The Magnificent Seven, the Seven Wonders of the World – good things seem to come in sevens. David Fox says financial planning is the same.
Three big influences on the advice industry over the next three years will result in the successful advice business of 2012 looking very different from the successful business of today. I brand these influences the “Big Cs”: changing Clients; increasing Costs; and the challenge of attracting and retaining specialist Capabilities. These influences are already resulting in the emergence of seven key trends, which are reshaping the structure and economics of those advice businesses positioning themselves for success, and even domination of our industry, over the next four to five years. However, most owners of successful businesses today will ignore these current influences and continue to believe that the approach that contributed to their business growth in the past will contribute to their continued growth and success in the future. These businesses will continue to do more of the same, just do the same more often, or be a bit better at it. This thinking is fraught with danger. And comparisons can be made with other industries and business models that have refused to accept that the strategies that drove success in the past may not be the strategies for success in the future.
Remember Encyclopaedia Britannica, the Swiss watch industry, IBM, the stockbroking industry, office supply retailers and the neighbourhood hardware and corner stores? These emerging trends demonstrate that some business owners seriously respect the key influences in our industry today and are reacting to these by changing the way their business is structured. They are changing how their business operates, and the capabilities it has to not only manage and develop the business but to effectively interact with clients and deliver value to them.
TREND 1: The growing power of the client According to respected US advice industry consulting firm Moss Adams: “The power of the client is growing, driven by sweeping demographic changes, increased consumer sophistication and greater expectations of service.” And it is my passionate view that the single biggest influence in our industry over the next five years will be the growing realisation of the need for advice from more demanding clients who will no longer respond to nor accept an advice offer that is not specific to their needs.
Advice businesses positioning themselves for success in the future are redesigning their offer to attract the changing client. They are beginning to understand that clients are being attracted to advice businesses because they realise they have a need for advice – and that advice is not limited to moving an amount of money from one environment to another. To have the capability to cater to the advice needs of clients, businesses have had to be more disciplined in the markets they are servicing. To design the offer that will attract clients to the advice business of the future, there will be a need to know the clients better than the clients know themselves!
Therefore, the successful business will no longer be able to work in the “everybody” market. Most of these businesses will have specific offers for three or four target groups – for example, senior executives of publicly listed companies, health professionals and small business owners. Each offer will be designed around the specific advice needs of that market. The advice offer for small business owners will include a business improvement plan, business continuity plan, personal investment plan, personal protection plan, asset ownership plan and debt management plan.
The small business owner may be attracted to the advice business because of their need for advice on funding business expansion. This may be the only advice provided and implemented in the early days of the new relationship; however, as this relationship evolves, other components of advice will be delivered, as they become a priority for the client.
TREND 2: The big are getting bigger This trend is not really “emerging”, as it has been apparent for some time now. And it has been a trend in many other industries – such as accounting, food and petrol retailing, banking, hardware and information technology – for many years. This trend is being driven by the rising costs of operating an advice business and being able to absorb these increased costs by building critical mass, resulting in economy of scale.
Businesses that achieve this critical mass are also able to attract and retain talented people much more easily by being able to offer them development opportunities and a broader experience, which smaller businesses are not able to provide. And the larger businesses are able to more effectively deliver multiple advice components to more demanding clients attracted to the bigger business because of their capability to cater to their specific advice needs. There are quite high-profile examples of this trend in our industry with the merger of a number of well-known, successful businesses to form one larger enterprise with locations in all major capital cities.A number of smaller businesses have also been merged or acquired to form larger models with similar effect.
TREND 3: Accountability for sales and marketing is separating Most advice businesses evolved from a principal-dependent model where the business founder did everything. They sourced potential new clients, converted them into a client and provided some ongoing service to contribute to retaining the client. On top of this they managed the business, developed the business, recruited new people to work in the business and were responsible for how the business operated.
As new advisers were employed in the growing business they were expected to do the same as the principal – especially source new potential clients and convert them into clients. However, as the need for more sophisticated and complex advice grew it became more difficult to find people who could both generate a stream of potential new clients and advise them according to their specific advice needs. Today the very capable and skilled adviser finds it difficult to source new clients.
And the very effective marketer rarely has the skills to advise. Therefore, the trend of separating the accountability for sales and marketing is emerging. Dedicated marketing managers are being employed to source large numbers of potential clients who will be converted to clients through the personal advice delivered by the most experienced advisers. Marketing managers are responsible for creating relationships with other professional firms and influencers such as professional associations, employer groups and corporations.
They are accountable for introducing the targeted number of potential clients to the firm. The marketing manager is also responsible for developing the marketing plan, designing and producing all marketing collateral and arranging promotional events.
TREND 4: Increased management capability Smaller businesses have needed a greater management capability than most demonstrated to achieve the required profitability and desired growth of their owners in the past. But many were able to “get away with” deficiencies in this area and still achieve a respected level of success. However, as business owners realise the importance of exponential growth and achieving critical mass to be a dominant business in the future, an increased management capability has become critical to future success.
A larger number of businesses are employing chief executive officers and/or general managers who are replacing the principal and founder of the business in this role. New management is often recruited from outside the advice industry and is able to introduce new thinking to the business. A new CEO or GM will be accountable for driving change in the business, especially the change required for the business to transition to a “dominator” model in the future.
TREND 5: Genuine client centricity Even though this trend is very closely related to the number one trend listed above, it deserves to be identified separately. Most advice business owners have been business-centric in their “thinking” and this business centricity has influenced the culture of the broader business. It is not difficult to understand why this has been so – business owners and employees commonly work in the business or are occupied in thinking about the business for more than a third of their lives. So our thinking on business matters is naturally “business first”.
An example of this is in the normal client engagement process in most businesses. Typically this process is documented as: Prospecting; first appointment; preparing the Statement of Advice (SoA); presenting the SoA; implementing the advice; and delivering ongoing service. This process is designed around all the “stuff” the business does! The client-centric business naturally thinks client first decisions are made from the client up, not the business down. Therefore the client engagement process is designed from a client perspective.
The business then determines how they would like the client to think and feel at the conclusion of each stage – that is, after the intervention of the business. The business is then in the position to identify what needs to be done to cause this transition.
TREND 6: Pricing according to value delivered As businesses become larger, become more client-centric, deliver multiple advice components and greater value to the client and employ more talent and broader capabilities, they soon start to review their pricing model. And for these businesses their challenge is to align their pricing model with the value they deliver, and in doing so start to be paid what they are worth.
Although debate about fees versus commissions, or how time-based pricing is more professional, continues in our industry, businesses that are positioning themselves for success in the future are focusing more on value, not fees. Once this is their focus and they understand the value they are delivering, the transition to value-based pricing becomes less of a challenge. The typical business still believes there is a need to justify price – the new successful business emerging believes there is a need to justify value.
This is quite different thinking. While today’s business is still being distracted by such issues as the difficulty in placing a value on intangibles, tomorrow’s business has realised that pricing is more an art than a science. If clients understand the value they are receiving from an advice business they are more comfortable paying a fee that is linked to that value.
TREND 7: Sharing the rewards of ownership Although some businesses realised many years ago that to attract, and especially retain, long-term talented employees, you needed to provide them with the opportunity to share the rewards of ownership, most did not implement a strategy to deliver this outcome. However, it is not uncommon among businesses positioning themselves for future success to offer key employees the opportunity to acquire equity at a point in time in the future.
Or, they offer phantom equity or virtual ownership to employees who may not want to participate in ownership decision- making but whose contribution to the growth and success of the business can be acknowledged with financial reward based on increased business value and/or the achievement of targeted profitability. This trend has certainly helped not only retain top talent in the business but has increased the sense of ownership among employees and enabled the attraction of additional talent and capability to the business as it progresses towards the vision.
These emerging trends will become more apparent in businesses that are focused not on the problems of today but on how they will dominate the advice industry in the next four to five years. Business owners who continue to ignore these trends may still be able to operate; however, they may have great difficulty in facing these influences of unprecedented force – the Big Cs.
David Fox is principal of Advice Centre Consulting.
