It’s hardly breaking news to say that the environment for financial planning practices is a challenging one. Issues such as the large institutions divesting their wealth management businesses, ongoing regulatory and legislative change, the conduct of some ‘bad apples’, and the rise of fintech continue to challenge the industry.
What might come as a surprise, however, is learning how few planning practices are actively taking steps to deal with these problems and prepare for the future.
Put simply, the impact of issues such as these will only accelerate in coming years and financial planning practices that aren’t prepared for this impact are at risk.
A recent report by Business Health on the state of Australia’s financial planning industry analysed the strengths and weaknesses of the industry, and how businesses are responding to the challenges of the current environment. The report is based on information from 226 firms that have taken the HealthCheck between January 2015 and December 2016.
It is a sobering reality check.
For instance, just 35 per cent of practices have a three- to five-year strategic plan for their
business, while a similar number (38 per cent) have an operational business plan covering the
next 12 months.
Given the continuing changes in the industry – including ongoing regulatory and legislative changes, as well as the social and demographic shift underway in Australia – it seems remarkable that two-thirds of practices have no kind of plan for the future of their business.
It’s especially so because Future Ready VII shows that having a clearly documented long-term strategic plan is linked to improved profitability. Those practices with no strategic plan have an average practice profit per principal of $178,110, while those with a clearly documented plan have a profit of $345,890 per principal.
Another extraordinary finding is that 56 per cent of practices with a single principal reported that their business could not operate at all without them. Essentially, what they are saying is that the business is valueless without the principal, and when that principal decides to retire – or is no longer able to work – the business will simply shut down.
Statistics such as these reveal a concerning lack of preparation for the future amongst financial planning practices.
It’s not all doom and gloom. Many financial planners are optimistic about the future, with the majority expecting to increase their practice revenue over the next 12 months (primarily through fees) and forecasting an increase in practice profitability.
The vast majority (80 per cent) also expect to increase the number of clients they have, and almost half are planning to add more support staff.
Certainly these are realistic goals, thanks in large part to Australia’s complex superannuation and financial system. More and more Australians could benefit from financial advice and, therefore, the potential client base continues to grow.
Technology’s role in planning
But without a strategic plan, just how financial planning practices intend to achieve these goals is unclear.
Developing such plans is easier said than done. With so many demands on financial planners’ time, making space in the day to develop a business strategy or marketing plan seems like a luxury, not a necessity.
But simply saying “I’m too busy” isn’t going to make the problem go away. So how do advisers find the time?
One answer is better use of technology. Advisers could be making much greater use of technology to help address the kinds of issues they are facing.
As the Future Ready VII report makes clear, technology is still a key area advisers need to address in order to improve their relationships with their clients, the depth and breadth of services that they offer and, ultimately, their own profitability and business success.
The good news is, those practices that are able to use effectively the benefits available through technology, such as the latest client management programs, are generating a far higher level of profit per principal, on average, than those who are still managing their business on dated technology platforms.
As an example, practices using paper-based files to record client details made a profit per principal of $119,300, while those using an automated client management system recorded $268,579.
Technology can help planning groups improve their services so they can efficiently deliver more successful outcomes for their clients. The right technology can make the basic running of the practice easier and more efficient. For example, a practice might use an automated workflow management system to make appointments, prepare plans, sign documents and make business lodgements. Yet almost one-third of practices still aren’t using such technology. And of those that do, only 32 per cent have workflow management that is fully integrated, so that their modelling, ongoing management and review processes all talk to each other.
Communication is vital
Communication is key. Future Ready VII shows that there is a direct correlation between client communication and referral business; where clients score the communication they receive from their adviser highly, they are far more likely to have already referred others to the business, and they also have a much higher propensity to do so again in the future.
Yet, over the past two years, the number of times practices communicate with their top clients during the year has fallen, which is of great concern.
Just over 1 in 3 practices communicate with their best clients more than 10 times a year, either via written or electronic text, telephone, group functions or face-to-face interviews.
And only 28 per cent meet face to face with their “A” clients once a year to review their current personal circumstances and their progress to plan.
Profitability is significantly higher among those practices that have a number of key client touch points.
It is clear that advisers can use technology to assist their relationship-building activities with clients and meaningfully engage with them on a personal level, by facilitating communication, personalisation and efficiency.
According to Business Health, the key attributes of the average planning practice are:
- Gross practice revenue
- “Notional” profit per principal
- “Notional” practice profitability
- Number of individual clients
- Funds Under Advice/Management
- Funds Under Advice/Management per adviser
- Total number of staff (including principals)
- “Notional” salaries bill
- “Notional” salaries bill as a percentage of practice revenue
- Clients per adviser
- Clients per support staff
- Support staff per adviser
- Average number of face-to-face client appointments per adviser, per week
- Money invested in marketing the practice
- Practices generating at least half their revenue from fees
- Practices not charging for plan/statement of advice preparation
- Practices formally surveying their clients
The question that all planners should ask themselves is are they currently average, below average or above average. And where do they want to be this time next year?
On the whole, the results outlined in the report show some areas of improvement but also a number of areas of decline or stagnation. The overall message is clear – businesses that invest in their people, technology and clients are more likely to deliver a profit to their principals.
Wayne Wilson is chief executive of knowITgroup.
