Terry Bell assesses the ability of financial planning practices to cope with regulatory change.

If Australian practices are to successfully address the issues raised by the recent Future of Financial Advice (FoFA) announcements, it’s essential that they objectively assess their current position: How well placed (or “healthy”) are they to make the changes which many will have to make if they are to survive, and indeed thrive, in the years ahead?

They will need to be able to balance the more immediate and pressing practice issues (the “stuff”) with perhaps the longer-term strategic ones (delivering value to the client and general positioning of their offer in the broader marketplace).

With this as our starting point, we’re delighted to launch the Practice Health Index. The newly developed index, based on a comprehensive analysis of our HealthCheck database, is a device through which advisers, principals and licensees will be able to monitor the ongoing evolution of the business of advice.  And while we acknowledge that no two practices are the same and, consequently, there is no “one size fits all” solution, we trust that the following provides food for thought.

Upfront we rate the overall health of Australian practices at 53 per cent (down from our 2009 analysis of 57.6 per cent).

Practices score highest in the areas of “people” and “risk management”, with the all-important area of “client engagement” coming in next. Meanwhile, “planning for their business” rates quite poorly.

Turning to each area in some detail:

People

There has not been much movement here over the past two years. Staff have clearly remained foremost for most practices. In 79 per cent of practices, the majority of staff have clearly written job descriptions, which (pleasingly) have been reviewed in the past 12 months. Further, in 71 per cent of firms, each staff member has had an appraisal/performance review conducted in the past six months.

Diagnosis: On the people front, it seems that Australian practices are healthy. Given what’s coming up over the next few years we will be keeping a close eye on this critical area.

Risk management

In this area we look at key maintenance functions such as business continuity, compliance, OH&S and IT. And while the “mandated” areas such as PI, compliance and continuity cover perform reasonably strongly, it is perhaps not too surprising (given the economic environment of the past two years) to note a deterioration in some elements:

• OH&S – less than 50 per cent of practices have conducted an assessment of their business work activities to determine their compliance with this legislation, with almost one third rating their understanding of their obligations as “less than good”.

• Key person – 30 per cent of practices state that they don’t have a key person plan in place. This is down from the 2009 rating of 37 per cent.

Diagnosis: Overall, we would say “reasonably healthy”, but fine-tuning is needed.

Client engagement

There’s a major surprise here. Other than in the area of segmentation, there appears to have been no progress achieved over the past two years in the area of client engagement. In fact our client rating dropped by 9.1 per cent!

Given the economic backdrop of the past few years, we had expected to see an increase in the level of contact with “A” clients of the practice, for example; but it has remained fairly static – only 50 per cent of practices report contacting their “A” class clients more than 10 times during the year. Why not more we wonder?

Of even greater concern perhaps is the percentage of Australian practices that proactively seek feedback from their clients in a structured manner – at 30 per cent, it has actually declined over the past two years.

Diagnosis: Immediate check-up required, with an ensuing health plan to be developed as soon as possible.

Planning for the business

This is by far the least healthy area, with a 5.6 per cent decline from 2009. Only 57 per cent of practices have a clearly documented plan for their business and, in many cases, they appear to be light on detail. Further, “progress to plan” is not tracked regularly.

Given the significant level of change coming for many practices over the next few years, we’ll be looking for a significant uplift here in index ratings.

Diagnosis: Remedial action urgently required!

Terry Bell is a partner and director of Business Health.