With the FoFA laws being debated once again, it is a herculean task for any financial advisory business to construct a formula for profitability, whilst navigating through layers of compliance that range from law to regulatory guidance to best practice.
Irrespective of what the outcome is relating to grandfathering, the costs of doing business in this industry is already high and is likely to keep rising.
Staying ahead of the ‘profit’ curve revolves around reducing costs and increasing revenue. With profitability in mind, set out below is a simple profitability prism for advisers. By implication, the prism needs all three sides in order to be complete:
Improve practice support and reduce opportunity cost
Many advisers would agree that a lot of the work (administrative or otherwise) involved in the provision of financial advice can be made more efficient.
In economics 101 terms, this is the concept of comparative advantage pioneered by Adam Smith: “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it off them with some part of the produce of our own industry, employed in a way in which we have some advantage.”
Unsurprisingly, the industry’s investment and reliance on software, paraplanning and practice management support is logically increasing at a rapid rate. If an adviser can use the hour that he or she spends on administrative/compliance matters to see more clients, their practice could be that much more profitable.
Of course, not every business is at the stage where investments in these types of infrastructure can be made. In these instances, many may consider joining the right dealer group that can provide them with these infrastructure (subject to the portability of their grandfathering benefits).
Minimising risk exposure
Minimising risk exposure is, in essence, about minimising risks of regulatory action and claims. In FoFA land, advisers now face a higher burden of proof as well as a higher level of product justification under the best interest duty. Having in place a strong compliance system is therefore an important aspect of de-risking your business.
For example, on the topic of file notes – advisers often put forward the ‘commercial reality’ argument that they do not have time to document discussions with the client as that time would be better spent seeing clients. In saying that, however, it could be said that for every client who wished they had taken out insurance when an accident has happened to them, there is an adviser wishing they had written a file note of a conversation that might have saved them in a FOS claim. The cost of claims (settlement payouts, excess payments and increased premiums), including the opportunity cost of dealing with claims, can be mitigated through good compliance and clear communication to the client.
Working with good people
Whilst every business will have their own hiring philosophy and metrics by which a good staff member is judged, in the context of a financial planning business, it is also imperative to look beyond how much business a person can write for you.
Critically, in FoFA land, if a person does not embrace the demands of the higher regulation, what he or she represents to your business is not necessarily revenue, but additional risk with every advice he or she writes. Ideally, every business would want ‘a safe pair of hands’.
As above, having only two of the three sides of the prism is less likely to lead you down the path of success. This is because:
• whilst having good people and good compliance may reduce the risks of your business, it may not grow your business as quickly as you would like to;
• whilst having good people and good support may allow you to grow your business at faster rate, you may be doing so at the risk of non-compliance with the law due to gaps in your compliance process; and
• whilst having good support and good compliance may grow your business at a faster rate, if your staff do not embrace your company culture and compliance processes, your business infrastructure and controls may not be enough to save you from claims and complaints.
Perhaps the best way to summarise the profitability prism is “find good people and good support to meet the demands of the regulatory landscape and to take your business to the next level”.
