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Unformatted text preview: $RU Teaching Case (INFS1000) by Dr. Kai Riemer Part 2: The financial planning industry The following text gives a brief overview of the financial planning industry, in particular: 1) Financial Planning as a profession, 2) the players in the financial planning industry, 3) mat ­ ters of regulation and public perception in the face of the recent financial crisis, 4) and the changing nature of the industry in making money. Links to further online readings will be provided below1. What do financial planners do? The purpose of financial planners is to advise clients in all matters of personal financial (money) management, often referred to as wealth management. In doing so, a planner as ­ sesses the financial situation and the needs of their clients and helps establish short ­term and especially long ­term goals. The planner then identifies investment options that corres ­ pond with these goals. This usually involves setting up an initial consultation meeting, in order to obtain information from the client and then to create a comprehensive financial plan, called a statement of advice. Further information is provided by these articles: • • Job description by the U.S. Bureau of labor statistics.2 “Financial Planner: A lucrative Job”, by India Economic Times, 17 Dec 2009.3 What exactly is financial planning? The online encyclopaedia Wikipedia describes financial planning as a “process to create a financial plan; a detailed strategy tailored to a client's specific situation, for meeting a cli ­ ent's specific goals.“4 A financial plan thus is “a plan for spending and saving future income. This plan allocates future income to various types of expenses (...). A financial plan can also be an investment plan, which allocates savings to various assets...“5 In the past, the financial planning industry has been very much skewed towards older peo ­ ple; those that have large sums of money to spend. Some people need advice because they are about to retire and have a superannuation payout at their hands, others made an inher ­ 1 Please note that these readings are solely for background information. They are not required readings, but for those who want to acquire a deeper understanding of the industry, when analysing the $RU case. 2 http://www.bls.gov/oco/ocos302.htm 3 http://economictimes.indiatimes.com/news/news ­by ­industry/et ­cetera/Finance ­planner ­A ­lucrative ­ job/articleshow/5346496.cms 4 http://en.wikipedia.org/wiki/Financial_planner 5 http://en.wikipedia.org/wiki/Financial_plan Faculty of Economics & Business Discipline of Business Information Systems Page 1 $RU Teaching Case (INFS1000) by Dr. Kai Riemer itance they now want to invest. All in all, the industry has grown in this segment of wealthy seniors that need advice usually when a certain event happens, which makes them look for a financial planner for assistance. However, the industry is changing towards younger clients, towards building relationships with clients earlier in their lives and then to grow these clients into higher value customers over time. That’s why today financial planning comes in different flavours. It is a diverse ser ­ vice and covers the following areas: education and career planning, retirement planning, investment planning, risk management and insurance planning, or real estate planning. All in all, financial planners help clients with a range of personal financial issues. Who are the players in this industry? Financial planning as a service is offered by a range of players in the marketplace; first and foremost by the banking and insurance giants (ANZ, Commonwealth Bank, Westpac, NAB, AXA, ING etc.). These large businesses employ financial advisers and offer planning as part of their service portfolio. Then, a range of specialised financial planning businesses exist; among them a few larger groups, many small businesses and even more single person busi ­ nesses. Some accountants also offer financial planning advice. While the banks provide a fairly standardised range of services, the smaller businesses, one of which is $RU, are in a position to offer more personalised services for their clients. All in all, the approaches to financial planning are different and not every strategy is the same. Regulation and public perception The financial planning industry in Australia is regulated by the Australian Securities and In ­ vestments Commission (ASIC). As they offer advice to the public on the purchase of financial products, financial planners need to either obtain an Australian Financial Services Licence (AFSL) themselves or work as so ­called authorised representatives (trained employees) of other licence holders. Recently, the industry has come under a lot of public and government scrutiny, after a num ­ ber of high profile cases of mismanagement and bankruptcy, which left many clients with their investments in shatters. The most widely discussed of these cases was Queensland ­ based financial planning group Storm Financial, which went into administration in early 2009, leaving the savings of 13,000 clients in vain  ­ a total of A$4 billion in invested money. The Storm business model was certainly not typical for the financial planning sector, as their planners advised clients to borrow large amounts of money for speculating in the stock mar ­ ket. While such an approach increases performance of investment portfolios when markets are rising, when the markets turn, portfolios move into debts. This is when Storm as a busi ­ ness went under. Storm was certainly not typical for the sector and an extreme case, but at present it shapes the public perception of financial planning to a great deal. Faculty of Economics & Business Discipline of Business Information Systems Page 2 $RU Teaching Case (INFS1000) by Dr. Kai Riemer As further readings, please refer to: • • “Storm Financial swept into administration“, The Sydney Morning Herald, 13 Jan 2009.6 “Financial planning industry applauds committee recommendations”, The Australian, 25 Nov 2009.7 Changes in the remuneration structures In more general terms, the way the industry earns its money has changed. In essence, finan ­ cial planners used to earn their money from commissions offered by the product providers (e.g. investment funds), whenever they invested the clients’ money in these products. Hence, many planners frequently offered the products with the highest commissions, in ­ stead of choosing from the wide range of products available in the market place. Conse ­ quently, the general perception was that these financial planners were acting more as sales people for investment providers than as independent advisers to the clients. But the in ­ dustry is changing towards a fee ­based model, whereby the clients pay for the services pro ­ vided by the planners, such as the statement of advice. However, many planners are still affiliated with a bank, insurance company or a funds management organisation. Hence, they still have significant restrictions on the kind of advice they offer to clients. That’s why one of the most persistent issues discussed in the media is the independence of the advice offered by financial planners. As a further reading, please refer to: • “Fees and commissions: how do you value advice?”, Money Management, 22 June 2009.8 6 http://www.smh.com.au/business/storm ­financial ­swept ­into ­administration ­20090112 ­7f7u.html 7 http://www.theaustralian.com.au/business/financial ­planning ­industry ­applauds ­commissions ­ recommendations/story ­e6frg8zx ­1225803452623 8 http://www.moneymanagement.com.au/Article/Fees ­and ­commissions ­how ­do ­you ­value ­advice/487398.aspx Faculty of Economics & Business Discipline of Business Information Systems Page 3 ...
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This note was uploaded on 08/18/2011 for the course INFS 1000 taught by Professor Dr.kairiemer during the Three '10 term at University of Sydney.

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