If you live in a so-called ‘advanced’ western economy, one word you’re going to hear a lot more of over the next decade or so is tax. And you can be reasonably sure that when the word tax is used it will not be followed by the word ‘cuts’. Short and sweet – too many governments with too much debt and short of selling off state assets, there are precious few ways they can improve their balance sheets.
A lot of the process of reducing government debt will keep coming back to tax both as a revenue source and also how it circuitously acts a ‘Catch 22’ like brake on economic growth, reducing a government’s tax take.
So for professionals giving financial advice to taxpayers in such economies, it’s a new paradigm even in economies like Australia where government debt sits below 10% of GDP. But while in academia the decades old reliance on theories like ‘Keynesian economics’ is being brought into question on a daily basis, for consumers it’s still about managing their financial lives in their ‘real’ world.
Their real world is going to look different for quite some years to come – in fact it already does. People are borrowing less and saving more – cue John Maynard Keynes’ Paradox of Thrift conclusions! Businesses – especially retail and construction – are being forced to find new ways of maintaining revenue and profitability. Safe to say a lot of businesses will not survive the transformation of economies moving to lower levels of consumption and household indebtedness.
Investors are going to have to alter their expectations about investment returns and financial advisers who have staked their business raison d’être on investment returns are going to have to re-work their business model. While it’s always been a risky strategy to stake client satisfaction on investment returns, in the new world such a business model might be more aptly termed ‘Russian Roulette’ – eventually the chamber with the investment returns ‘bullet’ in it will get you.
In the same way that western governments will have find more inspired policies than ‘tax cuts’ to seduce voters into re-electing them, financial advisers and planners are going to have ensure that their service offering is truly holistically based and not return centric. This will come down to some key issues including:
- Committed, ongoing, service
- Regular communication – written and in person
- Attention to detail in all service areas – have you returned that client phone call yet?
- ‘Going the extra mile’ with service delivery – do you sign your client mail-outs in real ink?
- A whole of business belief in service – how does your receptionist deal with clients?
- Portfolio construction – what worked in the 90s will not work in the 20 teens.
Clients can be assured of several things:
- It’s going to be a rough ride for a while yet
- Capital growth is going to be constrained for some years to come
- Early 2000s style income tax cuts are unlikely
- Maximising the utility of their income will be increasingly dependent on legally minimising tax. This does not automatically bring negative gearing strategies back to prominence in a financial adviser’s toolkit.
If ever there was a time when financial advisers the world over are really going to have to provide value for money it is now. Historical norms for investment returns are being challenged every day and keeping clients engaged with your firm will stretch many advisers.
While challenges aplenty abound for advisers I firmly believe this will be a period of refinement for the financial planning profession. This is business evolution laid bare – those that can adapt to the new environment of service delivery as the primary business function will definitely survive and go on to build robust businesses.
As governments grapple with finding the most efficient and equitable way of dealing with their debt ‘ball and chain’, eventually tax payers will have to foot the bill. There is now an even greater need for a very high standard of professional financial advice across the world. In very many respects these are the times which even more fully justify the existence of the financial advice profession.
Long may it live!