As we approach the end of the financial year, it’s time for firms to consider their next annual budget.
Profitability doesn’t occur organically; it requires careful planning, which must be revisited regularly. Each year, a thoughtful budgeting process is essential to align business goals and set clear expectations for advisers. Fortunately, setting budgets in an advisory firm is relatively straightforward due to the predictable nature of recurring service agreements and the compounding growth in a market where demand exceeds supply for new advice clients.
Budget planning usually goes hand-in-hand with thinking about team capacity and productivity. When team members see how hiring decisions affect the business and their own day-to-day roles, they’re often more motivated to work smarter and find better ways of doing things.
- Most advice firms aim for earnings before interest and taxes (EBIT) between 30 per cent and 40 per cent. Our Advice Operations Research report found an average target EBIT of 32 per cent.
- High-performing firms in Australia achieve around 40 per cent EBIT.
- Yet, the average advice firm typically achieves an actual EBIT of 22 per cent to 24 per cent.
- Rising costs are a universal challenge for every business, with financial planning firms particularly burdened by increasing wage costs, ASIC and CSLR adviser levies.
It’s not uncommon for firms to think that when advisers feel busy, it’s time to hire another adviser. However, why add a $200,000 to $300,000 per annum cost (factoring in employment costs, levies, licensee fees, and other on-boarding costs) if those advisers aren’t close to generating $800,000 to $1 million in annual revenue each? This is also assuming that one can be hired in a tight employment market.
Setting and achieving benchmarks for high-performing firms
Our research has found quality advisory businesses in today’s market are not only generating EBIT margins of 35 per cent to 40 per cent, but are generating revenue per adviser of $800,000 to $1 million.
These firms have a team-serviced approach for clients, which enhances service quality, reduces key person risk, and enables each adviser to serve more clients. They also apply consistent processes across the business, leveraging technology and deploying a global team where tasks are allocated to the most appropriate roles.
Achieving these benchmarks involves strategic planning and thoughtful implementation of key strategies or tactics.
Three key strategies to do this include ensuring there is an effective fee model, releasing legacy clients from service agreements, and giving advisers clear team or individual targets.
We maintain that there’s no one-size-fits-all pricing model that can be rolled out into every advice firm; it must be custom-built for the firm and its clients. However, a good model includes:
- A fee calculator updated annually to reflect changing business costs due to growth and rising expenses.
- Base fees that are forensically calculated to cover costs and target profit margins.
- A value overlay variable per client, based on complexity and net worth, is important for several reasons. Clients with higher asset and income levels generally receive a higher net return from great advice and have the capacity to pay. Additionally, this ensures the firm is compensated for the additional risk involved in advising them.
The client fee calculator is used annually to renew service agreements at updated fees.
The fee charged to new clients each year is also kept up to date. With the current supply and demand ratio in financial advice, very few advisers are finding pushback from new clients when quoting their minimum establishment fees of $5000 and above.
Many of our clients are uplifting base ongoing fees by at least 5 per cent this year to match rising costs.
When it comes to legacy client agreements, mature firms find some of their long-standing clients move to low-cost, DIY portfolios and stop paying for active management and advice.
It’s often better for these clients to have the ability to come back when they need help, rather than keep paying fees that no longer make sense. This change in service delivery also frees up space for the advice team to bring in new, higher-value clients with more complex needs.
To make sure advisers are given clear targets the firm must know how many new clients they’re seeking in order to meet their business goals, and allocate them between team members according to their capacity.
Where experienced advisers have a ‘full book’ of clients, strategies are often deployed to transition existing clients to other advisers in order to enable those most capable of winning new business to do so.
Considerations for next year’s budgets
When planning your next financial year budgets, consider these key factors to ensure financial stability and growth:
Staff pay rises: With CPI increases in the high 2 per cent range, failing to raise wages by at least this amount effectively results in a pay cut, as it reduces employees’ purchasing power. You’d be surprised how often we see firms lose great quality staff because they are enticed away by higher wages. Either the firm didn’t keep up with market rates or mistakenly believed they couldn’t afford higher salaries. This results in a significant loss of loyalty and productivity when all they really needed was to run a more efficient business and get their pricing model right.
A recent example showed a firm who needed to employ a new client service officer (CSO), only to discover they were paying their current team well below market.
Not only did they have to find another $17,000 to top up what they’d budgeted for the new hire, they ended up increasing their current staff salaries by approximately $78,000 per annum, but it at least turned out to be a very successful turning point in their business.
- Budgeting for additional team members: If you need additional team members to serve a growing client base this year, be sure to budget for costs beyond salary and super, such as hardware, software licenses, insurances, and office space (plus adviser levies and licensing fees if they’re an authorised representative). If adding full-time salaries in non-income generating roles is challenging, consider what tasks your team can pass on to an offshore team member.
- Rising costs: Some firms take a forensic approach to estimate their rise in expenses, while others apply a percentage uplift. Don’t forget to allocate funds for CSLR and ASIC levies. Consider the impact on your PI premiums if making acquisitions or experiencing significant organic growth. Review your profit and loss for potential savings, especially unused software subscriptions.
Impact of fee uplifts and client changes: Whilst managing your expenses is important, the greatest results are usually achieved by focusing on revenue. When setting income budgets, consider the impact of fee uplifts, client ‘downgrades’, and new clients.
- Shared goals
When we support coaching clients with budget planning, we typically collaborate with the management team on expenses. At the same time, advisers and senior operations staff are involved in setting income targets.
By working through enquiry levels and client capacity, the team builds a more accurate forecast and feels more engaged in the process.
If the projected EBIT doesn’t stack up, you’ve already got the right people in the room to troubleshoot and shape a plan they’ll help deliver.
We find that most of our firms share their revenue budgets with their teams and regularly track their target versus actual revenue. Some firms choose not to share expenses (and therefore profit) figures with their team, but we find that those who do usually end up with team members who are also conscious of eliminating wasteful spending, particularly those who share in a team bonus if the business meets its milestones.
When setting revenue targets, it’s generally helpful to convert the revenue figures into client activity, so that they focus on the activity that will impact the numbers, rather than the numbers themselves.
Sue Viskovic is head of consulting at Elixir, a specialist consulting division of Vital Business Partners with a team of experienced coaches located around Australia.
