In many fields of endeavour there’s a gap between the very best performers and the rest of the pack, but in financial advice that gap appears to be a gulf.

The performance difference between so-called high-performing firms and other advice firms is real and it helps to explain why the investment capital looking for opportunities to buy into advice businesses is choosy. The difference between a merely good asset and a great asset is stark.

As Professional Planner reported last week, Macquarie Business Banking’s 2023 Financial Advice Benchmarking Report reveals that the differences between the best firms and the rest is not due to some fluke or good fortune on the part of the firms’ owners. It’s due to considered planning and fine execution.

And as a result, high-performing firms generate three times as much profit per business owner compared to the rest of them.

The report distils the secret of high performance down to five key things:

  • Defining and documenting a value proposition.
  • Attracting and retaining great people.
  • Ensuring client-facing people are doing the most valuable work.
  • Charging appropriately.
  • Having a clear strategic direction.

Some of these things are interdependent. A firm can’t easily charge appropriately for the services it delivers if its value proposition isn’t clear, and understood by clients. It can’t necessarily have its client-facing people doing the most valuable work if it hasn’t also hired and retained great people in the business to support them.

The Macquarie report says nine out of 10 high-performing firms have a clearly documented value proposition, compared to three-quarters (76 per cent) of other firms. But the existence of this documentation is only part of the story. High-performing firms with such documentation generate on average about $84,000 (or 27 per cent) more profit per business owner than other firms, even though they also have their proposition documented.

Like any plan, having it written down is one thing. Executing the plan is another thing altogether.

The Macquarie report was the second in the space of a couple of a weeks to highlight the differences between good and great advice businesses.

National Australia Bank’s 2024 Accounting & Financial Planning Report concludes that the advice profession overall has a bright future, but clearly not all advice firms are created equal. The report says two in 10 (21 per cent) advice firms reported satisfactory growth in the previous 12 months, while almost three in 10 (29 per cent) of firms experienced very good revenue growth.

Looking ahead, notwithstanding business owners’ natural optimism, almost as many firms (41 per cent) expect very good revenue growth in the next 12 months as expect only good growth (44 per cent). Another 15 per cent expect only satisfactory growth.

(In this context, growth is in the eye of the business owner: the NAB report does not put percentages on “good”, “very good” and “satisfactory”.)

Three things capital is looking for

Earlier this year at the Professional Planner Advice Practitioner Summit, Koda Capital chief executive Paul Heath said the three main things investors look for in potential acquisition targets are profitability, professionalism and succession planning. Heath knows; he’s been on both sides of transactions in the recent past, acquiring a firm and attracting investment into Koda.

(The 2024 Advice Practitioner Summit takes place in February next year – registrations are open now.)

At the same forum, Merchant Investment Management Australian principal David Haintz said a clear sign of a heathy and flourishing business, and the starting point to attracting capital, is to have clear and documented plans for the future of the business.

Speaking to Professional Planner earlier this month, Merchant Investment Management’s US-based executive chairman Mark Spiker said the best financial advice firms around the world are moving beyond offering traditional investment activities (asset management and allocation) to offer a broader range of services, including tax strategy and estate planning. They’re also accessing best-of-breed technology. 

Those trends generally support some of the key success criteria identified Macquarie’s report. For example, a broader range of services suggests a value proposition that’s had some thought put into it. And technology can free up time to allow client-facing staff to do more of what they do best, more efficiently.

Of course, how hard a business owner drives the business and the demands they make of staff is an entirely personal and subjective call. Not all business owners want to, or are comfortable, squeezing every last cent of revenue or profit from the business. Some firms are good rather than great, by design.

At the Advice Practitioner Summit, Diverger head of mergers and acquisitions Wayne Marsh summed it up well.

“Some people are happy running small firms, capping their revenue, not looking for growth, playing golf, working the golf handicap,” Marsh said.

“And there’s nothing wrong with that.”

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