Rybka
I think one of the real strengths of an organization like Top of the Table is you can talk to people from different countries and learn from them. I think if, for our U.S. members, there is one thing you can do, it’s make sure you’re talking to the people from South Africa, from the United Kingdom and from Australia. Not about the technical parts of the rule, but how they have adapted to change. We have two change masters, and we’ll start with our first. Chris, tell us a little bit about your entrance into the business and your practice.
Leach
I joined the industry in the early ’70s. And yes, in case you’re wondering, I started very young, almost diapers. I came in as a tied agent and then I set up my current business in 1983. At the moment, there are nine of us in total. So it’s a nice sort of tight small team.
Rybka
And how about Sue? How did you get started?
Paterson
I came from a banking background and started in insurance in 2004. I worked with a business partner and gradually bought that business out. We specialize in business clients and we have three locations and about 16 staff.
Rybka
So you’re both entrepreneurs. We’re going to talk a little bit about the change in the U.K. first and this has been ongoing. Chris, maybe you could just talk to us a little bit about what happened and how your world changed.
Leach
Well, we’ve had legislation now for 30 years and, as you’ll see in the slide, hopefully it will come through the different legislation that we’ve actually had. We started with legislation with the financial services act back in 1986. And that brought in “best advice” which I understand you call “best interest” in the States.
From that, we’ve had a variety now of legislation. We’ve had commission disclosure in 1994 that frightened us to death. We have to tell clients exactly how much we’ve earned from any product that we sold them. And, just in case we had inadvertently omitted to mention it to them, the insurance company will write to them and tell them exactly how much we’d earned.
From there then, we had polarization dismantled and then we had the RDA, the retail distribution review which is very, very far-reaching. And when it eventually came in, it banned commission. So we were not allowed to actually receive commission unless it was term insurance. Then any insurance policy that had values to it had to be by fee, from the client or from the product. But it had to be based as a fee. Commission was totally banned. And you can imagine how we felt about that. It was very, very farreaching and had a major effect on the numbers in the industry in the U.K.
Rybka
A whole series of changes, not one, but a series. Your changes in Australia were a little more condensed. Tell us what happened in your country and how it impacted you.
Paterson
Australia faced a lot of change in 2003 but after that there was a lot of media hype about the financial services industry that really commenced around 2011-2012. In 2012, we were quite aware there were going to be a lot of changes over the next couple of years. So at that time we knew they were going to remove commissions on investment. We knew that we really had to look at a fee-for-service model going forward.
They also made major changes to what we call employer super, like employee benefit plans in the United States, which I was heavily exposed to. Twenty-seven percent of my business revenue came from that. So I knew that, by 2016-2017, I would lose $300,000 of recurring revenue from that change. We’re also now looking at changing commission structure. We still do receive commission on insurance. It’s all term insurance. But those structures are being talked about being changed again at the moment. And they’re also looking at our education changes again at the moment.
Rybka
We were talking about this on the phone. One of the rules that I thought that would be hard. What you said
Paterson
About opting in. In Australia, when you do investment work and you charge fee-for-service, and explain to the client, “This is the fee that we’re charging you,” every two years they actually have to physically sign a letter to opt in to stay with you as an advisor.
Rybka
So, “Yes, Sue, I want that 100 basis points coming out of my account for the next 24 months.”
Paterson
I think that conversation in the designing it is good.
Rybka
You both referred to something we are calling “best interest,” “best advice.” This is called a principlebased standard. So it’s not a specific rule, but if you disclose this, OK, it’s a squishy rule that you’re really not sure about whether you’re in compliance or not. How did this work for you, Chris?
Leach
Well, in fact, they’ve changed it over the years. It’s still talked about as best advice, but how you qualify has changed because they did bring in principle based at one stage. But the principles weren’t defined and therefore you didn’t know how you were supposed to actually adapt to this. And if you then applied it in one particular way and you were wrong and the regulators didn’t like that, you found out later on that you were in breach. But they didn’t give you any help along the way. So that’s changed a little now so that it is easier to qualify.
But basically, when you’re totally independent, you have to be able to show that you investigated the whole market. You have to show that what you’ve recommended is in the best interests of the client. And therefore, if you’re not, for example, offering the cheapest product, you have to justify that. And we have suitability letters which are sometimes 25 pages long that we have to send to the client. The letters says, “We didn’t recommend this because of this reason. We didn’t recommend that because of that reason,” and justifying it all along the way as to why you’ve recommended that particular product. And the regulators can still pull it apart.
Rybka
Well, I was helping with ALU’s lobbying against the SEC best interests and got to meet three of the five SEC commissioners. We were trying to understand the rule and one of them said, “Well, we really want to animate advisors to do what’s right.” And after the meeting our consultant said, “That means scare them to death.” They are definitely animating us.
Let’s turn. I think people here are scared. They don’t know how this is going to impact them. The main reason we wanted to have you here is you have continued to adapt your businesses. You have successful businesses. You’re here qualifying for Top of the Table after all of these changes. So what we’d really like to talk about is that in the U.K. there is a 90 percent attrition of financial advisors from when these rules started. Tell us about the people who survive. What did they do and maybe what did the people who didn’t survive do? What’s the difference between those who made it and those who didn’t?
Leach
Firstly, the ones who didn’t make it were either so scared that they didn’t think through it or they just decided that they could not adapt. And if you were transition-based, if you just sold a product and went, then it was that much more difficult. If you’d always built a relationship with a client and that client actually saw value in what you did, then that made it so much easier and so much better.
And it was attitude of mind. A lot of advisors looked at it and said, particularly with this latest retail distribution review we had where you have to have higher levels of exams, “We just can’t do it.” They held up their hands and said, “We’re gone. We’re out of here.”
I’ve been doing this now for a long time, I won’t tell you how long, but it’s a long time. But, interestingly, for the ones who stayed, I think it’s the very best time to be in this industry. The very best time. I am so excited. People say to me, “When are you going to retire, Chris?” And I say, “When I’m no longer vertical,” because it’s such a great, great time at the moment. If you’ve built relationships and if you can show that you’re actually giving value, that’s what the difference is. Getting the attitude right and saying, “This is going to come.” Don’t put your head in the sand. It’s going to come and then just attack it. Go with it.
Rybka
Very good. And Sue, what’s your advice?
Paterson
Well, I very much agree with Chris. I think that when all these changes came out, it certainly made me, personally, and a lot of advisors that I know take a breath, take a step back and ask, “How are we going to work through this?” But these changes have really probably been the best thing to happen to me
personally and my business. I think I very much had to get my head around it and take the time to get the confidence in being able to have a discussion with my clients and have confidence in the value that I am providing and the fees that we were providing for them. When we worked through that process and
actually understood, it was incredible. Probably didn’t even really understand how much value we were giving them. And so we really dialed down and said, “Look how much we do for these people.” And the relationships with the clients are so much more holistic. We don’t have as many clients on the book. We’ve been happy to let some clients go and concentrate on what is a good commercial outcome with that client. We are much more client focused.
I’m sure most advisors in Australia, if they sat down and looked at their own businesses, would say the same thing. Our businesses are in a much better place and we do a lot better for the consumer than what we used to do.
Rybka
So the same number of people need advice. There are fewer advisors. Those who adapt can prosper under the new model.
Let’s go back and zero in on how you first felt when some of these big changes were coming. We talked about what did you do, but how did you feel, Chris?
Leach
Scared to death, because we don’t like change. We like what we’re used to. And I think the longer you’ve been in the business, the harder it is to change. If you’ve only been in it for five years or so, you can adapt. You can change because you’re not so entrenched. But if you’ve been doing it for 20 year-plus and all of a sudden they want to change things, it really is scary. We don’t like change. Or not change that seems to be threatening change.
Rybka
Particularly for people who are already very successful. It’s work for them. And how about you, Sue?
Paterson
Same. I was quite disturbed and scared. But then I was very much on a mission to find a path forward to make this work. Without a doubt, I had to move forward and find a way of doing that. I spent a lot of time talking to other advisors who had already actually changed their model. I know Ross’s company sort of took steps to move forward earlier. I took a lot of confidence in the fact that the sooner I got going and moved forward, the better it would be to cope with the change.
Rybka
I put up on the screen something from Strategic Coach. Dan Sullivan says, “We wait for confidence.” This is difficult. We’re trying to get enough confidence to go forward, but it has to first start with commitment. You have to make a commitment to change your business, to stay in business, to do what’s necessary. Then you get the courage to have the hard conversations with clients about, “Well, I need to charge you for something I used to give you for free.” With people in the office we have to change how we’re doing this. So you get that courage and with that courage your team builds capacity to have a business that’s different or does things differently. And it’s only then that the courage comes. So we can’t wait for the courage to make these changes upfront.
We’ve got a lot of U.S. members who are going to be going back and, in six months for some of them, 50 percent of their income is going to be impacted by this change in rule. You said it’s $300,000 and that’s all from the profit side. You’re last in line, as entrepreneurs, to get paid. What would your advice be to the U.S. members? What did you do and what would your advice be on how they need to think about changing their business? Chris, we’ll go back to you first on this.
Leach
Well, I think first and foremost is look at it as an advantage. I know this is difficult, believe me. In hindsight I can do this, but at the time I was as scared as you. But it’s a case of looking at it and almost saying not only, “What do you have to do and what changes do you have to make to comply,” but “How can you go above that? How can you steal a match on your competition? How can you go further so that you really do stand out from the crowd?” And that I think is really important to actually grasp: “What can you do that you can get a commercial advantage,” because, in all honesty, if you just do what you have to do to comply then you’ll get pain and you’ll get some gain. If you go above that, you’ll still get pain, but you’ll get a whole heap of gain. It’ll make it all worthwhile. And I know that because my business is stronger now than it’s ever been.
Can I just say one thing? You all know Tony Gordon. I meet with him on a quarterly basis, and I find him invaluable. And I remember one thing he said to me a few years ago when we were making all the changes to the business. And he said, “Chris, you want to make sure when you go to see a client that it’s for one of two reasons. Either opportunity or obligation.” And what I’ve tried to do is to make sure that the obligation side where you’ve got to do the justification, make sure they can see how much the service is costing, etc. I’ve tried to make sure that the obligation side is covered by processes or by staffing up that I’ve done. So other people can do that. When I go to see someone, I do it because of opportunity. And that’s made a terrific difference.
Paterson
I actually removed myself from my business for a week when I had decided what the financial ramifications were. And I did a full swat analysis of the business and of myself, personally. And I went straight back into a cash flow position and determined exactly what that cash flow was going to look like.
Then, when I had the cash flow, I looked at what I needed the cash flow to be and fed in my strategies and decisions to get the cash flow back to where I wanted to be. So, in some ways, we very much downcurved expenses, really looked at how we did business, found strategies to make processes faster, more time efficient, more cost-effective. And at the same time trying to boost the outcome on the other side to the client. So it was very much something I had to get a lot of team engagement in when I went back into the office and said, “OK, this is what we have to look like. We need to develop new streams of revenue. We need to do better than what we’re doing.” And I have to say a lot of the people that work with me, their mindset about this and their enthusiasm was just a great reward to me and made it far easier for me. I found a lot of the younger people in my office didn’t even understand there was a difference. Oh well, OK. So it was more me that was struggling with it than it was some of the staff.
Rybka
Chris, when we were talking about this, I think you alluded to one of the things that most impacted me. You said, “You have to go with the message.” Talk a little bit about that. You said you can’t complain to clients. Your experience on this.
Leach
Very often, you see, we underestimate how much value we bring to clients. Very often, certainly in my sight, I was making things look relatively simple and straightforward. I’d go and see them and we’d do the business. They couldn’t see everything that happened in the background.
What you need to do, under the new way of working, is make sure that they understand just how much work is actually involved in what you do. Because that is a lot of work that you actually do. And there are different things that you do that emphasizes to clients just what goes on behind the scenes. Because they don’t know. It’s a bit like the duck on the pond. You don’t think anything is going on underneath, but there’s an awful lot going on that they can’t see. And I try to make sure that clients can now see what is actually there.
We do client appreciation events once a year and invite our top 200 clients. And they meet the team and then they can actually understand exactly who else is there, what is going on behind the scenes. And I think it has engaged the clients much more. That’s what I’ve been able to try to do.
Paterson
I think when we meet with clients it’s far more transparency. You have no choice but to be extremely transparent. But I’ve actually found increased transparency, it’s like everything around that makes really good marketing tools. And your clients value and appreciate the transparency.
We’ll meet with clients and look at what we used to earn off of them and actually think we’re not doing enough to earn that. And I’ve dropped fees on some clients and I’ll be with other clients and look at what we’re earning on them and explain to them, this just isn’t enough. And we’re going to have to raise the fee. So they are very open discussions. Again, I think it’s being confident in yourself in having that discussion. Putting time aside to really dial down what you do and what the real value of that is so that when you do start having those conversations. And have them early. Because the earlier you start actually having that relationship with the client, you’re not setting it up then when you’re forced to set it up. It’s good to actually try to jump in early.
Rybka
And again, great advice. We have six months, and a lot can be done between now and then.
We wanted to keep this presentation at a very high level for everybody from every country and I think these ladies have provided incredible value. We are having a breakout this afternoon on the U.S. rule specifically and this is a tool we’ve created. You can assess how this impacts us over eight different areas on U.S. specific DOL rule. But that’s really the end of our time. I think these ladies deserve an incredible round of applause.
Audience Question
Just a question to the young lady from the Aussie side of the world. You no longer have permanent whole life insurance as an option. So one of the shakeout issues of this rule is, you have landed on your feet from a revenue position and you’re very happy about that, but in the end, if I can buy nothing more than term insurance, I have no option to buy permanent whole life insurance. Indirectly didn’t the consumer really end up losing even though I’m so happy from an economic standpoint?
Paterson
Actually those things are quite different. I’m looking at Ross for a timing on this. Whole life policies left Australia about 15 to 20 years ago. Australia itself for some reason, to my understanding, deemed that we just have too small of a population to offer those policies. So we’ve only written term life policies for 15 years. The commissions on term life policies are actually going to decrease again. But, how do you offset those revenues? It was one of those things. I actually dropped my upfront commissions back in 2012 and moved onto higher ongoing commissions. So we have sort of an option how we do it. And that actually built up my on-goings by doing that. It was a pain for a couple of years, but it’s evened out now.
Leanne Barbara Bull
My name is Leanne Bull. I’d just like to make a comment about Australia and the fact that we have to put our advice in writing. A few of the people who you have been speaking to here, don’t have to put their advice in writing at the moment. In our situation, about 15 years ago they introduced a document called a financial plan. It used to take maybe five to eight pages to write. But that document is now 60-odd pages and covers all the commissions in several different ways, all the fees in several different ways, all the advantages, disadvantages, what the options were, what they could have done, what they could have thought about. And that’s probably been one of the biggest impacts on us, to some degree, in addition to the disclosure. Because of the fact that you’ve got to have a lot more staff to write the information and deliver all of that. And I just thought that was something that, it sounds like a lot of other people in the room haven’t been involved in yet. But that was a big impact on my business. Is that something you’re doing in the U.K. now?
Leach
In terms of clients and commissions, we don’t have to. Other than to tell them how much we’ve earned, we don’t have to do what you do in Australia at the moment. We have to let them know at the end of a year exactly how much we’ve earned over that full year. But in terms of the suitability letters and things that we do, that has to cover commissions, fees, every bit of any cost that would be incurred from the advice that we’ve given at that particular time.
You have to do all the research, what you have recommended and what you haven’t recommended. The whole thing, yes.
Audience Question
Brilliant presentation. So thank you very much. I don’t know if you have an answer to this question, but I love the phrase about becoming bulletproof rather than dodging bullets. That’s great advice. How do you know how to identify the bullets that are out there when the drafters of this regulation specify “let the trial lawyers figure out the details?”
Rybka
You gave a lot of thought to this.
Paterson
The media scrutiny on financial services in Australia, as an analogy, I think Australian advisors probably felt like a little koala bear caught in a bush fire. Because it didn’t matter where we looked, the media just kept going and going. And from a political perspective, it didn’t matter which government was in power, it did not stop. So we might have thought it was going to, but it didn’t stop. The media just kept pushing and pushing.
I was involved in our IFA like your NAFA. My thought process ended up becoming, it just isn’t going to stop. It’s just going to keep rolling through the future. And the reason I think about bullet-proofing is if you can look at your business and really position it above the legislative requirements, don’t just make that, exceed that. Make yourself better than the government or the rules are asking you to be. Then there’s a certain amount of bullet-proof. Because you know what you’re doing is totally the right thing for your business, but more importantly, for the client. And it might be non-intentional consequences from the legislative changes as well. So the better that you do above the line, I think you’re positioning yourself far better going forward.
Audience Question
First of all, I want to say thank you to you, Larry, for putting this together. This is fantastic information. Thank you. My individual financial planning practice is about half fees and the other half commissions. So pretty balanced between annuities and fee-based assets under management. When I analyze my individual business, if I was forced to go all fee-based because of this legislation, if I kept expenses the same, I would need about a $400,000 capital to contribute before I get back to breakeven in about month 25.
My question for you is, in making the decision whether to scale back expenses on marketing, staff, etc., or whether to go ahead and contribute that $400,000 of my personal capital into my business before I get breakeven to be completely fee-based. How did you handle that? And what’s your opinion on the two?
Paterson
Very much my preference was that I would be able to do this internally without investing further capital and I’m really pleased that I managed to do it. The budgets that I set myself for a three-year period from 2013-2016 basically did not see any growth in the business, but held the business as it was. And I also made a choice to take financial hardship as a step by moving from upfront to what we call hybrid commissions. So I was taking multiple hits at the one time. I was very open with my staff and said to them, “We’ve run this business in a way that’s been very enjoyable and part of that is just going to go for a period of two years.” And I was very open and took them onboard. I really did slice expenses.
But at the same time, I was trying to determine how to get other revenue sources. I made further acquisitions about the businesses which I sort of had borrowed to do but made enough to keep going that way. So all of that part has only been finalized. The strategy was there, but making it happen has taken until this year. This year, as I sit here now, is actually the first year that my figures have not only increased above budget but I’m absolutely delighted with how much that they had increased above budget.
The only other thing I would say is diversification, because we had a general insurance side so I had some stability with that. But I just sort of took a thought process that I’ll take a financial hit now and really pull it all in. But being very transparent with my staff about that was integral because they just had to understand. There aren’t going to be pay raises and there won’t be the exciting team days that we used to do. We just cut back. For one location, I let go of the lease and moved into a service office. Things like that.
But a lot of those expenses that are gone now, really you don’t need them. And you find very costeffective processes, easier ways, when you’re really looking for them. You just keep finding really clever ways of doing things. But I would aim not to put the capital in.
Leach
I just think from my side. It’s a case of looking at where you’re spending your money because you will have a one-, two-year hit where income will drop while you reorganize it and readjust. For example, if you’re spending money on marketing that could be used on staffing up so that you’re freed up to go and network more, and bring in more because the processes can do things under this new regime in the future. Then that’s the way of looking at how you’re employing your capital and how best to get returns from it in the future.
Rybka
I’d just like to sum up a couple of things for our U.S. audiences to take away from this. One, go with the message. It’s hard to fight the soundbite of best interest and say, “I’m not in favor of clients’ best interests.” Two, this will be one of a series of changes. Don’t look at this, “Boy, if I just get over this or barely get over this, I’m in the clear.” This will be a series of changes. Try to look for ways to go above this. Three, look at what really creates value, not what you think creates value, but what your clients are willing to write a check for. And finally, get your team onboard with this. You can’t hide this from them. You’ve got to involve them. Things are going to have to change, but be positive with your team and with your clients with this message.
We do have time. I think most of the people here will be here next year because you are change masters. Especially if you talk to your peers from the U.K., Australia and South Africa and learn from them. That’s your opportunity for the next couple of days.
I think one of the real strengths of an organization like Top of the Table is you can talk to people from different countries and learn from them. I think if, for our U.S. members, there is one thing you can do, it’s make sure you’re talking to the people from South Africa, from the United Kingdom and from Australia. Not about the technical parts of the rule, but how they have adapted to change. We have two change masters, and we’ll start with our first. Chris, tell us a little bit about your entrance into the business and your practice.
Leach
I joined the industry in the early ’70s. And yes, in case you’re wondering, I started very young, almost diapers. I came in as a tied agent and then I set up my current business in 1983. At the moment, there are nine of us in total. So it’s a nice sort of tight small team.
Rybka
And how about Sue? How did you get started?
Paterson
I came from a banking background and started in insurance in 2004. I worked with a business partner and gradually bought that business out. We specialize in business clients and we have three locations and about 16 staff.
Rybka
So you’re both entrepreneurs. We’re going to talk a little bit about the change in the U.K. first and this has been ongoing. Chris, maybe you could just talk to us a little bit about what happened and how your world changed.
Leach
Well, we’ve had legislation now for 30 years and, as you’ll see in the slide, hopefully it will come through the different legislation that we’ve actually had. We started with legislation with the financial services act back in 1986. And that brought in “best advice” which I understand you call “best interest” in the States.
From that, we’ve had a variety now of legislation. We’ve had commission disclosure in 1994 that frightened us to death. We have to tell clients exactly how much we’ve earned from any product that we sold them. And, just in case we had inadvertently omitted to mention it to them, the insurance company will write to them and tell them exactly how much we’d earned.
From there then, we had polarization dismantled and then we had the RDA, the retail distribution review which is very, very far-reaching. And when it eventually came in, it banned commission. So we were not allowed to actually receive commission unless it was term insurance. Then any insurance policy that had values to it had to be by fee, from the client or from the product. But it had to be based as a fee. Commission was totally banned. And you can imagine how we felt about that. It was very, very farreaching and had a major effect on the numbers in the industry in the U.K.
Rybka
A whole series of changes, not one, but a series. Your changes in Australia were a little more condensed. Tell us what happened in your country and how it impacted you.
Paterson
Australia faced a lot of change in 2003 but after that there was a lot of media hype about the financial services industry that really commenced around 2011-2012. In 2012, we were quite aware there were going to be a lot of changes over the next couple of years. So at that time we knew they were going to remove commissions on investment. We knew that we really had to look at a fee-for-service model going forward.
They also made major changes to what we call employer super, like employee benefit plans in the United States, which I was heavily exposed to. Twenty-seven percent of my business revenue came from that. So I knew that, by 2016-2017, I would lose $300,000 of recurring revenue from that change. We’re also now looking at changing commission structure. We still do receive commission on insurance. It’s all term insurance. But those structures are being talked about being changed again at the moment. And they’re also looking at our education changes again at the moment.
Rybka
We were talking about this on the phone. One of the rules that I thought that would be hard. What you said
Paterson
About opting in. In Australia, when you do investment work and you charge fee-for-service, and explain to the client, “This is the fee that we’re charging you,” every two years they actually have to physically sign a letter to opt in to stay with you as an advisor.
Rybka
So, “Yes, Sue, I want that 100 basis points coming out of my account for the next 24 months.”
Paterson
I think that conversation in the designing it is good.
Rybka
You both referred to something we are calling “best interest,” “best advice.” This is called a principlebased standard. So it’s not a specific rule, but if you disclose this, OK, it’s a squishy rule that you’re really not sure about whether you’re in compliance or not. How did this work for you, Chris?
Leach
Well, in fact, they’ve changed it over the years. It’s still talked about as best advice, but how you qualify has changed because they did bring in principle based at one stage. But the principles weren’t defined and therefore you didn’t know how you were supposed to actually adapt to this. And if you then applied it in one particular way and you were wrong and the regulators didn’t like that, you found out later on that you were in breach. But they didn’t give you any help along the way. So that’s changed a little now so that it is easier to qualify.
But basically, when you’re totally independent, you have to be able to show that you investigated the whole market. You have to show that what you’ve recommended is in the best interests of the client. And therefore, if you’re not, for example, offering the cheapest product, you have to justify that. And we have suitability letters which are sometimes 25 pages long that we have to send to the client. The letters says, “We didn’t recommend this because of this reason. We didn’t recommend that because of that reason,” and justifying it all along the way as to why you’ve recommended that particular product. And the regulators can still pull it apart.
Rybka
Well, I was helping with ALU’s lobbying against the SEC best interests and got to meet three of the five SEC commissioners. We were trying to understand the rule and one of them said, “Well, we really want to animate advisors to do what’s right.” And after the meeting our consultant said, “That means scare them to death.” They are definitely animating us.
Let’s turn. I think people here are scared. They don’t know how this is going to impact them. The main reason we wanted to have you here is you have continued to adapt your businesses. You have successful businesses. You’re here qualifying for Top of the Table after all of these changes. So what we’d really like to talk about is that in the U.K. there is a 90 percent attrition of financial advisors from when these rules started. Tell us about the people who survive. What did they do and maybe what did the people who didn’t survive do? What’s the difference between those who made it and those who didn’t?
Leach
Firstly, the ones who didn’t make it were either so scared that they didn’t think through it or they just decided that they could not adapt. And if you were transition-based, if you just sold a product and went, then it was that much more difficult. If you’d always built a relationship with a client and that client actually saw value in what you did, then that made it so much easier and so much better.
And it was attitude of mind. A lot of advisors looked at it and said, particularly with this latest retail distribution review we had where you have to have higher levels of exams, “We just can’t do it.” They held up their hands and said, “We’re gone. We’re out of here.”
I’ve been doing this now for a long time, I won’t tell you how long, but it’s a long time. But, interestingly, for the ones who stayed, I think it’s the very best time to be in this industry. The very best time. I am so excited. People say to me, “When are you going to retire, Chris?” And I say, “When I’m no longer vertical,” because it’s such a great, great time at the moment. If you’ve built relationships and if you can show that you’re actually giving value, that’s what the difference is. Getting the attitude right and saying, “This is going to come.” Don’t put your head in the sand. It’s going to come and then just attack it. Go with it.
Rybka
Very good. And Sue, what’s your advice?
Paterson
Well, I very much agree with Chris. I think that when all these changes came out, it certainly made me, personally, and a lot of advisors that I know take a breath, take a step back and ask, “How are we going to work through this?” But these changes have really probably been the best thing to happen to me
personally and my business. I think I very much had to get my head around it and take the time to get the confidence in being able to have a discussion with my clients and have confidence in the value that I am providing and the fees that we were providing for them. When we worked through that process and
actually understood, it was incredible. Probably didn’t even really understand how much value we were giving them. And so we really dialed down and said, “Look how much we do for these people.” And the relationships with the clients are so much more holistic. We don’t have as many clients on the book. We’ve been happy to let some clients go and concentrate on what is a good commercial outcome with that client. We are much more client focused.
I’m sure most advisors in Australia, if they sat down and looked at their own businesses, would say the same thing. Our businesses are in a much better place and we do a lot better for the consumer than what we used to do.
Rybka
So the same number of people need advice. There are fewer advisors. Those who adapt can prosper under the new model.
Let’s go back and zero in on how you first felt when some of these big changes were coming. We talked about what did you do, but how did you feel, Chris?
Leach
Scared to death, because we don’t like change. We like what we’re used to. And I think the longer you’ve been in the business, the harder it is to change. If you’ve only been in it for five years or so, you can adapt. You can change because you’re not so entrenched. But if you’ve been doing it for 20 year-plus and all of a sudden they want to change things, it really is scary. We don’t like change. Or not change that seems to be threatening change.
Rybka
Particularly for people who are already very successful. It’s work for them. And how about you, Sue?
Paterson
Same. I was quite disturbed and scared. But then I was very much on a mission to find a path forward to make this work. Without a doubt, I had to move forward and find a way of doing that. I spent a lot of time talking to other advisors who had already actually changed their model. I know Ross’s company sort of took steps to move forward earlier. I took a lot of confidence in the fact that the sooner I got going and moved forward, the better it would be to cope with the change.
Rybka
I put up on the screen something from Strategic Coach. Dan Sullivan says, “We wait for confidence.” This is difficult. We’re trying to get enough confidence to go forward, but it has to first start with commitment. You have to make a commitment to change your business, to stay in business, to do what’s necessary. Then you get the courage to have the hard conversations with clients about, “Well, I need to charge you for something I used to give you for free.” With people in the office we have to change how we’re doing this. So you get that courage and with that courage your team builds capacity to have a business that’s different or does things differently. And it’s only then that the courage comes. So we can’t wait for the courage to make these changes upfront.
We’ve got a lot of U.S. members who are going to be going back and, in six months for some of them, 50 percent of their income is going to be impacted by this change in rule. You said it’s $300,000 and that’s all from the profit side. You’re last in line, as entrepreneurs, to get paid. What would your advice be to the U.S. members? What did you do and what would your advice be on how they need to think about changing their business? Chris, we’ll go back to you first on this.
Leach
Well, I think first and foremost is look at it as an advantage. I know this is difficult, believe me. In hindsight I can do this, but at the time I was as scared as you. But it’s a case of looking at it and almost saying not only, “What do you have to do and what changes do you have to make to comply,” but “How can you go above that? How can you steal a match on your competition? How can you go further so that you really do stand out from the crowd?” And that I think is really important to actually grasp: “What can you do that you can get a commercial advantage,” because, in all honesty, if you just do what you have to do to comply then you’ll get pain and you’ll get some gain. If you go above that, you’ll still get pain, but you’ll get a whole heap of gain. It’ll make it all worthwhile. And I know that because my business is stronger now than it’s ever been.
Can I just say one thing? You all know Tony Gordon. I meet with him on a quarterly basis, and I find him invaluable. And I remember one thing he said to me a few years ago when we were making all the changes to the business. And he said, “Chris, you want to make sure when you go to see a client that it’s for one of two reasons. Either opportunity or obligation.” And what I’ve tried to do is to make sure that the obligation side where you’ve got to do the justification, make sure they can see how much the service is costing, etc. I’ve tried to make sure that the obligation side is covered by processes or by staffing up that I’ve done. So other people can do that. When I go to see someone, I do it because of opportunity. And that’s made a terrific difference.
Paterson
I actually removed myself from my business for a week when I had decided what the financial ramifications were. And I did a full swat analysis of the business and of myself, personally. And I went straight back into a cash flow position and determined exactly what that cash flow was going to look like.
Then, when I had the cash flow, I looked at what I needed the cash flow to be and fed in my strategies and decisions to get the cash flow back to where I wanted to be. So, in some ways, we very much downcurved expenses, really looked at how we did business, found strategies to make processes faster, more time efficient, more cost-effective. And at the same time trying to boost the outcome on the other side to the client. So it was very much something I had to get a lot of team engagement in when I went back into the office and said, “OK, this is what we have to look like. We need to develop new streams of revenue. We need to do better than what we’re doing.” And I have to say a lot of the people that work with me, their mindset about this and their enthusiasm was just a great reward to me and made it far easier for me. I found a lot of the younger people in my office didn’t even understand there was a difference. Oh well, OK. So it was more me that was struggling with it than it was some of the staff.
Rybka
Chris, when we were talking about this, I think you alluded to one of the things that most impacted me. You said, “You have to go with the message.” Talk a little bit about that. You said you can’t complain to clients. Your experience on this.
Leach
Very often, you see, we underestimate how much value we bring to clients. Very often, certainly in my sight, I was making things look relatively simple and straightforward. I’d go and see them and we’d do the business. They couldn’t see everything that happened in the background.
What you need to do, under the new way of working, is make sure that they understand just how much work is actually involved in what you do. Because that is a lot of work that you actually do. And there are different things that you do that emphasizes to clients just what goes on behind the scenes. Because they don’t know. It’s a bit like the duck on the pond. You don’t think anything is going on underneath, but there’s an awful lot going on that they can’t see. And I try to make sure that clients can now see what is actually there.
We do client appreciation events once a year and invite our top 200 clients. And they meet the team and then they can actually understand exactly who else is there, what is going on behind the scenes. And I think it has engaged the clients much more. That’s what I’ve been able to try to do.
Paterson
I think when we meet with clients it’s far more transparency. You have no choice but to be extremely transparent. But I’ve actually found increased transparency, it’s like everything around that makes really good marketing tools. And your clients value and appreciate the transparency.
We’ll meet with clients and look at what we used to earn off of them and actually think we’re not doing enough to earn that. And I’ve dropped fees on some clients and I’ll be with other clients and look at what we’re earning on them and explain to them, this just isn’t enough. And we’re going to have to raise the fee. So they are very open discussions. Again, I think it’s being confident in yourself in having that discussion. Putting time aside to really dial down what you do and what the real value of that is so that when you do start having those conversations. And have them early. Because the earlier you start actually having that relationship with the client, you’re not setting it up then when you’re forced to set it up. It’s good to actually try to jump in early.
Rybka
And again, great advice. We have six months, and a lot can be done between now and then.
We wanted to keep this presentation at a very high level for everybody from every country and I think these ladies have provided incredible value. We are having a breakout this afternoon on the U.S. rule specifically and this is a tool we’ve created. You can assess how this impacts us over eight different areas on U.S. specific DOL rule. But that’s really the end of our time. I think these ladies deserve an incredible round of applause.
Audience Question
Just a question to the young lady from the Aussie side of the world. You no longer have permanent whole life insurance as an option. So one of the shakeout issues of this rule is, you have landed on your feet from a revenue position and you’re very happy about that, but in the end, if I can buy nothing more than term insurance, I have no option to buy permanent whole life insurance. Indirectly didn’t the consumer really end up losing even though I’m so happy from an economic standpoint?
Paterson
Actually those things are quite different. I’m looking at Ross for a timing on this. Whole life policies left Australia about 15 to 20 years ago. Australia itself for some reason, to my understanding, deemed that we just have too small of a population to offer those policies. So we’ve only written term life policies for 15 years. The commissions on term life policies are actually going to decrease again. But, how do you offset those revenues? It was one of those things. I actually dropped my upfront commissions back in 2012 and moved onto higher ongoing commissions. So we have sort of an option how we do it. And that actually built up my on-goings by doing that. It was a pain for a couple of years, but it’s evened out now.
Leanne Barbara Bull
My name is Leanne Bull. I’d just like to make a comment about Australia and the fact that we have to put our advice in writing. A few of the people who you have been speaking to here, don’t have to put their advice in writing at the moment. In our situation, about 15 years ago they introduced a document called a financial plan. It used to take maybe five to eight pages to write. But that document is now 60-odd pages and covers all the commissions in several different ways, all the fees in several different ways, all the advantages, disadvantages, what the options were, what they could have done, what they could have thought about. And that’s probably been one of the biggest impacts on us, to some degree, in addition to the disclosure. Because of the fact that you’ve got to have a lot more staff to write the information and deliver all of that. And I just thought that was something that, it sounds like a lot of other people in the room haven’t been involved in yet. But that was a big impact on my business. Is that something you’re doing in the U.K. now?
Leach
In terms of clients and commissions, we don’t have to. Other than to tell them how much we’ve earned, we don’t have to do what you do in Australia at the moment. We have to let them know at the end of a year exactly how much we’ve earned over that full year. But in terms of the suitability letters and things that we do, that has to cover commissions, fees, every bit of any cost that would be incurred from the advice that we’ve given at that particular time.
You have to do all the research, what you have recommended and what you haven’t recommended. The whole thing, yes.
Audience Question
Brilliant presentation. So thank you very much. I don’t know if you have an answer to this question, but I love the phrase about becoming bulletproof rather than dodging bullets. That’s great advice. How do you know how to identify the bullets that are out there when the drafters of this regulation specify “let the trial lawyers figure out the details?”
Rybka
You gave a lot of thought to this.
Paterson
The media scrutiny on financial services in Australia, as an analogy, I think Australian advisors probably felt like a little koala bear caught in a bush fire. Because it didn’t matter where we looked, the media just kept going and going. And from a political perspective, it didn’t matter which government was in power, it did not stop. So we might have thought it was going to, but it didn’t stop. The media just kept pushing and pushing.
I was involved in our IFA like your NAFA. My thought process ended up becoming, it just isn’t going to stop. It’s just going to keep rolling through the future. And the reason I think about bullet-proofing is if you can look at your business and really position it above the legislative requirements, don’t just make that, exceed that. Make yourself better than the government or the rules are asking you to be. Then there’s a certain amount of bullet-proof. Because you know what you’re doing is totally the right thing for your business, but more importantly, for the client. And it might be non-intentional consequences from the legislative changes as well. So the better that you do above the line, I think you’re positioning yourself far better going forward.
Audience Question
First of all, I want to say thank you to you, Larry, for putting this together. This is fantastic information. Thank you. My individual financial planning practice is about half fees and the other half commissions. So pretty balanced between annuities and fee-based assets under management. When I analyze my individual business, if I was forced to go all fee-based because of this legislation, if I kept expenses the same, I would need about a $400,000 capital to contribute before I get back to breakeven in about month 25.
My question for you is, in making the decision whether to scale back expenses on marketing, staff, etc., or whether to go ahead and contribute that $400,000 of my personal capital into my business before I get breakeven to be completely fee-based. How did you handle that? And what’s your opinion on the two?
Paterson
Very much my preference was that I would be able to do this internally without investing further capital and I’m really pleased that I managed to do it. The budgets that I set myself for a three-year period from 2013-2016 basically did not see any growth in the business, but held the business as it was. And I also made a choice to take financial hardship as a step by moving from upfront to what we call hybrid commissions. So I was taking multiple hits at the one time. I was very open with my staff and said to them, “We’ve run this business in a way that’s been very enjoyable and part of that is just going to go for a period of two years.” And I was very open and took them onboard. I really did slice expenses.
But at the same time, I was trying to determine how to get other revenue sources. I made further acquisitions about the businesses which I sort of had borrowed to do but made enough to keep going that way. So all of that part has only been finalized. The strategy was there, but making it happen has taken until this year. This year, as I sit here now, is actually the first year that my figures have not only increased above budget but I’m absolutely delighted with how much that they had increased above budget.
The only other thing I would say is diversification, because we had a general insurance side so I had some stability with that. But I just sort of took a thought process that I’ll take a financial hit now and really pull it all in. But being very transparent with my staff about that was integral because they just had to understand. There aren’t going to be pay raises and there won’t be the exciting team days that we used to do. We just cut back. For one location, I let go of the lease and moved into a service office. Things like that.
But a lot of those expenses that are gone now, really you don’t need them. And you find very costeffective processes, easier ways, when you’re really looking for them. You just keep finding really clever ways of doing things. But I would aim not to put the capital in.
Leach
I just think from my side. It’s a case of looking at where you’re spending your money because you will have a one-, two-year hit where income will drop while you reorganize it and readjust. For example, if you’re spending money on marketing that could be used on staffing up so that you’re freed up to go and network more, and bring in more because the processes can do things under this new regime in the future. Then that’s the way of looking at how you’re employing your capital and how best to get returns from it in the future.
Rybka
I’d just like to sum up a couple of things for our U.S. audiences to take away from this. One, go with the message. It’s hard to fight the soundbite of best interest and say, “I’m not in favor of clients’ best interests.” Two, this will be one of a series of changes. Don’t look at this, “Boy, if I just get over this or barely get over this, I’m in the clear.” This will be a series of changes. Try to look for ways to go above this. Three, look at what really creates value, not what you think creates value, but what your clients are willing to write a check for. And finally, get your team onboard with this. You can’t hide this from them. You’ve got to involve them. Things are going to have to change, but be positive with your team and with your clients with this message.
We do have time. I think most of the people here will be here next year because you are change masters. Especially if you talk to your peers from the U.K., Australia and South Africa and learn from them. That’s your opportunity for the next couple of days.
