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Rise of renegade business Viridian to change financial advice
The Australian 7:21am April 12, 2019
Robert Gottliebsen
Four years ago, some 20 Westpac advisers and support staff in Melbourne left the security of the powerful banking organisation to start their own personal financial advice business.
Their colleagues in Westpac shook their heads and didn’t give the business they started - called Viridian - much chance.
Four years later those 20 renegades, led by Glenn Calder, have developed Viridian into a business that is set to change the way personal financial advice is delivered in Australia.
In a stunning development, Westpac is actually transferring its whole investment advisory business to the former renegades.
ANZ, NAB and Commonwealth Bank are all looking to exit personal investment advice or certainly change their approach to it.
These decisions are part of a total transformation of the way banks are set to operate in Australia.
As I explained yesterday banks are shedding their frontline housing loan staff in favour of brokers. Banks still originate 40 per cent of their housing loans but the proportion is falling and if the current trend is maintained the banks will relinquish huge areas of their once dominant retail role. They will no longer control the distribution of many of their consumer products.
It’s a dangerous long-term strategy that changes the nature of banking and will trigger a wave of bank branch closures.
Meanwhile the consequent investment advice revolution will be dramatic. To understand the change, we need to go back a few decades when detailed personal financial advice or financial planning was an infant industry.
The big life offices embraced it as a way of extending the scope of their well-established selling staff. They took into financial planning a high fee-mass production culture. At the time returns and interest rates were high, so the high fee culture was not challenged.
Then around 2000 the banks decided to enter the life and financial planning/investment advice industries. CBA bought Colonial and NAB bought MLC and tried to buy AMP. Westpac bought BT and ANZ entered the industry with a joint venture.
Each bank believed that financial planning and life insurance were a natural extension of banking and would greatly increase the profit potential of their banking operations via cross-selling.
But they did not realise that the culture of life offices and their financial planning offshoots was totally different to banking.
Partly as a result, the high-cost diversification did not work and the attempts to make it work and lift profits were a major cause of the Hayne royal commission. In short, it was a disaster.
Glenn Calder and his Viridian group left Westpac because they could see it was not working and believed they could deliver advice in a much better and cheaper way.
Fascinatingly, the Westpac group allowed the renegades to take their clients with them. The financial arrangements are not known but some in Westpac must have thought there was the possibility that one day Westpac might outsource advice via Viridian. But the Viridian model was unprecedented in Australia and rare in the world.
Viridian charges a fee for service and those fees depend on how much service is required.
Wealthy people can choose a fee based on returns. Viridian produces no product so is able to independently recommend any investment. It recently shifted platforms and share brokers simply on the basis of lower price for the same commodity service.
None of the above is any way unique although a vast number of advisers market “house” products and have had bad fee structures.
What is unique is that both the staff and the customers are offered shares in Viridian. Yes, customers!
Before they can take up shares the customers must seek outside advice and staff must agree to have 30 per cent of their stock in the form of “sentinel” equity. If the staff member acts in an unethical way or breaks the rules they may forfeit those “sentinel” shares.
When the Viridian operation started it was simply a matter of servicing existing clients. But those clients, often motivated because they were shareholders, brought in new ones. Some financial planning firms wanted to join. Those transferring received Viridian equity equal to their goodwill value but often questioned the fact that 30 per cent of the value of their business is “frozen” in sentinel stock.
But they are told that given the practice is uniform it is a protection for their goodwill equity.
The former Westpac people at Viridian soon discovered that if they were to provide advice to both high income/asset clients and lower income/lower asset clients then scale would be important. The enterprise needed to develop expertise in many areas----superannuation, aged care, pensions, franked credits ---as well as all the investment alternatives. Accordingly, scale was required to fund top people in each area and develop computer systems using current technology.
In the advice business, the cost of handling low-income, low-asset people and their pension and aged care complexities is very expensive in relation to their assets and there is no way such people can really afford the real costs.
And so, with scale, Viridian is hiring top software people to harness the latest technologies to enable advisers to put forward alternatives based the easily accessible data. This is exactly what is about to happen in a wide variety of service industries, so lowering labour intensity.
The original 20 Melbourne Westpac renegades have expanded to just under 140. Under the proposed Westpac deal a place in Viridian is being offered to some 175 Westpac people but it seems only around 150 are moving.
Viridian would never admit it but there is relief because 150 doubles the business ---a difficult management task. The figure of 300 trebles it, which takes the “difficulty bar” to a new level.
And most of the people moving will be entrenched in the culture of the Bank of NSW –now called Westpac. For many it will take six months to a year to embrace a totally different way of thinking and working.
But the Viridian people developed a new culture out of their Westpac ways, so are confident it will work.
This is just one of many changes looming in the advice industry as banks exit.
The Westpac deal gives Viridian scale and almost certainly many others will embrace a similar model. Others will take a different direction. For example, AMP is looking at a version of its earlier system.
But there will be a vast transformation of the industry.