these guys do but I want to be part of it.

MH: What was the contract, given that you'd done literacy at uni?

MB: So I was working as what's called a technical writer, I was 22 years old, and so they had asked me to come in and do a whole bunch of documentation around some of their core systems. Like most techos they'd written good programmes but not documented it well. And so I went in there to help out with that and I was very, very fortunate that they essentially told me that I needed to... Like really they said, "You need to leave your job and you need to come work for us." And so I did.

MH: And was that in the wealth management part of Bankers Trust at the time or which part of the bank?

MB: Very originally I started in what was called the investment management division. But I was on the technology side working with them. I ended up in what was called the funds management division, more in the back office, it was called BT portfolio services by the end of it. And I had a pretty... To be honest, a pretty odd role. I had one of the great titles of all time, which was I was head of business technology and development, and I used to say, well what else is there other than business, technology and development? But really it was what we probably would think about these days as a strategy role.

MH: And that was the precursor to BT Wrap?

MB: Yeah, well I was part of a big group of people who thought through and designed out something called All in One, which ultimately became BT Wrap. There's plenty of people more responsible for Wrap than me, I was a young bit player in the whole thing but I can at least say I was there for its conception.

MH: And do you remember, was that something that was led by client or advisor demand or was it really Bankers Trust that was sitting around the table and looking at the pain points? Do you remember how the original idea came about? It seems obvious now but back then there was nothing in the market to replicate.

MB: No there wasn't. I couldn't tell you exactly, I think it came from an international trip, a few of the senior people did, but what I can tell you is that the BT of the '90s was the most extraordinary business. It was a business that was ruthlessly, but ruthlessly positive about doing anything it took to be better. It was the most incredible culture.

And I often reflect on this, at the time where I worked in that part of the business, there was a guy who was the EVP, but below him in his direct reporting line 75% of his direct reports were female, and this is in the mid '90s, and that was an extraordinary group of people that I got to do my apprenticeship under. Some of them had become very well known, people like Alexis George at ANZ. People like Caroline Collie, who's done many things and many important things in the industry. And look, plenty of others that maybe people don't remember now, but it was just the most amazing apprenticeship, it really was.

MH: And what was the industry like back then? Was it still just emerging from the roots in life insurance? Because it sounds like it was really the start of well management as we know it today.

MB: Yeah. I mean certainly, I remember when the superannuation guarantee was announced and again, BT, they just saw that instantly. They saw the opportunity. I remember a very senior executive, his name I just can't recall now, but he put this slide up showing what would happen to superannuation monies over the 10 and 20 years ahead, and just bubbles, right? And the bubble 20 years ahead was too big for the screen, but they were so fast, they were so on to it, and they pivoted their business to understand that that's where the future was, really, really quickly.

Now the old life sales thing, I wasn't much exposed to that because that was very much on the sales side under the famous Terry Power, but I think... I often talk now about the rebirth of the importance of the BDM, and I think back then it was very much the era of the great BDM who could get out there and position something for the planners and make it work for them and I think in most cases for the client as well.

MH: You mentioned leadership as being a key part of the culture at BT back then, was there anything that you felt sort of really allowed that culture to innovate and to drive the market as hard as it did?

MB: Yeah, there is. We talk a lot these days about diversity and it's a really, really important thing, but I tell you, in the sadly long career I've now had, when I think back about where there was real diversity, back at BT in its heyday, the way I'd describe it is they just didn't care. They didn't care if you were female, they didn't care if you were gay, they didn't care what religion or colour you were. What they cared was were you really bright and really driven. And if you were then you were absolutely one of them.

Now, it's a long time ago, so there's no doubt there's probably some period in that period, it was a pretty robust culture right, and would you run it exactly the same today, I think not. But at its core it just believed in talent and I think that's never left me as a core principle.

MH: Yeah. And from Bankers Trust where did you go next?

MB: Well, interestingly enough I got approached to go and work with this tiny little broker and the same thing happened. I went for an interview and the lift doors opened and I got hit with this wave of energy. And whilst I played pretty hard to get, by the time those lift doors had finished opening I knew where my next job was going to be. And it was at a company with a very long name, it was called Commonwealth Securities Limited. And the abbreviation for that was CSL, which caused a lot of confusion as you can probably imagine why.

So yeah, I joined it the moment it was a very small... I think we had 110 odd people, we had a just launched internet site that was actually run off a box that sat under the desk of someone who worked at the advertising agency at Lowe Lintas in North Sydney.

MH: That's amazing, isn't it?

MB: Yeah.

MH: And was ComSec a direct to client proposition only then or did they also have intermediary distribution?

MB: No, back then it was absolutely pure mum and dad retail. It was a fair while before we got into the third party or white label type business line.

MH: Yeah. Through the acquisition of AUSIEX?

MB: No, before that. In fact, we launched something called Advisor Trading Centre I think in about 2003 or '04. So we did go... It was related to the colonial acquisition so part of the colonial acquisition the colonial margin lending business came in in-house and into the equities division where ComSec sat. You'd had a huge planted distribution capability and so we built some tools for them that we called the Advisor Trading Centre, and that's, in a sense, probably what made the IWL acquisition make sense but I think we're then fast forwarding to what, about 2007 or so after I'd moved on.

MH: Right. So you ended up being head of ComSec probably in one of its most exciting times when E*TRADE, ComSec, and I guess that first wave of real well management disruption was occurring. The energy and the excitement must have been huge.

MB: Oh, mate, I think you've lived yourself a little bit of what that feels like. It's a razor's edge of excitement, stress, guessing, I think we made some great decisions. I think most often though we made them because we couldn't afford any of the alternative decisions. But it was an amazing period, it was a very unique period. The North Americans were here to fight, we were incredibly sponsored by the ultimate person who really ComSec was his baby, he was a guy named Mike Katz, one of the great executive innovators in Australian financial services' history, and he just wanted us to swing hard and so we did and we started price wars and we ran very aggressive advertising.

I like to think I imported some of that BT culture of just charging hard, being unafraid to challenge the status quo, but other than me there was... Never has it been more true that success has many fathers and many mothers than is the case with ComSec. It was a genuine big team effort.

MH: Yeah. And you've touched on a couple of the things you were doing differently then and what sounds like a very aggressive strategy. ComSec I think has ended up with, caught 55% of the market. The next party, which was E*TRADE, and they were sitting at somewhere between I think 15 and 20 percent, from memory.

MB: Correct.

MH: How did it manage to dominate to such an extent, which is huge in any market for any product, in what has been a relatively short period of time?

MB: Oh, look, I think a lot of stories of that have been written and talked about. I think what we probably did that was smartest was we really focused on building technology that was scalable. We had a saying that I still use to this day that single purpose technology has got singular value. If you can build technology that can be used in multiple ways and for multiple outcomes, then you buy yourself a whole lot of operating leverage.

And so we did that, we really embraced real-time, we really embraced good internet architecture, so we were the first organisation... There's still a Microsoft case study on this, we were the first organisation globally that really embraced enterprise architecture, one of the first in the world that went to a proper hot, hot, five nines architecture.

So we built all this capacity and all this resilience and then in about 2003, the opportunity came along to buy TD Waterhouse, and TD had consumed Schwab's presence as well, and so we managed to pick up TD and Schwab on a combined singular transaction. And that moved us from being in a pretty good place to being market dominant.

MH: I think that was a really good example of huge international players, particular Schwab and TD Waterhouse coming into Australia, believing that they were going to be able to dominate the local scene, and retreating, I think Schwab was in Australia for less than 12 months.

MB: Yeah, I think it's a bit longer than that but I think they came down particularly in that era, because we're talking late '90s, early 2000s, I think they met some pretty combative Aussies.

MH: And we still see that today, there are countless examples of every couple of years a big international player believing that they can come in and steal market share.

MB: Yeah, well I think the history of Australian financial services too, is a history of people coming down thinking they could export their systems and discovering that the localization of those systems was extraordinarily complex, in a way that the complexity of our superannuation and tax systems, things like negative gearing, all of that complexity is a pretty high, what we would call it now, is a pretty wide mote, right? And it's pretty hard to swim across and there's a lot of alligators, or crocodiles in our case. So yeah, we got some protection by that, I think.

MH: When you're overseas, if you continue to remind people of that it would be appreciated.

MB: I do.

MH: So you went through a couple of very exciting companies. You saw oversea players trying to come into Australia and then you decided it was time for you to go overseas.

MB: Yeah, mate. Well, I got taken out of ComSec and put into the business bank at CBA, which was an extraordinary journey because at the time it was a weeping sore for the bank and I remember we had the minister for small business on the radio weekly just ripping into us. And we put a crack team together, a couple of ex-ComSec people, a couple of new people, and we really ripped into that. And I think solved the core of the problem in just under two years.

But to be quite frank, Matt, I was pretty burned out. I was still pretty young, I was very young when I was running ComSec, and I was pretty buggered, and a few externalities hit, and I'm including the JFC and so I sort of took my wares offshore. I'll tell you, I think it was a... I don't know about remuneratively, to be quite honest, but I think as an executive and as a human I'll never regret having done that. It was an extraordinary learning experience.

MH: Whereabouts did you go? You were travelling through Asia and ended up I think at one of the large banks there?

MB: Yeah, so I did a tonne of work, some of it independent, some of it, yeah, for... Well, it wasn't a large bank and it's certainly not now, but I'll get there. So I did a whole lot of work in Indonesia in the first instance, particularly in Jakarta and did some big M&A projects for banks. Then went and did a whole bunch of work in China for another year. And then yeah, I got poached to go and be the managing director for Asia Pacific for one of the largest brokers in the world. And I had a fantastic time there for 52 weeks. And the 53rd and 54th week MF Global, as we now know, went under and I got left... The round numbers, so from memory I got left as the chairman of 12 regulated companies in eight Asian economies that I was simultaneously tipping into bankruptcy.

MH: Wonderful, what could go wrong?

MB: Yeah, it was a bit of fun. I don't recommend it in any way.

But having done that, and I stayed up in Asia. I'm now, what is it? I think 12 or 13 years into my own Chinese journey, I've worked in about six provinces in China. I'm still on the board of a listed bank in China and I think last year I was very... I don't know about lucky, very honoured to actually receive from the government in that province a recognition by way of what's called a [foreign language 00:20:03] Friendship Award. These days I'm actually officially recognised as a friend of China. For better or worse.

MH: Probably another podcast in itself but obviously huge opportunity in China, a lot of people have, over the last decade plus been looking at working in China and vice versa, looking at how they might bring Chinese companies into Australia. What's some advice that you have for people considering it as a business partner?

MB: Oh, wow. We've got a couple of hours, right? Look and say, a couple of things that I tell people all the time, the first thing I say is that I meet a lot of people who say, "Yeah, I know China, I've been there a lot," and I say, "Oh, that's interesting, where have you been?" And they've always been to Beijing and Shanghai and maybe they've been to Hangzhou in Zhejiang Province.

But thinking you understand China because you've been to Beijing and Shanghai is like thinking you understand America by being to Washington and New York. You don't. You do not understand the country that way. You've got to go... I call it, you've got to go and get your shoes dirty. So first thing I'd say to them is you've really got to spend time inland in the real parts of China to have any chance of understanding China.

And then the second thing I always tell people is that equally... I think in the west we have a very different mode of business relationship. And in China you've got to earn your friendship. If you want to do a deal in China my advice to you is go to China and spend time with people 10 times before you start talking business. The relationships are hard to build there and they're built... In a weird way they're built by not talking about business. So you've really got to invest in the relationship, and this whole fly in, do a bunch of meetings, fly out, you may think it's working but I don't believe it works that way.

MH: Is that just the way that Chinese people are dealing with foreigners or is it the same for locals when they're building relationships? Is it to do with trust or why do you say that?

MB: Yeah, I think it is very much the same way for them. I think it is about trust. Since the crackdown on corruption it's not quite the way it used to be but it used to be the case that if you didn't... This sounds terrible, but it's true. If you didn't get drunk with the people that you want to be doing business with then you weren't friends. That's kind of just the way it worked.

That wasn't in the kind of western Aussie British way of [inaudible 00:22:54]. But you had to show your commitment to the relationship. And one of the things I do like about the Chinese is if you can only take two glasses of the magical baijiu that they drink, and that does the job, you'll get more respect than someone who comes in and drinks 15 of them and doesn't get drunk. But it's a commitment, it's sort of in a sense showing your willingness to actually hurt yourself a bit to prove your friendship.

MH: That's interesting.

MB: It is.

MH: Just going back to topic for a moment, do you still see opportunities or do you believe there's opportunities for wealth management and cross-border passports?

MB: Yeah. I do in the sense of the genuine human globalisation story. The individual who lives in multiple geographies, which I think is more common now than maybe is even realised. I mean certainly not today as we all sit down in our lockdown economies, but the global citizen-

MH: Probably highlighted it because we're dealing with people we thought lived in Australia are actually having virtual meetings in what is one of their various homes.

MB: There you go and I think that's right. So I do think that that's very real. I think that Aussies in the past, particularly in the past five years, have become vastly more interested and keen in investing in the international economy as well, but I think that there's a challenge here in Australia which is inescapable, which is just our population size. 19.4 million adults don't allow you to... it's just not enough people to do a lot of experimentation with because getting to critical mass makes it really hard when there's only a very small population and that population has been, despite a lot of opinion, I think has been quite well served by the core of the financial system in Australia, which is the banks.

I know we have arguments about that but I guess one of the other perspectives you get working and living overseas is actually how good the Aussie banks are, particularly as banks. They're actually exceptional.

MH: And opportunity to export what we're doing over there? Or is that the systems and products that we're so used to over here, they're just not necessarily relevant?

MB: Yeah, well they're relevant but I think in the same way that there's a lot of broken down businesses that tried to come here, tried to localise, couldn't and failed, I think the challenges are similar for us, you've got to go and you've got to localise and that's always a complex thing. And if only in Australia, it's because you've got to remove a bunch of complexity before you even get to the start line to them.

So I think financial services is, this may be an opinion a lot of people disagree with, I actually think financial services is a lot exportable than a lot of other things. And I think the fact that you don't see a very large number of multinational financial services outside of just the banking part of bank is evidence that that's true.

MH: Yeah. And too often it's a strategy where they're not getting market share or not growing in Australia so see it as an opportunity to expand overseas, which is a flawed strategy in many regards.

MB: Yeah. And I think you've got to be realistic. We're pretty parochial here. If you think you're going to go to even Singapore, which is a very, very open economy, and they're not a bit parochial there, you're crazy, right? Of course they are. It's the DBSs and the OCBCs that are going to come first in rank order. And that's just the way it is.

MH: So moving on, some of the work that you're doing now in Australia obviously spans all of those areas, you've taken over as CEO of Investment Trends a little while ago, do you want to just give us a little bit of an update on who Investment Trends is and what your core focus is these days?

MB: Yeah, sure. I think I've been here almost four years now, and I think a lot of people know Investment Trends for the core of what it is, which is that we're essentially a market research firm working exclusively in wealth management. The truth of that though is we don't really like that term market research, we see ourselves as a data shop, as a quant and stats shop, and we hold ourselves to a statistical standard that I think, no disrespect to any other player in the global market, but I think the standard that we hold ourselves to statistically is extremely high and relative to anyone.

So what we're focused on is finding insight on behalf of our customers, ultimately for the benefit both of our customers and their customers. And to us that's really important. When we work with you we're talking to you about the financial planners that engage with you and how you can do a better job with them, but I think one of the great net wealth stories and insights is that one of the best ways to serve them really well is to do a brilliant job by their clients.

And so that's, for us, that's the exciting part and the interesting part of this business. We sit at this intersect of statistical and methodological complexity. We've now built out the business to have real core technological capability, but all of that's kind of irrelevant if you don't ultimately have the industry expertise, because if you don't know the difference between a [inaudible 00:30:34] and an ETF, you've kind of got no business researching this space. And so we're industry experts, data experts, and methodological experts, and I think that's why we're all here, that's why we enjoy what we do.

MH: And given the fragmentation of the market at the moment, some of those trends that you must be seeing, are significantly different to what you would have witnessed or the team would have seen two, three, or certainly five years ago. Whether it's as a consumer, an investor, an advisor or even a platform.

MB: Oh, yeah. You've probably heard me say this, Matt, but it's always been in the interest of firms like us and of consulting firms to say that never in history has there been more change afoot. That's sort of the great line.

We've had a complete and utter reshaping of the advice industry in Australia. We've had, in the course of five years, really a complete and utter reshaping of the platform industry in Australia. Particularly as you guys have come and pushed in hard and made the big institutions respond, which they've done, but that competition has changed things substantially. We've had huge regulatory reforms going from FoFA to lift reforms to you name it.

And it's all been happening in a marketplace that in the end is sat under this big cloud of the Royal Commission. So the challenge for research businesses is when nothing changes it's pretty hard to tell an interesting story. That is not a problem that we've had as a firm for the last few years.

MH: So looking forward, I think everyone's, well hopefully everyone's relatively familiar with what's occurred over the last couple of years and has a reasonable gauge on I guess the current structure of the industry. It's still being shaken up, there's still a lot of things falling out. What does the industry look like in 12 months and 24 months?

MB: Well, sadly, Matt, I think what's happening right now, and the reason that you're at home and we're talking in the way that we're talking is going to dominate. And so the real shame of all of this, to me, is that environments like this are not, as much as there's lots of press about innovation and you re-engineer the world and you find a better way to do it, the truth is that large scale innovation is very expensive. It takes very large checks from very deep pockets, and capital has become more scarce now than it has been in a very long time. And I think that-

MH: Might stop on that one for a moment, I think that's an interesting point that you're making, because most would suggest that true innovation actually costs very little and has typically or historically occurred in garages.

MB: Yeah. And I think that's true at one level. It's true that some of the most innovative firms on earth were bootstrapped. They started in the dorm at Harvard and they started in the garage. But to scale those out and again, you guys understand this as well as anyone, to scale those out to actually be of a sufficient size to have impact, meaningful impact, that's an expensive process. And that's a tough thing to do right now because the vast majority of capital that is available has got to go to risk reducing spend.

And innovation in and of itself, I don't say this negatively, I love it, but innovation in and of itself is risk. Right? It's on risk. And I think that's going to be really challenging. So I think the next 12 to 24 months of this industry will be mostly about just trying to stay on the curve, stay with regulation, keep the client engaged, and there's probably some risk... I don't know if risk is the right word. There's probably some possibility of reasonably large scale disruption by way of M&A.

MH: Which has certainly been on the cards now since the Royal Commission and I think people have been trying to work out how all the bits fit together and with prices coming down maybe it does make sense for some of those to get together.

MB: Yeah. It's take different pieces of the value chain, push them together, extract synergies from one CEO instead of three and one HR department and so on. Try and drive price down and capture market share by being a more holistic, integrated offering. I mean it's hard to executive, like really hard to executive. But prices being where they are and some of the stresses being in the system, that may be a more realistic possibility in the next 24 months than it had been in the previous.

MH: Yeah. Through the recent research that you did around platforms where you benchmark each of the platforms every year, there were some really interesting insights that we touched on probably a month ago now, around things like robo advice, and I guess the future direction of platforms. Do you want to just touch on some of the things that you saw?

MB: Yeah. I think that the issues we were talking about is still very real, it's just there's probably a few things that have come out of platforms in the last two years. One is that my sense is that there's a contest at the border between platform and advice. So increasingly we're seeing elements of advice being embedded in investment platforms, and they were historically the exclusive purview of the advice technology providers.

So that's being contested a bit. But equally I think the advice technology providers are also contesting because they're starting to do all sorts of things to turn their own systems in, for example into CRM. I think about that as the contest for which system a planner logs into first. Is it their platform or their planning software?

And so what planners have always wanted is greater efficiency, and there's lots of greater efficiencies that can be delivered and are required through faster onboarding, faster ROAs, SOAs, these sorts of things. But equally there's efficiencies to be gained by being a more I guess singularly operated technology business as a planner, and having CRM at the core, having a workflow system that does things like tells a planner when they need to contact the client and I think managing that client base holistically and ultimate you'll get to the idea of next logical phone call as opposed to next logical product. You might get the next logical call so that the planner starts to get driven by the technology.

The contest for that is really starting to emerge and I think in the midst of all that we're going to a more true wealth mode. So my criticism of the wealth industry in Australia is that if you consider that essentially it only covers tradable product in the sense of listed product or managed funds, maybe some fixed income, it's not for wealth. And so we're trying to do, and you're trying to do this as well, it's the non-custodial assets. And for a genuinely wealthy person often those non-custodial assets are worth a lot more than the custodial assets.

So when we look at high net worth, for example, despite all of the advice that they get and all of the help that they get, unless they're reaching out to have a family office, the likelihood that in the end they roll all that up into an actual Excel spreadsheet is really high. And that's because of the non-custodial asset problem, and a whole bunch of other issues. But I know that the industry's looking to really start to address that.

And as you address that I think you start to get real whole of wealth and then the final thing is the industry's really looking at the household level wealth and I think that's vital, because this notion that four people live in the same house and have the same surname but are different clients, in a wealth sense just doesn't hang together.

And I know you guys have been working on all of that stuff, but I do think we're advancing in the ways that we need to and they're really quite sophisticated and they will ultimately provide more value across more wealth for more people.

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MH: Your comments on the combination of AdviceTech, of planning software and platform I think again maybe something we could debate for hours, but there's been lots of examples in the past where people have tried to do that and failed miserably because the two technologies and the use case for them are so different and it's very difficult to invest heavily into both at the same time and you end up being mediocre potentially at best, as opposed to a specialist.

And certainly the trend that we're seeing is actually to pick a market leading CRM, use that with a market leading platform, and then maybe one or two other bits of tech around it. But I think the issue at the moment is that the average number of technology solutions in a practise is about 15, and a lot of them have overlap and do the same thing as each other and you end up incurring huge cost to the ring of circa $10,000 in some cases per seat.

MB: Yeah, and that's a big problem. It's partly because the industry, like most industries, right? Has evolved. I think if we all sat down with a clean sheet of paper there's no way on earth you'd structure an industry that looks anything like this, you'd be insane, right? But it is what it is, and so yes, you're exactly right. I think you've got to choose your battles. You can't be all things to all people.

But it is really interesting to me. You start to see retirement modelling tools, for example, inside platform. You start to see much more sophisticated asset allocation strategies and the execution of them through managed accounts and MDAs on an automated client base wide basis. My argument is that when you see all that happening you've kind of got to recognise that the line between advice and platform is really starting to disappear.

MH: And do you think that's, again, being driven... What's the real driving force behind that? Advisers have always asked for better integration between planning software and platform, that's certainly part of it or is it just platforms looking to differentiate and add more value?

MB: I think it's both, Matt. I should be asking you that question. But the greatest form of integration is not to have any. It's to have one system that does everything. Now, that's just too hard but I think you see this constantly where there are needs that go unmet. Doesn't matter which party is not meeting them, it's always available to the other part of the value chain to meet that need. Modelling tools is a great example of that. Planners, for many years, have wanted better and better modelling tools that they can sit and have better conversations with their clients.

It's only five or six years ago where planners told us just the presence of a tablet, an iPad in a meeting with a client, made that a substantially better meeting. Today I was telling my staff, there's about three people left that use tablets, and they're all either over 80 or under five years old, no one's using tablets. But what they want is that interactivity. The tablet was the device by which they could sit and look at the same thing.

So I think animating that experience for them, giving them ways to show evidence around why they want to give the advice they want to give is vital. And you think about CGT modelling tools, it's a great example. One of the most powerful but undervalued pieces of advice to a client is to not do something. Every planner's got the same experience of a client coming in saying, "I really think I want to do this." But as professionals, we understand that the tax consequences of that, notwithstanding that it might be a good idea, mean that it's a bad idea.

Putting tools into the hands of planners that help them have that intelligent conversation with the client hugely increases the value, the perceived value of the planner. So again, whether you do that or to pick a name, whether you do that or [inaudible 00:44:05] does that, the planner doesn't much care, and certainly the client doesn't care. So I think you guys should go fight it out.

MH: Work out which bits we need to do. As far as advice goes, you've done quite a lot of research around that of late as well. How is the advice business model changing and what's that going to look like in the next couple of years?

MB: Wow, I mean you write up a list of things that have changed a bit recently that's going to be right near the top. I think what's not being understood, possibly even out of Canberra, is that in the last 18 months the consequence of everything that's happened has been, in many ways, a reduction in the size of the balance sheet that underwrites financial planning in Australia.

What I mean by that, a tonne of the industry was owned by banks. They sat on very large balance sheets that could provide a very large moral underwrite, which in the end it turned out was required, because there's many billions of dollars have drawn down on that moral underwrite. Now, I'm not saying we're better off or we're worse off, it's just understanding that that's completely changed now, that the average size of balance sheet that's backing financial planners in Australia is substantially smaller. So the pressure has to be on to get it much more right than the industry at large has got it right previously. That's probably issue number one.

But I do think the thing that the Royal Commission... And it was a royal commission into misconduct, it always has to be remembered that's what it was looking for. But it did sadly mask the fact that the vast majority of Australians who get financial advice think very highly of that advice, right? Even in the last few weeks, we've got data coming in at the market where despite the fact that the very vast majority of clients who have a financial planner actually haven't changes anything, they haven't sold or bought much at all, the very vast majority of them say that the engagements that I've had with my planner make me feel better, more confident, they've been valuable, and I'm glad to have had them.

You know what I mean? I think we've got a planning industry that... FoFA is such a high bar that even if you look around the world, you can be pretty confident that the very, very, very vast majority of Australians that get financial advice get very good financial advice because the bar's so high, right? I think the challenge, of course, for the planner, is that that bar being so high means that the only way to expand the available pool of clients that more clients are able to get financial advice is to drive cost down. And the way you drive cost down is through technology and the way you do that is to invest, right? And that's what you've done. That's what all the other players in the market do. But that's a difficult thing and it's a difficult thing in this marketplace. And we've got to drive cost way down from where it is. We really do. It's still way too expensive.

MH: Have you done any research on what consumers... No one's ever happy to pay anything, but on what a consumer feels is fair value for advice?

MB: Yeah, we have, and it's in the order on average of about 500 bucks.

MH: So we're about $3000 short.

MB: Yeah. But here's the thing, when you talk to Aussies about financial advice and what they'd like, very few of them, and the number is about 13% of them only will tell you not even using these words, but will tell you that what I want is something that looks like holistic financial advice as defined by FoFA. Very, very few people as a percentage say that's what I want.

But that's because that's an all-in relationship. That's a deeply committed relationship. The challenge that FoFA presents is that it doesn't allow smaller pieces or episodic pieces of advice to be given in such a way that it builds a relationship of trust over time so that via that trust and via the sum of those pieces of episodic advice we went up at holistic advice.

And there's the challenge because... And I think planners are frustrated by that as well. So many clients came in and say, "Look, I just want to know this thing." But to answer this thing, we need a full fact find and we need a two hour meeting and then we need to go away. That really, particularly as a way to start the relationship, I mean that's, it's just not a very natural thing, right? 

MH: Yeah, certainly episodic advice, we're hearing that all the time. The issue is that people are having to totally overhaul their advice business, it's always been about that retention and retained client relationship to use technology to actually be able to preempt when that episodic advice should be provided, because most clients don't actually know when they need advice on particular topics.

MB: No, and that's very true, too. And I think this is in the nature of the challenge of assessing advice. I've said this many times but there are clients in history who have had terrible advice that they've made a tonne of money from, and there's been clients in history who have had brilliant advice that they've made no money from.

And you've sort of got to fast forward through cycles of the economy to understand which was which and so it's almost impossible to understand. So yeah, clients often don't know when they need advice, and they don't know that needing advice on issue A means getting advice on issue B, C, and D. And that's why it's the 500 bucks. It's not 500 bucks because I think that's the value of holistic advice, it's 500 bucks because I don't even understand what holistic advice is but I know I need some help with A, B, and C, or A, B, or C.

MH: So in the case of episodic advice where they're coming in periodically for insurance advice, mortgage advice, whatever it might be, in the absence of an investment solution, which may or may not be part of the broader offering, who manages the money in the future?

MB: Wow, who manages the money in the future? Well, again, as much as we've got this great big wealth and financial planning industry in Australia, the fact of the matter is that the very vast majority of Australians don't use planning, and so right now who manages the money is largely the couples who live inside the houses that you see.

And that may sound a weird thing to say but as a research finding it's very true, I think. So historically we've believed that the dad managed the money, but what we as a firm have shown, and I think no great insight here, but we went and proved it, but it's households that manage money, it's not just dad. Who they put it with? Well, throughout history we've had pretty high allocations to cash and cash equivalence in this country and rates have disappeared on us and so we're in this interesting moment too where in a terrible market people are being forced to take on risk because cash rates don't pay the bills, particularly for older people.

So who's going to manage that money? I mean that's a great question. In a large part of the world, the longer money is being managed by the industry funds and they're able to provide some episodic advice, but that's very narrow around super and I think, again... Well, not again, but also we forget that for most people, most middle class people, super is really, really important, but it's not everything. They do invest in other ways, and I don't know who manages that because we don't have, as they do in other countries, we don't have scaled advice platforms, we don't have the asset accumulation platforms of the likes of Schwab in the US, which is, in an ironic sense, it's a beautiful example of vertical integration done well.

MH: Absolutely.

MB: And we've decided that vertical integration is evil, but I think people haven't stopped to remember that actually that wasn't a finding of the royal commission. The industry kind of preempted that vertical integration was evil, and yet-

MH: The management of conflict.

MB: Right. I can't see that as a finding of the Royal Commission, it's the management of conflicts that's important.

MH: It helps when the total cost of the vertically integrated product is so low.

MB: It certainly does, yeah. But it is a good model, right? They start at robo and they go to bionic and then they go to something beyond bionic and you go all the way up the chain and you end up with family offices. But they are a system that allows people to get in at a very, very low price, stay in at pretty low prices and scale up the advice relationship over time. That's where we really struggle. Essentially our mode says you've got to be wealthy enough to be able to afford advice, but the simple logic of it is, is that you've got to get advice to be wealthy enough and there's the conundrum.

MH: Which is potentially again a flaw in some of the models that people are looking at where talking about robo for a moment, robo on a mass scale where there's a very clear path through a large institution to full service advice might make sense but I think the proposition for an advisor in a practise to put in a robo solution to service what would typically be their smaller clients on the hope that one day they might become full service but inherit a whole lot of risk along the way just doesn't make sense.

MB: No, it's pretty tough isn't it? I think what planners are telling us is that they want to service, and the word's really important, lower balance clients. But they're not saying they want to service low balance clients, and I think that's for the exact reason that you've just outlined, there's just too much risk along the way, it's too hard to make money along the way.

But we do have to get from wherever we are today, even if you drop the wealth hurdle by $100,000, you would very substantially expand the pool of eligible clients. And we've got to... I mean at the end of the day, if we want financial advice in this country we've got to regulate it in such a way that allows planners to have profitable businesses. And the only way at the moment to increase profitability meaningfully is to expand the catchment. And so we've got to find ways of allowing smaller pieces of advice across smaller, non-holistic sets of issues that maybe over time build the holistic but that's how far you are.

I don't think it's okay that... And this is... Matt, some people think I'm, after talking to me, they decide I'm some crazy socialist, but I think it's not okay that the numerical majority of Australians are ineligible financial advice because the regulation in the country says that they can't afford it. I think that's wrong.

MH: Mike, we might leave it on that powerful thought. We've gone way over time but I would love to pick up this conversation maybe in another 12 months and just see how we have come out of this pandemic and really which direction the industry's heading, you've got a wealth of knowledge and we appreciate your time sharing it.

MB: It's always a pleasure, Matt. I hope we talk again within 12 months.

MH: Absolutely, thanks for your time.

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Views expressed are of the interviewee and may not be the opinion of Netwealth or its related companies.

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