The third, and final, webinar in the Professional Planner/MLC series on future-proofing your business looked at building a viable and sustainable planning practice. Simon Hoyle reports
It’s a simple proposition: no clients, no business. Building a viable and sustainable financial planning business means delivering to clients a service that they need, one that they value, and one they’re prepared to pay a fair price for.
Tony Stephens, a principal of Business Health, says an important first step is to identify exactly what sort of clients you want to work with, and what you’re going to offer them.
“The practice needs to provide value to the client, but the client also needs to think that they’re getting value and they need to want the service, but they also need to pay for the service,” Stephens says.
“And one of the things that certainly looks at the sustainability or proving the sustainability of the business is having clients who pay for the service directly as opposed to being paid from a manufacturer.
“This is not meant to be anything about commission. But the fact is…that what we’ve seen is businesses that have clients paying fee for service are more valuable than those who pay through a commission.”
Bob Neill, national manager of MLC’s adviser business centre, says a sustainable business is one that “in tough times survives and delivers a return to its stakeholders, and in good times is able to take advantage of opportunities that are presented to ensure that they stay ahead of their competition”.
“I think from a valuation point of view, the critical thing is ensuring that business actually has control over its revenue sources. If it doesn’t have control over its revenue sources then its viability is threatened. The best control you can have over those revenue sources is to have that direct relationship with your clients, where they’re the sole determinant as to whether they pay you your fees or not.
“I think if you look at the experience the finance broking industry had over the last couple of years, where their revenue sources were largely dictated by sources beyond their control, it’s been a sad and sorry tale for their value and viability I think.”
Neill says that whether a planning business finds clients and then defines a value proposition, or defines a value proposition and then goes looking for suitable clients, “depends a little bit on whether you’re starting with a clean sheet of paper or not”.
“And most businesses these days do not start with a clean sheet of paper,” Neill says.
“If you’re starting with no legacy – from scratch, so to speak – I think you’re far better with a business proposition, being very, very clear around what it is that you’re going to deliver to your specific target group of clients, and how you’re going to ensure that their requirements are met by you.
“In reality, most businesses have been built over time where they have clients that have come to that business from a number of different sources with a number of different demands, and we have a number of different expectations from those clients. So one of the challenges businesses face, when they are looking at their clients, is how do you actually ensure that the business that you’ve built up over time, when needs and demands and circumstances were different, is a business that’s going to prevail with you going forward.”
Stephens says there is no single “best” value proposition, and no single way to define it.
“I wouldn’t like people out there to think that there’s only one value proposition out there,” he says.
“But it’s got to be around providing holistic financial advice. I think there can be a lot of different value propositions in your business, a lot of different things that you provide.
“I think the most important thing to remember is that whatever the value proposition you have in your business, that’s what you’re going to be judged on. So if the value proposition you have is to be the lowest cost provider of investment advice or life insurance products, if that’s your value proposition, there’s nothing wrong with that.
“McDonald’s are a profitable company, as are the Rockpool [restaurant] or whatever it is. They both serve food, they just serve different kinds of it at different prices. “But if price is the issue that you’re going to be competitive on, [then] as soon as someone comes in with a lower price, then you’re in trouble.”
Neill says the key elements of a customer value proposition are “having very clear articulation around what you offer to your clients; having a business capable of delivering that type of capability into the future; taking out the key-person risk and ensuring you control things that you can control – and build some robustness to withstand the challenges from those you can’t”.
Stephens says a value proposition “has got to be succinct”.
“One of the things I’ve seen in the US is they have a thing called a ‘30-second elevator speech’. The story is that if you get into an elevator with somebody, and they say, ‘What do you do?’, you have to explain to them what you do by the time the elevator gets to the 30th floor.
“Now that may sound a bit cheesy and salesy, but I think basically, again…it’s got to be succinct. It’s got to be relevant. It can’t be verbose; otherwise people will lose interest. I think that a really good outcome of the CVP [client value proposition] is whatever statement you make, the client says, what do you mean by that? Or can I have some more information. I think ‘What do you mean by that?’ would be a good response from a client.”
Stephens says there then arises the issue of how to put the proposition into practice – how to deliver it to clients.
“Having a client value proposition is very important; delivering that client value proposition is probably more important – doing what you say you’re going to do.
“And by the way, it’s very difficult, in our experience, to actually get a documented value proposition. But then to actually live up to that and to deliver that, I think is much more difficult.
“The other guiding thing is that, whether it’s business sustainability, whether it’s ongoing revenue, whether it’s client reviews, everything is based around the fact that we have to, as business people, take some time out and think about our business and make some informed decisions moving forward and don’t just react on a day-to-day or month-to-month basis.”
Once the business has defined its value proposition, another issue is translating that proposition into a marketing plan – so that the clients you want to target know what you’ve got.
Neill says it “boils back to being very clear around, first of all, that you can articulate what that value proposition is, so you’re able to communicate that; you live and breathe communication, so that it doesn’t become just a few hollow words on your web site or on the wall”.
“Your avenues to market will depend a lot on where your particular skill sets lie,” he says. “If you’re a brilliant orator and a great speaker, then standing on a platform and talking to people is a great environment.
“It’s [about] finding a strategy. And this is the thing that we quite often see missing in businesses: there’s no clear strategy around how they’re going to take their message to the market place.
“So one of the strategic requirements for a business, essentially, is to sit back and clearly understand how best they’re going to take their proposition to the market place, and have a defined way that they’re going to roll it out, with benchmark expectations around performances, and a review around how successful it’s been.
“And there’s no one strategy that fits everyone. There’s no silver bullet. It’s ensuring that you’re very clear around what your message is – that you’ve identified the most effective way for you to take that to the market utilising the capabilities that you’ve got, and ensuring that you follow through with that strategy with a sense of discipline and implementation.
“Most businesses have no problem with strategic planning. They have lots and lots of problems implementing that strategy because they don’t necessarily have the discipline and the accountability to follow it through.”
Once a viable business model has been determined, “‘sustainability’ means having a profitable, efficient business that can attract and retain clients”, Stephens says.
“At a very high level, it’s as simple as that.
“Those clients need to be able to, by definition, pay the fees that are required to maintain that profitability. And you add on top of that, is it a business, so it’s not a one-man band?
“It’s profitable, and it is successful in recruiting new clients, and it is successful in maintaining existing clients over the long term. I think that’s an important aspect as well.”
Neill says lack of key-man risk is critical, as is the ability of the business to adapt.
“It’s got to be a business that’s able to adapt to change, particularly in the dynamic environment that we operate in,” Neill says.
“If it doesn’t have a process of continuing to review its strategic direction and adapt to the changing circumstances and the external environment, then it will get left behind. And ‘sustainable’ means that it has a longevity about it. It’s capable of surviving for long periods of time.
“We see probably the key challenges are to emerge from these smaller and key-person-type operating businesses into the more corporatised world, and the governance structures and decision-making processes and the strategic direction decisions they have to make…around this sustainable business challenge that they’re going to face.”
A formal client review process often underpins a viable and sustainable business. Stephens says Business Health surveys show that “one of the key drivers in an ongoing client relationship is the client review process”.
“The happier clients are with their review process, the happier they are with the overall service,” Stephens says.
“And the happier they are with the overall service, the more likely they are to stay, obviously - but they’re also more likely to refer clients as well.
“If the goal of your business is to create a long-term client relationship, that can’t be done without an effective client review process.”
Neill says a formalised client review process, embedded into the culture of a business, helps through both good times and bad times.
“We’ve long been envious of the trusted relationship that accountants have with their clients, and largely that’s driven off the necessity of those clients to engage with their accountant at least annually,” Neill says.
“And I think good businesses that are walking their way through a strong review process are bedding those clients into their business and the relationship. Now that relationship is important for all of those business opportunities we talked about – the referral of new business, and investment of further funds.
“But it’s also a very good defensive measure when things do turn sour.
“Businesses that maintain that interaction with their clients when portfolio values were falling, have largely experienced the client loyalty and the retention of those clients. Where they weren’t engaged, the clients have shown a much greater propensity to leave. So I think it’s a critical part of bedding the client relationship with the business which is a critical factor in building a long-term sustainable value business.”
Stephens says the review process must “close the loop” by being directly linked to the business’s initial client value proposition. That’s why the proposition must be carefully thought out to start with. A proposition that is focused on investment outcomes is asking for trouble.
“There’s nothing you can do about investment returns,” Stephens says.
“And so if your value proposition is about investment returns, and then [in] the review process the news about investment returns is all bad, then there’s nowhere where you can go, really.
“The more effective client review process looks at the outcomes that the client is looking for.
“It’s not necessarily good news either. But if the client wanted to retire at 60 and they wanted a million dollars or two million dollars, and they’re not going to have that amount of money when they’re 60, there’s only two things they can do. They can either save more money or they can work a little bit longer. There’s not much else you can do.
“But again, from what we’ve seen in terms of the client responses and the surveys, they want to know about their financial situation. The review needs to be about their financial situation in totality, not just about their investments. An investment review is not a client review.”
Another issue businesses inevitably face is growth. A degree of scale is necessary, to achieve some economies. But, says Neill, “growth just for the sake of growth is a bit pointless, in my mind”.
“I do think that businesses are facing a scale imperative,” he says.
“I think the reality is the challenges that businesses are going to face as we move forward, around perhaps pressures on their revenues, and perhaps clients with increasingly complex demands and an increasingly complex and perhaps more regulated or tougher regulated environment, means they are going to have to get some scale to meet those challenges - whether it’s to drive efficiency, whether it’s to create diversity in their revenue streams, and whether it’s to have the sort of business to attract the young talent and afford to pay young talent.
“For all of these reasons, I think we are facing a scale imperative. I think businesses are going to have to make a choice around whether they stay small and niche – very specific – or whether they actually look to scale and become effective.
“I think the danger place is the middle ground because I think if you’re stuck in the middle of those two options, you may very well be severely challenged around the competition that you face from businesses that make one of those decisions.”
Neill says “growth always has to be focused growth”.
“There has to be a clear strategy around how you’re going to grow, how you’re going to manage that growth,” he says.
“[Scale] adds a layer of complexity around the management and expectations as they get bigger. So our business owners are faced with the dilemma of how they most effectively utilise the key resource in their business, which are their senior people. Are they managers or are they advisers, or are they directors of a large business with some executive support around it?
“So I think my personal view, and it has been for some time, is that businesses are going to have to achieve some scale to be as effective as they can to meet the increasing complexity. They need to be very careful how they manage that growth. And growth for growth’s sake, as I said, is pointless. If you’re growing profitability and you’re growing value, and you’re growing liquidity in the equities that you hold, then you’re on the right journey. But it’s going to need to be planned and executed effectively.”
Neill says small practices, perhaps built around just one planner, are not necessarily going to be unviable or unsustainable.
“Don’t read into my comments any denigration of the skill or the talent or the value that the individual interacting with the client has,” he says.
“The challenge is to ensure that you build the capability to deliver that advice and leverage the skill set and talent that individual has into other people that come through, because if you’re not able to do that, then the client will clearly recognise that the attraction that the business has for them to remain a client will dissipate when that person goes.
“And yes, businesses will always be highly dependent on the skill of their key people. The challenge is ensuring that that skill is able to be delegated, and filtered through your organisation, so the client perception is one that it’s the business that delivers the service. Sure, it’s going to rely on skilled individuals. It’s always going to do that. But the challenge is to ensure that they don’t see it coming from one individual and one alone.”
Neill says businesses in regional areas “do face some really peculiar challenges”.
“The nature of them is that they are generally built, even more strongly than city or suburban businesses, along the personal relationship characteristics of the key person in that business. And they tend to be smaller in nature, so the capacity to delegate that work to others who are skilled is limited.
“The question is, are they sustainable? I think they are sustainable, so long as the key individual remains involved. The challenge of course is what happens when that key individual may want to depart the operation. Can they convince someone else that they are able to replace that person and give the clients the same experience that they’re used to with that individual? And that’s not an easy exercise.”
