The future belongs to the professionally managed

David Haintz

By

April 20, 2017

What is the difference between a financial advice practice and a business? And what does it matter?

In the recent past, there has been much said about the impact of technology on the future of financial advice. Many portray the demise of the human adviser as inevitable. This makes for bold headlines but, in my view, fails even the most modest level of scrutiny. Whilst interesting in a tabloid sort of way, the robo debate clouds the more meaningful discussion of what the financial advice business of the future may look like.
My view is that whilst there will always be room for smaller lifestyle practices, the dominant model of the future will be growth-oriented, professionally managed advice businesses.

Over the last 28 years, I have worked in or closely with firms at different points on this journey and the vast majority grapple with glass ceilings and what’s next. Many, but not all, set out to grow. But they almost always hit walls at certain levels. Those that want to move through the practice stages to become a business typically hit walls as they grow to, say, three employees, and then five, and then eight, and then 13.

There is certainly room for growth. More and more consumers will need advice, and whilst robo-systems may service that to some degree, there is a huge gap and, therefore, demand and opportunity will be there for professionally managed financial advice businesses. This is the direction of the evolving profession.

Decide whether you want it

So how do you define a professionally managed business?

In many ways, it’s more of an attitude than a result. Do they regard themselves as financial advisers in business, or business people running an advice business? If advisers don’t take their own business seriously, then it’s going to be hard for them to value the kinds of things advice coaches can deliver and provide to them. If we want people to grow and see the value, then they’re going to have to be able to implement and take advantage.

We all have to decide what’s important in our lives, and running a business is not appealing to many people. Many recognise that running a business isn’t their strong suit. It can be helpful to view your firm as part of your own investment portfolio.
When you start a business from scratch, there’s minimal cash flow. You scramble for revenue and you’re keeping costs down as much as you can. Eventually, some revenue gets going and maybe you start getting a couple pieces of technology or outsourcing a few tasks or getting a little support.

Then, slowly but surely, the business grows more and the cash flow improves. There’s a crossroads that most advisers reach – most subconsciously a few consciously – where there’s enough money to cover your lifestyle. You’ve got to a stable, liveable point. That’s always just a dream when you get started.

And then you’ve got a decision to make, – are you going to upgrade your lifestyle or are you going to upgrade your business? That is, are you going to take that extra money and say, “Well, I can invest this back in my business and do some more marketing or some more hiring or some more infrastructure or whatever I need to move the business forward”? Or, are you going to say, “Hey, I’m making more money. I’m going to go and enjoy making more money and go do more things that drive my lifestyle”?

Many practices understandably started off with the attitude that you eat what you kill. To push through walls we hit at five, eight, 13 people, a firm needs to take a more professional view.

The real question is whether or not they have individuals in the business who are skilled and dedicated to the running of an enterprise, just as they are skilled and dedicated to the serving of their clients. Those firms that tend to view the management of their practice as a nuisance or fail to instil the discipline required to develop talent, implement the agreed upon strategy, manage to profitability, become operationally efficient, etc., are not professionally managed. That doesn’t mean they’re not growing and attracting clients, but it does mean they are limited in terms of their ability to push through glass ceilings from there. For example, broadly speaking, an adviser can look after about 100 clients; it is hard to scale with just one or two advisers. Those firms that tend to be highly dependent on one or two advisers should not be described as professionally managed firms.

Reasons to grow

There are several key benefits to growth:

  • Attract and retain talented people
  • Achieve critical mass
  • Confidently implement premium pricing
  • Attract a higher valuation multiple.

Growth businesses most often also demonstrate
two other key benefits:

  • Ability to deliver greater value to more demanding clients
  • Working more effectively with external advice partners.

A business generating $5 million in revenue is not a $1 million business on steroids; it is a very different animal. The key differences between the two can be seen in the talent level of employees and the type of clients. Ten criteria that would mark a typical $5 million growth business would be:

More highly skilled and motivated employees focused on team and outcome

  • Clarity on vision and positioning
  • Belief that advice is the product
  • Clients totally engaged in the advice process
  • Work in harmony with other professionals
  • Multiple ownership
  • View talent management as a burning issue
  • Separate the accountability for sales and marketing
  • Innovative technology supports key business processes
  • Remuneration structure is based on incentives.

The advice industry began as transactional, and not the slightest bit client-goals oriented; well before managed funds were in vogue. Back then, it was a big thing to have, say, $10 million in assets. Then it became a big thing to have $100 million in assets. You didn’t see many billion-dollar businesses. But today, in the US as an example, there are about 650 firms with $1 billion-plus in assets under management.

That’s only one measure, but the point is that you can’t argue a $1 billion-plus AUM model is a practice – it’s a business.

Those who adopted the principles of professional management back then experienced that growth, and those who didn’t, suffered because of it.

Once a practices decides to adopt those principles, there are several changes that firms must make to seize the opportunity that awaits.

Being more professional means having key metrics for things such as productivity, efficiency and error rates, devising a human capital plan to help attract and retain key people by helping them define and achieve success, actively managing profitability, paying attention to the key metrics and ratios, and more.

Standardisation becomes essential. You have to implement processes and systems. Every new staff member can’t just do their own thing. Make the process for the firm so that’s what people have to follow. You can’t be adviser-centric, you have to be client-centric or process-centric. Advisers will eventually realise this means that to grow the firm will need to systemise the processes and customise the advice. Standardise everything – the way reports are created, the way people deploy technology, everything. Advice needs to be customised, but the process has to be standardised. There must be an obsessive focus on every part of the process. The standardisation is what lets you customise consistently for clients over time.

Systems are important, but they need to be automated, client-centric systems. If businesses want to grow, they need to separate the technology needs of running the business from those of producing client advice. Another useful way to view businesses is to consider the systems needed to ply the trade (the product systems) separately from those needed to manage customers and operations (business-management systems).

The customer relationship management of the future will not be the CRM of the past. What is needed is one source of truth – whether the firm is multidiscipline or not – shaping the industry from outside in, with the client and data at the centre.

In Australia, PractiFI, on the Salesforce ecosystem, is a great example.

Advisers didn’t get into this industry to be a manager or developer of people. They got into it because they liked helping clients, solving people’s financial issues and helping them with their financial lives. Totally understandable. However, financial advice firms, like all businesses, are composed of people, the processes they follow and the technology used to deliver the product. In this instance, the product is advice.
As business skills expert Michael Gerber said, “It’s not the unique things of a business that make it successful, it’s the business’s ability to do the ordinary things in an extraordinary way, and to do those things consistently, predictably, effectively, day after day after day.”


TOPICS:  business developmentbusiness growthprofessional management



David Haintz

About The Author /

David Haintz is founder and principal of business-to-business consultancy Global Adviser Alpha. He is a CFP and a past director of the Financial Planning Association of Australia (FPA), where he was instrumental in the push for professionalism. David has had a 26-year career with his own firm and subsequently became a founding director of Shadforth Financial Group. He departed Shadforth in 2015 and established Global Adviser Alpha.