#394 Paul Barrett – Transcript

Clayton Daniel
Clayton here from Ensombl. I was looking at who were some of the most high performing podcast guests. As a result, I’ve dragged Paul Barrett from AZNGA back onto the podcast. Mate, it is great to have you. Thanks for coming on.

Paul Barrett
Hey, guys, good to see you. Hey, thanks for having me back.

Clayton Daniel
Absolutely. So I saw you present overseas in the Philippines a little while ago. And it reminded me, it’s always good to listen to you talk, because you’ve got the finger on the pulse sort of unlike a lot of people in the industry. And there were some really cool things that you will discuss at that at that off site. And I thought, if we could bring it into the podcast, so more people could understand it. That would be awesome. So sort of jumping into it. Let’s talk about, you know, those financial planning practices that are that are getting access to cash for growth, the thematics that underpin the space. You know, you’re probably the best to speak to on this. So what are you seeing what what can find your plan is do to get the, you know, get the attention of that money?

Paul Barrett
Or face cloud? That’s a that’s a full toss on his beginning analogy, yeah. Are you talking about the words thematic with themes? And I think that’s spot on, like when you think about investing in something, no matter who you are, you try to send what is the investment thesis, you know, what are the themes that make something attractive? And I have to say, right now, there’s probably more talk about investment in financial planning firms, and in fact, more investment in financial planning firms than I’ve ever seen before. But the talk and the noise in the chatter, particularly from foreign investors, actually, is at an all time high, and is an ISO 23 years doing this. And you think about the reasons for that. And some of the themes for that. A few things come to mind. The first one would would be there appears to be a systemic change in the demand supply curve. Okay, there are increasing numbers of people seeking advice. And I actually think COVID is partly responsible for this, because COVID created, you know, all at the same time, all over the world, quite a bit of consumer anxiety. And when you get anxiety levels, in his system, spiking, it creates the need for advice, and people want to reach out to another fellow human being to talk about this stuff. So you’ve got this increase in demand the exact same time, you’ve got this reduction, if you like in supply, it’s been well documented, the number of or the the number of advisors heading to the exit door was in our space. And that continues are the latest sort of predictions on hearing other advice numbers might reach 12,000 soon enough. And so you’ve got this systemic change in supply at exactly the same time. You’ve got an increase in demand. And and of course, that this is the reason why people should listen to Michelle Lydian and Nick Cuellar proposals, because actually seeks to address this. But in any case, you’ve got that demand supply thing, Cabal things going on. You’ve got this fragmentation our space a whole bunch of, of SMEs, who wants to put a time, the sun had tethered to big safe haven like a bank, and they’re on their own getting their own license or operating more independently. And so you’ve got this fragmentation happening. And if you look back and tiny fragmentation gets followed by consolidation, and then more fragmentation and more consolidation, it’s like a repeating cycle. And we’re in that fragmentation phase at the moment. Third thing would be SMEs are getting more corporatized. So they’re seeking for partnerships with firms, they’re going to help them do more sophisticated stuff. You’ve got your talk of regulatory tailwinds for the first time, probably in 20 years, which in itself is a theme that is your particularly interesting to people with money and in foreign investors. So normally, you’d only need one of these themes to drive a business case. Right now. We’ve got four or five thematics all playing out at exactly the same time.

Clayton Daniel
That’s a Yeah, that’s a really good point. What Why do you think financial planners have it looks looks like this, from where I’m sitting at anyway. We’ll see it and that is financial plan is a coming at the business of financial planning in a much more professional way. They’re just they’re just there seems to be an uplift, I would say in the personal responsibility that the management of these firms at Taking, if you go back, sort of before my time, 20 years ago, there were there was it was a lot about turnover of business. These days, you’re hearing a lot more talk of EBIT, da. And just just that sort of even that simple differentiation is an indication that people are taking the business of financial planning a lot more seriously. Is is that a common? Is that a coming of age for the profession?

Paul Barrett
You just use used word business, okay. And that’s fun to me what’s going on? planters had gone from being distributors of product, you know, tethered to institutions, to business people. And once those subsidies all dried up, and that and that that linked to the institution, the power provider got got broken, then these operators had to make a decision. Are we going to stay in the sector? If so, you know, how much will we invest in becoming business, pick better business people and running better businesses? So the conversations that I’ve had in various roles over the last 20 years, with planners, those conversations have changed. They’ve gone from, you know, talking about the Rothschild five arrows, or equity fund, back in the 90s. To, you know, let’s talk about business succession, business planning, strategy, pricing, all these sorts of things. And so you’ve got this completely new world now for the operators in the space no longer are they distributors, they are business people. And not everyone was able to make that transition, but those who have have made it with gusto. And so you’ve now got this insatiable appetite from, you know, owners and operators, these businesses for valuable services that they’re quite prepared to pay for, such as you know, governance and strategy and m&a, and outsourcing all these sorts of things. Which is why this discussion we’ve been having over the last few months about licensees is so interesting, because their licensees don’t appear to have made the same transition yet, that these business owners have made licensees but did something there to start picking, what are the valuable services that we can supply to these planning businesses that are now businesses that they’re going to be prepared to pay for. And so you’ve got this modernization out of necessity inside these SME businesses. And I say out of necessity, because back in the old days, you didn’t need to think about these things. Because back in the old days, you got paid a subsidy from product providers to give advice on product. That’s what’s changed.

Clayton Daniel
Do you see this headed into the because the the classic sort of analogy is the lawyers and the large consulting firms, the accounting firms, this concept of the mega practices, or these mega firms where people become partners? Is this something that you see happening? Or is it is it slightly different? Is it a financial planning take on that more traditional scalable business model?

Paul Barrett
Well, you there’s quite a few nuances to your question. Firstly, this concept of partnership is not one I would advocate for financial planning firms. Because the partnership model, it means something, okay, particularly in the accounting space, it means something in the partnership model. And our and our viewers in nga has some flaws to it, we could get more corporatized model based on high performance is the way forward for financial planning firms, not a partnership model that might be based more on entitlement. And so just want to clarify that. But what I was saying to you is that your size and scale is definitely something that these SME owners and operators are thinking about. But before they think about size and scale, that they’re more likely to be thinking about capability. So So you’re seeing the conversation around the board room, in these firms moves towards Well, what’s our consumer segment that we’re trying to serve? And what’s our source of sustainable competitive advantage that we can take to that segment? In other words, what what sort of product or service can we specialize in? Yeah, and take that segment. And specialization appears to be a trend amongst the most high performing firms. And I don’t mean, you just do one thing, you do it really well. I mean, firms will do a number of things, but they’ll but they’ll have these collection of specializations under one roof than they take to the consumer segment. And consumers appear to be far more willing to pay more for something that is perceived to be deeply specialized. And he’s more and more and more nuanced and complex. So that’s a trend I’ve seen. But then in terms of scale, yeah, there’s there’s no doubt that these SME businesses are getting bigger because they They take a view that if we build or buy capability, we keep doing it, we’re gonna get bigger. And as we get bigger, we can actually, you know, sell more services to more to the same client group. And we can get some degree of efficiency and synergy out of our scale. I think those sorts of synergy benefits are often overstated. What’s more likely to drive the size and the increase the size of these firms is the sophistication around what they’re taking to their client base. So we have firms in our network that have particular demographics, for instance, they specialize. So take, for example, the example of a pharmaceutical, demographic or client group. So we have two firms now in our portfolio, that specialize in pharmacies, and they get to know the lifecycle of the pharmacists from cradle to grave, and they then deploy a number of specialized services that target that particular demographic will add more together, and then they’ve got the client for life. So that’s the sort of thinking that you’re starting to see inside these firms that I reckon I don’t reckon you saw that 1015. And so that’s what we’re seeing changing.

Clayton Daniel
Let’s duck into the issue that you mentioned before, around the lack of supply, and I guess probably too, and this sort of leads into the QA er, but before you know that, there needs to be sort of a conversation with Todd as a bit of a stop gap between where we are now and QA are coming into play in whatever that looks like. But ultimately, with the with, with advisors leaving, you can you can also attach to that the lack of new supply of new advisors, right, so the university graduates, or the top dogs are looking at that they’re looking at McKinsey, or they’re looking at investment banking, and these types of things. And financial planning rarely, if ever gets a gets a show in at that stage, right? The whole profession has always relied on the big banks sucking people up from different areas of the workforce, and then running and through some training, that obviously, has ceased to occur. Yes, there’s a professional year, which in some ways makes things easier, but then certainly many others can make things more difficult. Are you seeing a solution, across the practices under a is at NGA, that have gone to some effort or have solved that problem to some degree,

Paul Barrett
a really complex discussion, there’s some there’s a couple of forces, I think at play here. The first one is if you have a professional industry, however you want to describe it, that has low barriers to entry, which we’ve had for 2030 years here, in the end, in the end, that’s going to catch up with you. Because in the end, it’s especially as regulation so starts dampening some of the economic opportunities that you might have had in the old days. What happens people don’t take the profession seriously. So it’s not like, you know, a young person goes to their career guidance counselor at school, like I remember doing and says, Hey, you know what, I want to be a planner, tell me that how I do that, because it doesn’t feature in the, in the sort of career center of, of inspirational things to do. Yeah. And so therefore, I’m of the view that you’ve got to increase the, you’ve got to increase the queue at that at the nightclub door, we’re making our to get it. Okay. So by creating barriers to entry, making it more prestigious, I think it normally would have a positive effect, actually, on the attractiveness of your of your area of your segment. However, what’s going against that? Okay, I counterbalancing force to my argument is that globally, we’re seeing a trend that sees professional services, careers being less attractive. And there are now in your tech careers and online careers. And, you know, building a YouTube channel or building Facebook, there’s a whole range of new opportunities in the new economy that are attracting talent, with less regulation, higher economic returns. And so you’ve got the sort of counterbalance to my to my argument. And so what are the solutions? What are some of the solutions to that? Well, I think you’ve got to continue to make your your industry or profession more attractive, or the you got to continue to lobby politicians in government to make it more more easy to deploy your solution. So the analogy I use here is, we should have higher barriers to entry. But once you get in it should be easy to operate. What have you I’ve said before that a planner has to jump a speed hump, and then they get a hard life whereas the doctor has to climb a mountain to get an easy life. Right so what’s the once you’ve got through your barrier, you then get a certain type of life afterwards and we’ve got a hard life because their barriers too low, their needs change. Okay? And and that will actually see more capital come in more investment in the sector, hopefully more human capital come in as well. However, however, globally, there are some far more attractive, it appears careers for people to pursue. And so how do we sort of try and overcome that one of the things we’ve done in the last 12 months, we’ve looked at the supply of talent issue, and we’ve realized, you know, what, we are restraining ourselves geographically to try to solve this problem, because we have this mindset of you’ve got to go hire people from your local suburb. The reason we invest in in virtual business partners, there are a few reasons one of the key ones, you know, 1200, Filipinos working out of Cebu growing by 60 a month. Why don’t we do that? Because there’s a talent pool, in a nother marketplace that we can access to try and solve this problem. Now, there won’t be necessarily a long term sustainable thing. Let’s do other things, too. But that is a clear example of a solution to this issue. COVID showed us all working remotely works. Yes. Well, working remotely doesn’t just mean working from the suburbs of Sydney. Okay. It can mean working from the suburbs of Cebu Yes, or of Mumbai or wherever. Okay. And so there’s a number of things we’re doing to try and to try and solve is one of things that are you’re working on is attracting teachers and from actions is grandi. I think that’s an Aster stroke. And particularly teachers are targeting another sector, where the underlying skill sets are rife, or we’re trying to do offering them a better economic outcome. Another great example of trying to solve the problem.

Clayton Daniel
Yes, that question was a lead into the next question, which ultimately, yes, the que AR. So then the next question becomes, if there is an under supply of talent, what are you doing? Or what is AZNGA doing? Or what are the practices doing in regards to tech efficiencies and to scalable advice? I mean, every business is a tech business these days, obviously. But what sort of one to 10? How important? Do you see tech efficiencies in practices these days?

Paul Barrett
Yeah, well, firstly, given that in 1969, we could put a man on the moon, I’m assuming that technology exists in 2023. It can greatly enhance financial planning. So let me start with that. Okay, because what I’m now gonna say is, I haven’t seen it yet.

Clayton Daniel
Yeah.

Paul Barrett
We talk to all sorts of emerging tech companies all the time. Yeah. And we’ll have some common issues. Firstly, they don’t have money. Okay. And when you’re going to actually start putting into your ecosystem tech solutions, you want to make sure they’re sustainable business models. Yes. So we’re waiting for serious money to flow into the sector, in terms of tech spend, it’s starting to happen. But there’s a long, long way to go. So we’re going to make this sector more attractive to people with money to invest. Okay. But do I think it’ll happen? Absolutely. I do. I think it’s inevitable tech will make a major mark on the way we deploy our services in Australia. No question. Cuellar, your that that may play a role and may not depending on where you think that’s gonna go. But you know, that that will be particularly one element. But I do think that it’s coming, where I would say that right now, if I had, if I had 100 units of effort to spend on efficiency, I’d probably spend 80 units of the 100 on better processes and policies. And I’d spend the remaining 20 on tech, because there’s a whole bunch of low hanging fruit around around efficiency that can be dealt with and answered by improving policies and processes. Take come second. And inevitably, I think if you fast forward, say five years, it’ll probably be the other way around, you know, ticking stop playing more of a rock, but there’s a way to go yet.

Clayton Daniel
That’s yet i i, that 8020 rule, because ultimately, tech is there to simply automate policies and procedures that can be automated, right? Because the policy that the the operation will flow is the operational flow, and then you want tech to handle as much of it as possible.

Paul Barrett
Yeah, but you listen to what you’re saying, right? What? You’re using some big words. And yeah, these SME businesses, like if you came along with the best tech solution to an SME business, it’s the businesses don’t have change management and project management skills. And this is another issue that’s holding tech companies back. They build the best mousetrap and get frustrated, the planners won’t use it. The reason planners won’t users Clients don’t have the capability in their organizations to deploy that tech properly and do all the change management. And that’s why, again, back to your earlier question as, as SMEs get larger, and get better capability, they’ll be better able to deploy tech solutions. But that’s been another thing, holding it back. Another thing going takeback, of course, has been regulations, right. I mean, the regulatory environment has not allowed tech suppliers, the freedom that they wouldn’t enjoy and other in other sectors. And I suppose that’s what you’re getting? That’s what you’re getting at with your QR, question. It will QR make it easier for tech companies? Well, maybe if we can get a better feel for the risk appetite, then maybe.

Clayton Daniel
Interesting. So in in regards to talent, I think we share definitely common grounds in terms of the issues there tech, it’s great to hear your view, I think, as I mentioned, at the beginning, I think you have a very unique view, because you’re very intimate with a lot of successful practices. So it’s interesting to hear your view on that. Let’s assume that let’s move across into QA, let’s assume for a moment that the QA moves ahead in a way that’s very beneficial to financial planners in a way that, you know, assuming that permissions are certainly on investments and superannuation and still no longer available, and as a result, that the chances of conflicts are reduced. As a result, the documentation required is reduced. And so we go from a scenario where a planet can handle 100 clients into a scenario where a planet can handle let’s call it 200 flights, right? And potentially up from there. But even just a factor of two. What do you see as being, I guess, the the easiest way to go from handling 100 clients to 200 clients? If if Halon and tech aren’t immediately the solutions? How would I as a principal, advisor, look, with your view go from 100 to 200. In the event, the QR was beneficial to me getting rid of Essos bam, just like that, oh, we

Paul Barrett
have have taken our local look and a real honest look at what financial planning firms actually are. Okay. lemonade stands make lemonade on deck and they and they sell it to thirsty customers on a hot summer’s day. They do. Financial Planners manufacture regulatory documents. And they and they spend if you look at if you do a time and motion study on all of the activities of a planning firm day to day, the vast majority, the time is spent on these rules for documents, preparing revision documents, if and, and, and having having a hard life back to my earlier analogy, all of the compliance around all of that. By putting barriers to entry up and giving people an easier life and taking the heat off around compliance, the production of these regulatory documents, you will and you will enable planners to use their minds and professional judgment. And this is the bit that we need to shift to. Because right now, financial planners remind me of NPCs non player characters in video games, non player characters, what do they do, they run around the place based on the rules engine, an algorithm that the programmer built for them, they can think for themselves. When I watch my son play fortnight, and he’s player one. I watch him he jumps when he wants to he runs where he wants to be shoots when he wants to. He’s using his mind and professional judgment. The only person in the video game that does that will do that is player one, okay? How to Plan has become Player One. Okay, then that is a key challenge. And if we don’t have to be burdened by these regulatory documents and processes, and we can use our minds, we no longer have to be NPCs we can then be player one. That’s the single most, I think, obvious low hanging fruit that we can grab ahold of out of out of QR. But in order to do that, Daniel, what plate mesh It’s your name on my screen his his Daniel. And that in order to do that, we need to have a long look at our risk appetite in this country. Like we do in Australia, we appear to like rules and regulations and we like the flags to be narrow and we all want to swim between them. Yeah, I heard on the weekend that rap music was banned at the Easter Show. Okay, there is an example right there of what I’m talking about. Yes. Okay. Okay. And when I read all the reaction to the QR, what I read, what I see is people who are fearful, okay, it’s people who have a risk tolerance of not very high, maybe not zero but closer to zero, then we’re going to Okay, so we all need to lead our self interest and egos at the door with this discussion and the QR and we need to understand that has to be an element of risk if you want. If you want to solve this problem about more advice to more Australians more affordably, you’re going to take a little more risk in order to achieve that. And its risks that apparently, we’re not prepared to take at the moment. And so my call to action would be to all comers in this debate, trying to be self interested at the door, except the fact that we do need to take a little more risk in order to get the great return for all Australians are we’re all seeking here. Yes.

Clayton Daniel
This question leads into something we touched on very briefly earlier, but that is the licensing model. Traditionally, there has been a view of, well, if my license says I can do it, then I can, if my lesson says I can’t, then I want with masses of advisers moving across into either small boutique, or self license land, those decisions are now far more available when and open to the financial planner. So in a way, we’ve almost seen a changing of the guard with the licensee model. Without the rules actually changing I will include the word yet there. So assuming that the licensee model from a regulatory regulatory point of view does change and sort of continues to go into the direction that it’s already been moving. If you if you if I was to say licensees haven’t quite yet found their role in the new world. What would you say to an advisor looking at licensees, what should they be looking for? What was your recommendation to both both stakeholders in terms of a good relationship?

Paul Barrett
We’ll start with the licensed seats. The my my advice licensees would be start with a white sheet of paper and work out what services your clients and licensees clients, our advisors are prepared to value and pay for. Okay, and be honest about that. And either build or buy those services and package them up and sell them at a fee that you can make money out of this business model is baked in the past around? Well, you know, we’ve always done it this way. So we’ll keep providing tech services and compliance training and then we’ll charge nearly nothing for them. That is not a sustainable model. Okay, if you’re outside of that unusual environment that licensees operate in, in the real world, people put a margin on top of their costs and build profitable service offerings. Okay, the same thing needs to apply here. They’ve got to get back to basics. And so if I’m running a licensee denouncing why, okay, what if advisors are fragmenting and they’re all hitting off of their own license handle when the bad what sort of services do I need to supply them? It might be things like m&a services, outsourcing, governance, marketing, lead gen is a bunch of really high value add services, that there’s no reason they can’t supply. But for whatever reason, they’re not supplying those, they’re supplying more kind of ancient artifacts, that the clearly advisory companies don’t value. And that’s why they’re leaving, and actually taking a little more risk by doing that. But they’re doing it because they want to control this service offering. And they don’t want to be, they don’t want to be constrained around so many 20s very narrow, very narrow flags, licensees put on the beach, and turn to the planners. And the way that this equation, fix them, going into your own license carries with it extra risk and a different capability set. I think the best outcome is the planner, spinal licensee that does offer value add services, and the planners are prepared to plot to pay proper money for those services, because they see there is real value in that. So it’s a it’s a bit on both on both pot parties there. But one thing is for sure, this licensee or dealer group model ain’t gonna cut it in the future. It just it just isn’t gonna work. And so I think we need to forget about licensees as we know them or knew them and start thinking about services businesses and how a services business ought to take its proposition to advisors and make money out of that. Yeah,

Clayton Daniel
well, I’d imagine you would see a lot of licensee models that are out there. And I’m sure you probably speak to a lot he practices about the licensees that they’re dealing with. Let’s talk for a moment if we can about it as an NGA. Where are you guys headed? Are you? Are you headed further and further into any particular of these subjects that we’ve discussed today? I mean, they’re the is the licensing model, something that you’re interested in, is take efficiencies and take place something you’re interested in? Is the outsourcing with your relationship with VBP? Or is it all of the above or none of the above? Are you agnostic? What let’s talk about Obamacare for a moment. What is a Zed look like? Let’s say 12 months, five years? 10 years down the line? Wow. Ah well civilizer is,

Paul Barrett
yeah, all the above. We knew that envelope could be thinking about it, like Clayton. even look at the financial services sector in Australia not that long ago.

There were lots of great companies of some scale delivering great services to advisors and the clients of advisors, their landscapes changed quite a bit. That’s changed quite a bit in the last probably five to 10 years. And, you know, there’s the struggles of some of the larger players well documented, and certain players have got out all together. And I can’t, I can’t. It looks, it looks to me, like we are in a one off inflection point. It looks to me with all of this fragmentation going on, and the big end of town essentially playing a different role, if any role, there is a wonderful opportunity for an innovative firm like ours to come in and actually supply valuable services, valuable, profitable services, to a growing number of SMEs who are no longer tethered to institutions. Okay. So, you know, we want to build a wonderful financial services company. And that company will be a b2b company that serves advisors and provides attractive valuable services to them and an auto include a lot of things you’ve just mentioned, could it include licensing? Yeah, it could. But that would just be one sliver of a broader proposition that included a whole range of very profitable, valuable things. And that’s why using an m&a strategy up until now, we’ve been accumulating capability. So what have we really been up to, we’ve been buying capability, so that we can then assemble it together in a in a well organized way to provide a really compelling proposition to the SMEs around Australia and our sector. That’s what we’re doing. It’s, it’s, it’s really quite simple. But the beauty is in the execution, making sure that you can invest in quality assets by financial planning firms themselves and accounting firms, but also in some of the components of the supply chain, and VBP is an example of that. So that’s what we’re up to in terms of five years plus, you know, we would like to create, you know, one of, we’d like to create a financial services company the strands can be proud of. And yeah, 10 years ago, 15 years ago, 20 years ago, there weren’t those terms existed. Okay, they’re on the nose now. Okay. There’s an opportunity for a firm like ours to make strains proud of a financial services business want to do. And there’s, there seems to be a right time, right place, feel about this. Okay, year, we entered into acquiring venture planning companies, companies for Royal Commission. So you see, you might say, Well, it’s time over again, would you do it a few years later, we asked to be No, truly, because that Royal Commission actually enabled us to bring forward a whole bunch of business transformation to compress period, right? I saw I wouldn’t change things, but it’s it, there’s a right time, right place feel about it. And you know, we’re executing well, we’re gonna continue to do that. One thing I would say, though, is that you alongside our strategy of partnering with SMEs, we think there’s an opportunity to invest in some larger firms as well. So we might actually increase our m&a program in the in the next few months, in the next couple of years to capitalize on, on this one off opportunity that exists in the market today.

Clayton Daniel
Well, very interesting. To me, I fell in love with this finding this, you know, whether you call it an industry or profession, but I fell in love with it, you know, a while ago, and and it’s always been, you know, I’ve always looked at it as the the opportunity to do something innovative is there that there just when I look at it, there seems to be a massive gap, in the sense that everyone was just walking down this traditional business model and trying to, to, you know, what, I would call back in my back in my name bucket days, you know, hit the red band on it, right? It was, it was all about trying to get that thing and run it as hard as as hard as you could. But there is there is so much around in between all the gaps in the fringes of this industry that if you if you can capture it, you can do something interesting with it. And it’s been Azan nga has been around for it’s been around for a while, right? I guess, eight years. That’s what I’m talking about. Right? So this is not this is the thing that I’m really enjoying about seeing what’s going on is it sir, it’s a result of eight years of, of probably making good decisions and then learning from others and, and now you’ve got this really clear message, which is one that’s extremely positive. And the fact that you get to see all the best and probably the worst parts of the industry, in doing all the due diligence amongst the practices is, is yeah, it’s It’s one of the things that being on this side of the coin with ensemble, it’s always really interesting to hear. So I appreciate your time. Are you speaking in in the Philippines again this year? Yes. Yeah. Okay. Very cool. Mod. I’m thinking about coming over. I know Emily’s actually presenting at the event as well, which is super cool. Yeah. So it’s always a good excuse to get over there. Anyway, thanks for your time, very much. Appreciate it. And yeah, I’m sure in the next couple of years, we’ll get it done again.