Sorry...had to ask, otherwise what follows wouldn't have made sense!!
We recently wrote an article for LinkedIn that addressed the specific need for cultural change in the financial services industry. It was sparked by a recommendation made in the final report of the Hayne Royal Commission.
While it does refer to some specific circumstances that apply to that industry, we reckon there's plenty of food for thought for most others. So we thought we'd share on our site as well.
Also for those of you in the industry who missed it on LinkedIn.
Hope you enjoy!
Commissioner Hayne's hot button: Culture...
A reading of the Hayne Royal Commission report shows up a recommendation that so far has received little, if any, media coverage.
And it’s a recommendation that probably won’t get that coverage any time soon - it’s just not “hard-hitting” enough to create much interest amongst those who consume the mainstream media. Which is a shame because it’s one that will arguably create more positive change over time than practically any other in the report.
And according to Hayne himself, if you run a “financial services entity", you'll ignore it at your peril.
That surely applies regardless of the size of that entity - big, small and in between.
Here it is...
Recommendation 5.6 - Changing culture and governance
To paraphrase the Commissioner, the recommendation essentially says that all financial services entities ought to:
asses it’s culture;
identify any problems with that culture;
deal with those problems; and,
determine whether the changes made have been effective.
Hayne goes on to say that the recommendation applies to all entities and taking a “doesn’t apply to us” approach would be ignorant and foolish. He also seems to expect some pretty serious effort in dealing with this recommendation and I’ll leave you to read his further commentary yourself right here - start at the top of page 392.
Should we be surprised?
For one thing, following the release of the Commission’s interim report, Treasury submitted the following question for further attention:
What more can be done to achieve effective leadership, good governance and appropriate culture within financial services firms…?
But really, the fact that sales long ago overtook service (advice) in some corners of the industry is absolutely not a revelation.
And as if we needed any confirmation of the trust deficit in the industry it came with the Investment Trends research late last year which indicated trust levels are at an all time low.
There’s also good news!
That same Investment Trends research said around 2.1 million Australians intend to turn to a planner for advice in the next two years.
That’s right…even against the backdrop of the Royal Commission hearings and even with a distinct issue about trustworthiness there’s still a couple of million people willing to seek out advice.
It’s no leap of faith though, to suggest that potential clients are going to be more diligent in their choice of adviser than they’ve been in the past. They’ll have more questions for prospective advisers to which they'll expect clear and concise answers.
Even prospects referred by existing clients will likely be more challenging to convert in future.
So advisers will need to work harder for clients but it's good news nonetheless. The industry still appears to be at least somewhat assured of a future market for advice.
Which leads us to the culture issue.
In the minds of many - certainly in the mind of Mr Hayne - it’s culture that got us where we are today.
And the inference is that culture can, should, and most likely will, be a major contributor to what we might call “repair and renovation” of the industry.
Certainly if an advice business is to grow sustainably into the future its culture will need to demonstrably align to the values and beliefs (not to mention needs) of its preferred clients.
The challenge is that “culture” is at once often obvious in an organisation yet so very intangible. And its intangibility makes change difficult and - usually - a slow process.
If we were to ask ten people what they believe contributes to organisation culture generally we’d get a long list of responses. That said, most would include on their list:
Leadership style in the business;
Values, both implicit and explicit;
The market in which the business operates; and,
External factors that influence the business (such as economic conditions, the legislative and regulatory environment).
Of course this isn’t an exhaustive list and nothing here would be surprising or likely argued as unimportant by most people. So it’s a good start in creating a list of individual cultural influences in a business. It’s also a list that highlights how “cultural drift” might occur.
The factors above are highly inter-related.
A change in one of them can and will have an impact on some or all of the others.
For example a change in leadership usually involves a change of leadership style which will influence all the leader’s direct reports to a greater or lesser extent. There’ll also be a “trickle down” effect right through the business. Values will shift - perhaps subtly, perhaps not. And a new leader may have very different views on how team members should be rewarded. All of which shifts culture away from where it was under the preceding leader. Needless to say this is a particular challenge in large businesses where leadership tenure is often short.
Cultural drift happens at the macro level as well. In the financial services industry it’s fair to say reward structures have gone increasingly down the path of encouraging sales and revenue generation rather than client satisfaction (there’ll be protests I know, but really if we’re totally honest, that’s where we find ourselves).
So as an industry we’ve “drifted” culturally from one that is “for the client” to one that’s become less so. Again there’ll be protests and yes…of course that’s a generalisation. But the important issue is that this is how prospective clients see the industry - hence the Investment Trends research trust finding mentioned above.
There’s no getting away from it.
It’s change that occurs so incrementally so as not to be noticed until it’s too late that creates issues - thing about the boiling frog syndrome...
Stopping the “drift”.
In most businesses where we see cultural drift it simply happens because there’s nothing to stop it. There’s nothing organisationally to say “hang on…what we’re doing really isn’t in line with what this business is all about.”
In other words, there’s no clear and demonstrable business purpose driving everything the business does - the reason, over and above making money, the business exists.
All businesses begin with a purpose.
No matter how large they eventually become, the founders of the business will have had in mind a problem they were trying to solve. The fact they could make money from solving that problem for a group of customers was at the outset almost definitely not the only reason for starting the business. Most financial advisers I know and have dealt with entered the industry with something of a personal purpose - a desire to help clients become the best they could be financially.
Purpose is what sits at the heart of culture.
Regardless of the factors which exert day to day influence over the culture of an organisation, a purpose-driven business will more quickly identify and be able to short-circuit cultural drift than a business with no clear purpose.
Working to a purpose has been shown time and again to result in stickier clients, more engaged teams and an improved bottom line - without the need to micro-manage the sales process.
In short, culture built on purpose is for the most part stronger and more enduring than a culture that shifts with the breeze of organisational change.
Where does this leave us?
There’s not too much doubt about Commissioner Hayne’s intent when it comes to culture.
He sees a significant need for change and is recommending financial services entities take full responsibility for making sure change happens where it needs to . He clearly has a view that current culture across financial services business is too driven by a focus on reward for financial metrics.
We can debate the subtleties of his recommendations and supporting comments until we’re collectively blue in the face - everyone will have a view, and a strong one at that.
But before that happens and to perhaps give the debate more focus, consider this…what really matters is two things: what’s going on in the minds of existing advice clients who might be a little rattled by the Royal Commission; and what those 2.1 million potential clients identified by Investment Trends are thinking about the industry and with whom to engage for advice.
The way forward for advice businesses is crystal clear. Any business unable to demonstrate - not talk about, but actively demonstrate - a purpose-driven culture that focuses squarely on the client and transcends revenue and profit is doomed to underperform on just about any measure.
Put another way, hear no evil, speak no evil and see no evil isn't what the industry needs right now. Any business that thinks this will all go away might well end up a skeleton of its former self...
It’s time for a quantum shift in the advice industry.
Time to stop with the micro-management of the numbers….it doesn’t work it seems. If it did, we wouldn’t be where we are today.
Time to focus our thoughts and actions on delivering to our business purpose. To embed it in our businesses, articulate and demonstrate it to clients and prospective clients.
Purpose becomes real when it’s the driver of your vision, your strategy and the day to day activities in the business. And these are aligned, financial outcomes by and large take care of themselves. To be fair, you might need a hand…
Who’s up for the challenge?