Transcript

Matt Heine (MH):

Hi, welcome to the show.

Neil Younger (NY):

Thanks very much, Matt. Good to be here.

MH:

Neil, it's been a little while since we last caught up, obviously, we've been in our various stages of lockdown over the last 12 to 18 months, but I thought it'd be a great opportunity to catch up with you and just to hear a little bit more about what you're seeing in the market, both from an advisory perspective and also a licensee perspective. But before we do that, I was hoping you might be able to just share with the listeners a little bit of your background, given that very relevant, given everything that's happening in the industry and a pretty seismic change that's occurring.

NY:

Yeah Matt, and it's so great to be here. Listen, I've been in the industry for now for some nearly 30 years, would you believe? It's starting to show my hair colour these days, but I've had a long and deep background in the advice segment of the industry, and probably a unique perspective, because I spent a considerable amount of my career in senior executive roles in large banking institutions in the advice space. Nowadays, as you know, I run the Fortnum Financial Group and that's a very different-sized business to those that I was once a part of, but has a similar thread in terms of being a business that's in the advice sector. And so, the banking part of my career was very, very different of course. Advice businesses were historically seen as distribution vehicles for product capability within the bank infrastructure. And whilst we always believed in advice and the difference that advice could make, the economic model's very, very different to what it has to be now to sustain. And it was a very different time I think in the growth of the advice segment in the marketplace.

My last role in the banks was with ANZ as the MD of advice and distribution. So even that title suggested a combination of those two functions, that were part of my role. When I left ANZ back in 2016, it was really at a time when ANZ themselves were contemplating their role in wealth. We all know what then subsequently happened with their wealth business. They were the last in and the first out and other banks of course followed suit. I saw my next role really was in the advice segment. And I saw that advice businesses needed to stand on their own two feet. And I knew that there was an economic model that was sustainable, because the value proposition was so critical. And Fortnum was the landing spot for me. And it's interesting.

Fortnum had been around at that point for six years, it's now 10 years old, founded by Ray Miles and founded on a principle of an advice community that had a sustainable proposition. So there was a strong alignment between my philosophy around what the advice businesses of the future will look like and a correlation between that and what Ray had sort of established when he put Fortnum together. So... Yeah.

MH:

So, I was going to say Neil, given that your background has historically been running some of the largest licensees in the country, even if you go back 15 to 20 years, could you ever have envisaged the disruption that has occurred? It was it even on the radar?

NY:

No, no, not to the extent that we have witnessed. I mean, obviously, FOFA was the real change point 2013, but I don't think the industry really also had adopted a lot of really positive change initiatives as a result of FOFA. The inherent coupling of advice and product, I think still remained. Grandfathering assisted that, but also the business models in the banks were never forced to stand on their own two feet. They were always subsidised by the bank infrastructure. So as a result, that part didn't change. I think the inherent risk became very obvious in the banking environment and that was amplified by the Royal Commission. And then commercially you had to work out is that the business you want to be in, if you're in the banks and clearly the answer to that is obvious. So they said, "No." So, no, I couldn't foresee that to have occurred to the degree that it did. With the benefit of hindsight, looking back on it, I think it was an inevitable that, that ultimately, the scale attributes to the advice business were inconsistent with the objectives of large banking organisations.

So, that's why I say ultimately, it was inevitable, but now you could never have predicted that now.

MH:

And I think you've touched on the change to business models and the fact that the licensees were subsidised, it probably doesn't quite do justice to the volume of subsidisation that was actually being passed on. And at the time, that was the business model and there's nothing wrong with it, but your KPIs would have been very different around growing the network and you sort of having these huge networks that weren't necessarily all aligned culturally or otherwise. How did you manage that? Because they were very significant numbers.

NY:

I think, we had the salary channel, of course, and the bank structures and we had the aligned businesses and certainly the models were set up where they were breakeven from a cost perspective in terms of running them. Because of the size of the business, there was considerable scale benefits to how we ran centralised back office support into the various networks. That gave us some opportunity to make the commercials stand up, but ultimately, what would you be in a business where you're just washing your face. You really want it to make a commercial return. So the only way that you could do that effectively was through another P&L. And that was how you seemed to really justify the existence of the infrastructure. And as I mentioned, when you start to risk adjust that, that's when you were, you're well and truly underwater. And that was one of the challenges we faced into. And I think what you saw all banks doing collectively was how do we eliminate that risk as best as possible?

And this is where the banks invested heavily in control environments, which advisors found very stifling in terms of the way they sought to deliver advice to therein client. From a business's perspective, how can you have some sense of comfort that's 1,500 advisors as a network are all doing what they should be doing when you've got a regulator telling you should know. So it works a little bit easier into the bank channel where they're employees and you're telling them what they need to do every day and they're operating on one system, works less effectively when you're dealing with practices that are in the suburbs that might have themselves, or maybe a couple of other people around them. And that they're trying to get on with running their business and you're telling them the way they've got to do it.

MH:

It's a very challenging business model where you're being rewarded in KPIs on growth, as well as on compliance and risks. So I think those two factors probably still remain the same. And if I look at the Fortnum business model, Fortnum was probably the first and certainly the largest to really, I guess, pioneer a fee for service when it came to a licensing model, which didn't work for everyone, but you've really managed to sort of mould that and create something fairly significant now.

NY:

Yeah, and at least I don't underestimate the impact of the tailwinds of the banks exiting the space, because that's certainly assisted us significantly. We were the first to kind of foray into genuine price for the service, because there wasn't any other revenue stream coming into the business that took our focus. So, that was tough. In the early days of Fortnum, the true believers bought that business model, it was hard to take that to somebody where there was a significant disparity on their own P&L costs associated with licensing versus the subsidised models. So as much as people saw what that could mean for their business, it was a hard P&L adjustment to digest. So it was tough going for a long period of time. But I think what then happened was the price differential started to converge. The reality was that advisors were exiting the bank infrastructures that where they were well-supported in terms of resources.

And the only way they could feel comfort that they would get them on the other side was to pay for them, because a lot of promises made across the market for cheap dealer services from groups, but you got nothing when he got there. If you're were well-supported in service inside of an institutional group infrastructure, that's a big change to move to nothing. So what I set about doing, because I had come from that corporate background, I set about corporatizing the business model, so it can adjust for scale. So I can deliver a full service proposition and had the economic model to support that. And because we started that work before the banks exited, when the banks started to leave, we were well-positioned, right? We had the capability for a full service delivery and we also had a price model that was sustainable. And it worked, over a very short amount of time, more than doubled the size of Fortnum's business.

And that put us in I think, to a minimum viable level in terms of our business model operating, standing on its own two feet that could start to realise some of its own benefits of scale. And that's where we find ourselves today, but the job's not done Matt-

MH:

No, never is. You've mentioned resources a couple of times, which I think is probably a topic in itself. How did you personally go adapting from institutional world where you'd spent 10, 15 years with a lot of resources and a lot of people to a smaller boutique business?

NY:

Yeah. I get asked that question a lot, Matt. And I contrast it like this. In the bank, you have lots of resources, but not so much control over them. Inside Fortnum I've got lots of control, but not so many resources. So they both have goods and bads about them, right? So, but it was a big adjustment to kind of getting down into the trenches. And in many senses, I hadn't been there for a long time. And so, had lots of people in the trenches for me, as opposed to, I don't say that with any arrogance, but that was just the nature of having large-structured businesses and plenty of people doing individualised tasks. So, we needed to build a resource profile commensurate with the size of the business and the activity it was undertaking. And, and as I said, it was an opportunity for me to get my hands really dirty around what that design was and how we could build that back out. And people ask me as well, which did I like more? Actually, like having greater control to tell you the truth.

And you'd appreciate this, you've been running a very successful business for a long time. And you can put your own footprint into that business structure, you can be very nimble and very adaptive to what you hear from your clients. And that's, I think been part of the fun build there for Fortnum is that I can build a freedom within a framework structure that's responsive to the needs of our advisors. I could never have done that before. So yeah, they're different, but I'm enjoying where I am today.

MH:

And if you think back on your time at the banks, the banks do training very well and no doubt you would have had fantastic leadership training. What were some of the really good lessons that you learned through your time with the various banks?

NY:

There's no doubt, you get a lot of training on corporate behaviours and how to operate in large structured businesses. So you get a lot of education on project management, oversight, governance, and so forth. And that's a skill that you evolve over time and a skill that gets to be developed as you move into more senior roles progressively. So, I've benefited significantly from that. And much of that, I'm able to translate into the operating model of a business like Fortnum today. Because when you sort of elevator up a little bit of a helicopter up a little bit, and you start to see things from a larger level, you start to think about things that when you're in the trenches day-to-day, you might not necessarily see. So, I've benefited significantly from that background and experience. Obviously, you got lots of management courses, so you're finding lots of specific skills, but yeah, it was a very useful vehicle.

And I think it's one of the gaps now that we're probably seeing in the advice industry, that we've got to find different ways to fill, less sizable infrastructures available for people to have the opportunity to work through.

MH:

Yeah. And if there's one skill that would have been very helpful over the last many years is change management. How do you successfully drive significant change on an ongoing basis without burning the team out and the advisors?

NY:

Yeah, I think that's right. So, change is an inevitable every day, but how do you plan for it and how do you execute against those plans? So, in a corporatized space, I mean, you set your business plan for the year, you set the project initiatives that you're running and you ran STEER coach with very detailed infrastructure. You had people assign to tasks like change management and so forth. The same principles apply today to the Fortnum business, but you just don't have the same individual resource components sitting around the table, but you've got to execute the same way.

 

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MH:

You touched on it before that the job's never done. And in some ways, many of us just getting started for the, just sort of the next evolution. What does the licensee of the future look like?

NY:

Yeah. So I'm caught on record in some views around this piece. I think the advice business of the future really is a function of the type of advisory practices that they will be working with. And in that sense, what I see the advice practise market will look like is much larger underlying businesses. So I think as challenging as the statement sounds, the day of the sole practitioner is numbered. You need infrastructures to be able to support the delivery of advice, because it's a complicated process to deliver against. Now, that's not to say that process won't get better with technology over time, but the reality is you need a more corporatized practise level business model. So what we're seeing is businesses starting to join together and get bigger. And I think you will see a lot more larger practices in the marketplace. So if you then think about, "Well, what does the licensee offer to them and how does it remain relevant?" Well, it's got to engage a different level of business than traditionally it's been involved in.

Now whilst we’ll always talk about core tenets of governance and support around training and technology and so forth, to support the advice process. They are hygiene, a ticket to the game, and essentially, our business needs to continue to get bigger, to be able to support those at the right commercial level, but scale-related solutions and innovation that supports that stuff. But then you've got to say, well, beyond that, they start to say, well, how are you relevant to those bigger practices? And that's about helping them as they evolve their value proposition for their clients. So it's breadth of capability at the licensee level. So instead of it just kind of being one channel to approach, to delivery of advice, it's well, how do you service a very different and in some sense, complicated needs of consumers? And also, how do you help practices go through those different challenges as they themselves get bigger? And that's why I think we stand in goes stead, because again, that corporatization without being bureaucracy is the functional way to do that. And we've got deep experience in that at our business level.

And how do you help businesses through that sort of growth phase, I think is a significant part of future value proposition. So and my view is larger practices, not necessarily meaning that you have to have as many of the licensee level, you've got to have the right ones. So when I talk to Fortnum's growth. I focus more day now on practise numbers more so than advisor numbers as probably a key ingredient to the right inputs to success into the future.

MH:

So you mentioned larger practices quite a few times now. What does that actually look like?

NY:

Well, I think it looks a lot bigger than the ones we see today. So if you look across the marketplace, the average practise size is still under $1 million and some of them probably close to the 750. And we've seen significant reduction in advisor numbers across the market, partly brought on by FASEA, partly brought on by advisors just having enough of the new environment and not wanting to make the changes necessary to work. So we've seen that number come down and sub-20. The pundits would suggest that number can go somewhere to 15 to $13,000, 13,000 advisors, which is kind of the lower end of the estimate. And you kind of go, "Well, what does that lead us to?" It leads us to an environment where you'll have fewer advisors and more concentrated advisor groups. So I think those numbers go up appreciably. Now, I used to say that number is going to be north of $1 million. The average practise in Fortnum's day is about $1.3 million.

So, if you look into the future, I think that number is getting closer to three-plus is a real starting point to be thinking about the sizing of a practice. So again, that's the evolving space.

MH:

And that that's a lot more than just organic growth. So it's going to lend itself to a lot of M&A activity across the industry. Certainly in my travels, I've seen some mergers go incredibly well, and I've seen some go incredibly badly. When you're sort of matchmaking practices or talking to practices about scaling up and potentially merging with other firms, what was some of the key advice that you give them?

NY:

Choose wisely and work through the process carefully? If I contrast an advisor buying a financial planning practise going back sort of five years ago to what you really need to do to make sure that that arrangement is going to work, they're chalk and cheese. Before it used to be a high level of assessment of the economics of the business that you might be looking to merge or to acquire. Now, it's a very detailed understanding of the governance, the advice type, the service proposition, et cetera. And it gives you the opportunity to really understand the underlying dynamic of the culture and whether that can blend together. And the success around that assessment is critical. We do a significant amount of downstream due diligence on behalf of our practices. Now we look at it through the governance layer, but that governance layer teases out a lot of things around the business and the people running that business themselves. And I think if you do that work upfront, then that creates a better pathway to success. You'll always have whether those personalities will work together, once that marriage is made.

You can't get away from that, but you can prepare as best as possible. And that's what I think we're seeing successful mergers occur. And I will say one thing though, I actually don't believe in mergers. I believe that there's always one party taking the other party over. So if you're honest about things from the get-go, if you get the alignment right, then you've got a higher probability of success.

MH:

And there's things that practices can do, I often talk about dating before you get married. Are there situations where you've seen firms enter into joint ventures on particular specialties or anything where they can actually get to know the potential suitor better?

NY:

Not so much direct joint ventures, other than they start to maybe some collaboration that occurs. You probably see that happen in the licensing structure more where they do have the opportunity to engage more in say, collective conversations around practise development or problem solutions that are facing multiple businesses. And that relationship grows. And then, there's a sense of there's enough of a rapport that they could work together.

So I think for a lot of practices, the licensee is a happy hunting ground for suitable partners, certainly for support to allow the two businesses or multiple businesses in that sense to come together. So I think that's a, yeah, that's one of the benefits of a community-style approach to businesses like ourselves that forward those connection opportunities.

MH:

If we just keep on the theme of practices for a moment going back 10 years, and now I'm starting to show my age, there was a significant shift in the industry to really specialise. So you would have your risk specialist, your investment specialist, estate planning specialist, and that was seen as the way of the future. That seems to have been completely turned on its head. And now in many ways, if you're not holistic, you might not survive. What was your view on that and how it's evolving?

NY:

Well, definitely that's been the trend. And I think a lot of that has to do with two things. One is the amount of money that you need to be able to make per client to get the model to work. And the real challenge presented by the regulatory environment around limited advice. So whilst yes, I get, I've read the regs plenty of times you can do it. The practical process around delivering limited advice to one particular segment is very, very challenging. And there's been lots of work done by us more recently to understand what those impediments are. The solution is beyond just the regulator changing their reg guide. Unfortunately, it's a fundamental change to how the advice framework is constructed today to allow that to happen probably. So I think those two things are the real drivers to the fact that most advisors have tried to have fewer clients and deal with them more holistically. That said, you can't take a holistic view to the client and at the practise level and have specialist capabilities within the practise.

And I think that lends itself to the argument that I put, which is really to get across that level of requisite specialist capability, you'll have a bigger business, and that's where we're seeing some of the practices start to bring in specialist capability now, as they're building bigger infrastructures within their business capability. And that assists them, because it's then the practise treating the client as a client of the firm, more so than treating them as a client of the individual planner.

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MH:

And if you look across the Fortnum network, what would you suggest is the average fee per client, and also how many clients do you think that advisor can realistically service?

NY:

Yeah, it's an interesting one. I think the stats are somewhere around three... These are rubbery, right? Because it's hard data to track all the time. I think it's somewhere in the order of at least $3,000 per client across the business. But some businesses are much higher than that, because their thresholds are getting higher. Those stats are a little bit distorted by some legacy is advisory practices are still working through rightsizing their business. And rightsizing really means cutting off those that are no longer economical for their practices to deal with. And part of that is the capacity to serve. So traditionally, you always say that one plan at a 200 clients was about the ratio. I think the number's probably closer to 150 and for many advisors it's now approaching 100. So that's if you just do a simple maths, if 100 is the number used to be 200, then half the clients double the fees to get the same revenue is simply how it works.

And that's one of the really disappointing things of what we're seeing happen structurally in the industry is the amount of clients that just advisors have no capacity to engage, or the minimum levels that advisors are putting in place for the clients are an impediment to many people seeking and getting the advice that they could benefit from.

MH:

Often technology is cited or quoted as the solution to small-balanced clients. And to your point earlier, we've obviously seen a lot of the smaller clients and smaller balance clients, either removed from the advice practise or sold on to firms that are set up to service them. Do you see a situation where ROBO or technology is going to be used to future-proof businesses and to better serve those smaller balanced clients and potentially bigger ones?

NY:

Absolutely. I see it as a necessary way forward. The question is what form will ROBO advice take? So for me, the current ROBO construct, which almost feels a little bit back to the future where there's a product solution off the back of the advice it's just streaming into a product isn't going to be the pathway required to really create a digital scaled advice solution. I do think that technology should play and will need to play a role in the mechanics of the advice process. The phrase that I've always used is there's human-led technology enabled advice. So I think there's always going to be a need to couple the two together effectively to add scale to the process where the human being can do some work with the technology piece. But I actually think that's a critical piece. And if I'm excited about something, I'm starting to get a sense of that technology tailwind is happening, but I don't think we've seen the solution that's going to work for everyone.

Now, again, not being as cynic, but thinking about things through the lens of, of my prior role in a bank, they're still big client bases, right? At some point in time, the banks will be back and advice. They just might be back in a digital version of that rather than in the human one. So we'll see what plays out there.

MH:

I suggest that it's almost inevitable. And if you look at what's happened in the UK, took 10 years between the institutions exiting and coming back in with digital-led experiences.

NY:

Yeah. So, we've got a very complicated reg environment here. And one of the things that digital tools will to do is to solve specific problems. You're in that limited advice world when you're doing that. And that's where it's quite problematic. And if you try to push the decision rights back to the client, there's still an obligation in our advice construct to sort of second guess the things that the client might not have considered. And that gets to be a very challenging digital journey for consumers, but these problems will be solved. No doubt about that. Smart people out there coming up with smart solutions and what will solve them. And I think it's critical that we do, otherwise, I just see the advice gap getting bigger rather than smaller.

MH:

One of the, I guess, the outcomes of COVID over the last 18 months, there's really been an acceleration of tech adoption, both at a practise level and also a client level. If you think through the various practices in your network, what are some of the really innovative ideas that you've seen or that have been implemented to solve some of these remote working issues?

NY:

Yeah, well, I think everyone did the obvious first step stuff, which was moved to Zoom and Teams calls and so forth. And I think the general consensus from advisors has been, that's been a really positive move for their business, particularly to service their ongoing client segment. So lots of clients, in fact, reported that they found in a far better way, more effective way to engage on a more regular basis without the impost of having to travel into an office, et cetera, et cetera. So I think that's embedded in businesses for the future. I think advisors in the main have struggled with new client engagement and how do you establish a relationship in a digital framework or when that relationship's already established? And I think that's the challenge many of them are still trying to resolve. And in fact, that's the area where I see kind of the greatest amount of innovation being applied.

So, some advisors have been trying new sort of digital tools that they might be able to engender some form of rapport over a period where they're pushing back more interactive journeys for the clients in terms of how they collect information from them. That's where I've seen most of the early stage kind of innovation that's occurring. We obviously in the business run a tech stack approach, which we're very accommodating of being able to plug and play open architecture tech solutions into the core solution in the business. So that's allowed for some of that, if you trial sort of work that's being done by practices to see if they can find a way to crack those nuts. I don't think we're there yet is my sort of view overall. I think there's still more opportunity for additional innovation in that regard. The other area, I think we're seeing advisors sort of really ask for innovation, is consistency of workflow through their operating model.

And that's a lot about how do they make sure that they're not missing things inadvertently. Now advisors find themselves on the wrong side of the regulator from time to time or certainly wrong side of the compliance team from time to time. It's not because they go up in the morning and decided to do that. It's just complicated and you can make errors easily, having structured systems and processes to do that is critical. I think that's one of the next areas of innovation that we certainly focused on within the business to help provide solutions there.

MH:

Are you starting to play around with machine learning or artificial intelligence in any shape or form to help manage that compliance side there?

NY:

Yes, we are. So one of the real challenges is that tiny rises that got to stick something in X plan in a required field so that we can then run a little tool over the top of that, that pulls that data and tells us where somebody hasn't put that something in the field, right? That's the biggest challenge for the industry is just the laborious nature of trying to get that right. So there is the new technologies out there now that can obviously look at SLA documents and start to read tables and structures within those documents. And we're using some of that today. So that kind of allows the advisor workflow to be less formulaic, but the result still is available to us as we seek to understand whether things are being done as they should and help advisors to feel comfort that they have done what they need to do. So that's some of the innovation work that we're seeing. And some of that's starting to work now, right?

In the early days, I think fair to say, it was promising more than it was capable of, but it's getting better all the time. As the machine itself learns, we're finding more applications for that, which is great.

MH:

Fantastic. Neil, we were about to run out of time, but before I let you go, I know you're an avid skier, you like to travel. Obviously, that's not an option at the moment. What are you doing to keep yourself sane?

NY:

I was thinking, I got a five kilometre rule at the moment in lockdown, but we've also got, you can move around and your own LGA. So I live on the Northern beaches, not a bad place to find myself locked down. So I am spending a fair bit of time at the beach. I was talking to my 13-year-old son the other day, and he said to me, "Daddy, are you getting in the water?" And aside from the mindset stuff of cold showers in the mornings, I haven't braved the cold water yet, but I'm just about to. So yeah, look, I think that's my mental release is heading down the beach. I'm on the beach at the moment, soon to be in the water. Can't wait to be travelling and doing all of those things that we once enjoyed again. But that's my respite for the moment.

MH:

Good. Hopefully, it's not too much longer before we can all get out of this mess. But as always Neil, has been fantastic catching up. Really appreciate your insights. I think there's some fantastic information in there for the people listening and look forward to catching up again very soon.

NY:

Always a pleasure. Take care Matt.