Scarcity of adviser talent combined with a pressure on profit margins and growing costs makes it even harder to answer once a simple question: what advice business model is the one these days?
According to consultants in the sector, there are two types of advice businesses at the moment to look at when analysing the current market environment and each of them comes with a set of very different challenges.
The first type of business is the one which is in a relatively good shape, growing quickly and with plenty of client opportunities, where problems like “managing growth” are described as “the good problems to have” by Encore Advisory Group director Tom Reddacliff.
However, he warned, some aspects of these businesses will be also put to a test. According to Reddacliff, the businesses’ human resources capabilities, consistency of the processes and the strength of the balance sheets are the three things that need to be sorted out.
“What I would see often in the advice business is that different advice pods operate differently which creates a lot of challenges for the back-office staff and tests systems,” Reddacliff tells Professional Planner.
“They are growing on the top line but it is not turning into the profitability they want bottom line. But there are also businesses that do the opposite of what I am describing and these businesses really nailed harnessing their HR capital.”
At the same time, there are many businesses which are on the other side and are usually smaller, or even “a bit stuck”, with costs significantly going up – it’s these practices that need to focus on operating “really sufficiently” and “managing your costs really well”, Reddacliff says.
Business model of the future
Speaking about the business model of the future, Reddacliff says he has been observing the arrival of a super firm type-of-business to the financial planning space and he expects it will dominate the landscape in advice.
“The ultimate business model [what we are dealing with now] is the emergence of privately owned, big solid multi-partnered scalable firms and that is the business model of the future,” he says.
According to him, financial planning is starting to look more like other industries in this regard even though it has seen traditionally a prevalence of a single owner business and still almost half of advice businesses have this model in place.
“But I do believe in terms of business model that this is absolutely the model of the future, the one that is growing, typically it’s got a solid balance sheet, it is interested in tapping businesses in,” Reddacliff says.
Elixir Consulting founder and managing director Sue Viskovic agreed that single advice practices are becoming “increasingly difficult to run” business types and they make sense only if those businesses are on a fast growth trajectory with plans to grow.
“There is a whole host of reasons why having one adviser in a practice is absolutely a difficult model to do nowadays,” she says.
“If there is only one adviser in the firm, there is a significant risk because if that adviser cannot work for a period of time, [those practices] cannot deliver services and we also know how difficult it is to get to critical mass when there is only one revenue generator in the firm.”
Viskovic also confirmed there were “a lot more mergers happening” across the financial planning industry and this includes the so-called super firms buying smaller practices.
“But we are also seeing the like-minded smaller firms seeking each other out, merging and joining forces together,” she says.
The mergers are often very complicated processes which come with a set of their own challenges but one pivotal point for many advice firms, according to Viskovic, is separating management responsibilities and tasks.
“When they move from the principal adviser trying to run everything and being an adviser at the same time and try to separate out that role then it is absolutely a game changing tipping point,” Viskovic says.
“The firms that we spoke to [in our research] said that was the moment that enabled their significant growth and optimisation of their back office and a lot of people see that as a cost… but we have seen that [separating out those roles] does have an impact on profitability and the ability for the firm to grow because you have people focused on client work and people focused on running the business and that works together. It is very hard to be wearing all the hats.”
Hi Oksana, many thanks for such an insightful article. May I offer some advice, however, to the single owner practices as they read yet another industry buzz phrase ‘the super firm.’ Just like the phrase ‘tech stack’ this will distort and distract financial planner owners from the fundamentals of running a small business. We must be helpful in our messaging and promote the benefits of running a Business System that will provide compliance, client growth, staff opportunities and profitability. Let’s not further complicate the effective management ideals of a financial planning business. Your business system comprises written procedures, checklists and templates, all of which can add immense operational efficiencies. Furthermore, we now have an established offshoring service offering that magnifies these same efficiencies. Merging two planning practices will reduce key person risks, but the first step for our industry is to provide quality small business education that then allows for consolidation of practices with similar cultures and values, if that is desirable. Back Office Hero has witnessed dozens of practices around Australia that, for what ever reason, have had difficulties in writing procedures, using existing technology or outsourcing repetitive tasks and the owner works 50 plus hours a week. Practice owners have weathered the compliance wars, a GFC and a Royal Commission and do not need the distractions of yet another buzzword to lead them astray.