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MitonOptimal Quarterly Newsletter - Q1 2014The optimal business strategy for challenging times – building a moat or predicting the future?

As irrational as it is, predicting the future is something that humans try to do all the time. Whether it be the stock market, the weather, the election or the rugby score, there seems to be an insatiable human desire to try and predict the future. We do this as we hold onto the fantasy that we might “strike it rich” or avoid risks that may harm us.

For financial planners, predicting the future is something their clients probably secretly think they should be able to do. “Why am I not invested in that top performing fund?” is, I’m sure, a question most planners will have had to deal with at some point during their careers, and probably more than once! However, financial planners themselves would probably also like to be able to predict the future, not only for the benefit of their clients, but also to protect the future of their businesses.

This is of particular relevance, given the challenging times in which financial planning businesses find themselves. As the authors of a recent paper entitled the ‘Brave New World of Wealth Management’1 put it: “(M)ost owners recognize that the business is becoming significantly more challenging. New clients are harder to find, operating costs – and employee compensation in particular – are increasing and regulators are becoming more hostile. Additionally, looming over all of these changes is a much greater, immutable force: old age. The founders of the industry’s participants, with an average age of 59, are reaching an age at which personal needs and objectives shift in preparation for retirement.” While this is a description of the wealth management industry in the US, it is just as apt for South Africa.

As the quote indicates, there are many challenges facing financial planners, but the most current one for many advisors seems to be the “hostile regulators“, with the obvious question: what are they going to do next?

Up to now, the Financial Services Board (FSB) has tended to look to the UK and Australia for regulatory regime guidance. The problem now is that seemingly similar regulatory reforms in the UK and Australia appear to be diverging in direction. The Australian FOFA reforms are backtracking under political pressure. Proposed changes such as, clients having to “opt-in” every two years, mandatory transparency of advisor charges and a ban on volume payments are now falling off the reform wagon. In contrast, the UK RDR reforms appear as though they are being enforced with all the intent with which they were formulated. What then for South Africa?

It is probably safe to hazard a bet on South Africa ending up somewhere between the UK and Australia, but what that looks like we don’t know at this point in time. What we have seen already in South Africa is changes in line with the UK such as increased levels of business compliance, more onerous qualification requirements and greater fee transparency. But other changes, such as distinguishing between “Independent” and “Restricted” advice in the UK (and first mooted by Treasury in SA in a white paper in 2006) has still not eventuated.

We could spend time trying to predict further regulatory reform and the implications for advisor businesses, but given that we know we can’t predict the future, this would most likely be a futile exercise. This does not necessarily mean financial planners shouldn’t do anything to improve their chances of dealing with this uncertain future, however.

Unfortunately, research indicates that the majority of advisors in the country are following exactly this course of (in)action: according to Core Data Research, 54% of South African advisors are not making changes in anticipation of RDR-type reforms. The reasons for this are most likely to be varied, but having participated in a number of forums with financial planners over the past year, there is a very real chance that the reason for this is simply the perception that regulators are viewed as being “hostile” to financial advisors and thus are to be resisted.

Such unhappiness may seem justified, given that many financial planners have built up very successful businesses over many years with many very happy clients. Consequently they resist the need to change or be told what to do.

Another, more productive approach, we believe, could be to reframe the “hostile” lens through which regulatory change is seen. Warren Buffett says that ideally, he will invest in businesses that have a “moat” around them. By “moat” he means something that provides a business with a real competitive edge, ideally a barrier(s) to entry, which deters competition.


Practis Management


(1) Hurley, M. et al, "Brave New World of Wealth Management: Opportunities, Competition, Demographics and Growth Conundrums", Fiduciary Network, April 2013.
(2) Ingram, W. Presentation to Fundhouse Practice Management Programme, July 2013.





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MitonOptimal International Limited is registered in Guernsey (Registration No. 51561) and is the overlying holding company of the companies that make up the MitonOptimal Group.
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