Author: Janine Mace

“Hope is not a strategy.”

This is how veteran practice consultant, Jim Stackpool from Strategic Consulting and Training, sums up the situation facing financial planners in the brave new FoFA, post-GFC world.

It is a sentiment shared by Forte Asset Solutions director, Steve Prendeville, who does not mince his words when it comes to the gravity of the current situation: “This is talking about survival.”

Practices are facing the ‘perfect storm’ of FoFA and a tough economic background. “Most mature practices are still operating 20 per cent below their 2008 level. This means they need to look at their business model,” Prendeville says.

“Any hope of a quick reversal is gone now after four years. You cannot accept the status quo. You need to break things down and go back to basics.”

The tough environment explains much of the recent merger and acquisition activity, with planning businesses seeking scale to drive profitability. “When there is no organic growth, you need to be looking for inorganic growth,” Prendeville notes.

He believes the pressure on practices is unlikely to lessen any time soon and describes the current environment as “hyper-competitive”.

With extensive experience in business consulting to both accounting and financial planning practices, Peter Knight, from Knight Partners Business Accountants, agrees that professionals in the financial services industry face unprecedented challenges.

“The average age of financial planners and accountants is around 55 so they are often resistant to change, but in this environment they are not able to not do it,” he says.

While recognising traditional habits are hard to change, Stackpool believes planners need to recognise they are operating in an environment which is “fundamentally different” to the past and need to act now to remain profitable. “With FoFA and the new accountancy standards in 2013, change will continue. The world is not returning to the pre-2007 landscape.”

He argues planners need to accept the changes. “People have been venting their spleen at the new legislation and practices, but it’s not going to change. For many planners, their business model is on broken ground.”

In search of profitability

While transformation to ensure profitability is essential, the question is how to achieve it. The first step is to undertake a searching review of the practice, its owners and its business model.

“Planners need to look at every part of the value chain. Taking a business-like approach is absolutely essential in an environment where it has never been as hard,” Prendeville says.

Although vital, reviewing the practice from the ground up is not always a comfortable task, notes Fiona Mackenzie, associate director at Macquarie Practice Consulting.

“It can be challenging to look at the legacy issues in a business, such as the client base and the business’s operations. However, practices need to take stock as this is a very labour and relationship intensive business,” she says.

Stackpool argues it is not a time to be fainthearted. “You need to change how you behave and your mindset. This is not some new tool or script. You need a focus that is laser-like on the client, especially at the moment.”

However, a key question planners need to ask themselves is whether they are prepared to put in the work required, he notes. “Do I have the energy for this transition? Am I up for it, as it’s not easy?”

Prendeville agrees: “Over the past four years it has been very draining, so business owners need to take a personal inventory and ensure they have the energy to continue and make the necessary changes.”

Once they make this commitment, he believes a business-like approach is essential, as the luxury of knowing new business will come through the door no longer exists.

“Owners must manage their business as a business. The practice needs systems and workflow processes to provide clients with a standardised experience,” Prendeville says.

“The increasing focus on customer service and fee-for-service means there is a need to segment the client base and take the McKinsey time-in-motion approach. You need to look at the cost of delivery on a per client basis.”

He believes practices need to meet very specific benchmarks if they want to remain profitable. “The margin needs to be more than 35 per cent. This is the optimum level if you wish to maintain the capital value of the practice.”

Prendeville argues profitability will become a key determinate of the value of planning businesses. “EBIT needs to be at 35 per cent to maintain the value of the practice. Profitability will impact on the multiples achieved during any sale and high profitability will lead to higher multiples.”

How to analyse a practice

While undertaking a business review sounds simple, knowing where to start is not always obvious.

According to Knight, a simple way is to create an organisational chart of the practice under headings such as marketing, operations/product and finance/accounting. “These are the areas to look at in 80 per cent of businesses and it gives you a structure to approach the review,” he explains.

It is then possible to review the tasks (such as timesheets or preparing billings), which come under each heading. “You then ask how it is done and can we do it better? Under the sales heading for example, what are the authorised representatives’ activities and what are they doing to achieve their targets?”

From there think about what can be changed or restructured, Knight says. “The big question is if we started again from scratch, would we build the same business?”

He believes a key tool in lifting profitability in a professional services practice is improved productivity, but cautions this cannot be imposed. “You need to talk to people to get them involved and participating.”

With improved productivity increasingly important, a detailed analysis of every member of the practice to ensure they are efficiently performing their allotted role is essential. “You need to closely analyse roles and who is doing what to ensure it is a good match,” Knight notes.

In his experience, professional services businesses consist of “finders” who are responsible for new business, “minders” who manage relationships and “grinders” who enjoy technical tasks. “A lot of the role in the past few years may have been ‘minding’, but now people may need to become ‘finders’ again,” he says.

Examining each aspect of the business includes the basics. “Productivity and time management are increasingly important and need close attention,” Knight counsels.

He believes planners need to focus on time management and suggests putting an estimated finish time next to items on their ‘To Do’ list, so they can map out their day and see what realistically can be achieved in the available time.

“Get team leaders to do this with their team members in the morning and then check at the end of the day to see how they have gone and what remains to be done,” Knight says.

Mackenzie agrees productivity and efficiency are vital to profitability. “When planners are putting plans together, they need to be streamlined and disciplined in using templates to increase the efficiency of production,” she says.

“Documenting plans is a large piece of work and it needs to be done very efficiently.”

Benefitting from technology

Although focusing on personal productivity is essential for improved profitability, new technology is also important.

Prendeville believes this can provide an important bottom line benefit. “Technology will help customise delivery and growing technological innovation will lead to increased profitability,” he says.

“There will be significant liberators through new technology, so practices can maintain and even increase their margin from clients.”

Growing dissatisfaction with available planning technologies is encouraging development of new offerings that improve asset allocation, automate the production of SoAs and enhance report generation.

“The planning industry has not had a seamless front to back-office, but the increased arrival of streamlined solutions will change all this,” Prendeville says.

“The dominance of key software products has homogenised advice, but now you need a client-centric approach and this will be available via new software offerings.”

Mackenzie agrees: “Planners need to get the back-office working really well and ensure the IT system is being utilised well so more time is spent on client relationships.”

Doing the numbers

When it comes to the operational nuts and bolts of practice profitability, Knight believes the first step is simple but important. “Do a budget and a cash flow statement,” he advises.

“If the world is as scary as it seems, it’s important to see what things are likely to look like. Do the exercise and then have the conversation with the partners or your life partner and ask, ‘What are we going to do about it?’.”

This analysis will encourage discussions about necessary changes. “The only way to increase profitability is to increase sales or lower expenses, but you need to identify how to achieve that,” Knight notes.

Although lowering expenses is often an easy solution, it is not always the right one, as some expenditure – such as marketing costs – may need to go up, not down. “You must watch expenses, but you need to be smart with what you do and how you spend,” he notes.

Prendeville agrees: “Ensure you have personalised marketing and communications and don’t take the accountant view that marketing is an expenditure. It is an investment.”

Mackenzie believes there needs to be a forensic examination of both revenue and expenses. “Every part of the business can be looked at to improve profitability.”

This includes the level of staffing in the practice.

“People are part of the expense line, so you need to consider what their utilisation level is. This may need to be reviewed, as utilisation is often only 60-70 per cent,” Prendeville notes.

“Hard times call for hard decisions. It is increasingly evident that practices may need to downsize.”

However, it’s not about a ‘slash and burn’ mentality. “You need to focus on it, but you also need to focus on maintaining staff relationships and morale. This is easy to let slide, but it needs to be looked after,” he cautions.

Stackpool is another who believes employment expenditure needs to be reviewed.

“You need to review productivity. The return should be $200,000-$250,000 per full time equivalent (FTE) in the business. With $200,000 per FTE, that means $1 million plus in turnover equals five people,” he says.

“A lot of practices are carrying people in the hope the sun will shine again, but if the practice is staying below $200,000 for an extended period, then its future is doubtful.”

The $200,000 benchmark is one Stackpool has used for over 20 years and in his experience, better advice firms currently average $750,000-$1 million revenue per adviser. “The best model is to go for quality people, not quantity of people,” he says.

Another area to reconsider is the practice’s office.

“Premises is the second biggest expense, so you need to ask if you can do something smarter in this area, such as sharing, for cost mitigation,” Prendeville explains.

“Cost savings needs to be considered. In the absence of income growth, you need to look for savings.”

Clients under the microscope

Improved profitability will also come from evaluating the client base, Mackenzie says. “Planners need to focus on who the practice will concentrate on and how it will do it.”

She believes practices need to take a very hard look at their client base, as during the set-up phase they often took on almost any client, but now they need to reconsider that approach.

“They need to analyse their client base, as often half the clients are not profitable. They also need to talk to staff about identifying the ideal clients and about succession for those who are not in the sweet spot,” Mackenzie says.

Stackpool agrees clients are an important part of the profitability equation. “There are a number of levers that can be pulled in the practice. One lever is to decrease the numbers in the client base, as a large number of inactive clients reduces the return per client,” he explains.

“You need to use a client segmentation model to determine what is the return per client.”

Practices also need to carefully consider whether or not some types of business, such as corporate super, are profitable enough to warrant retention, Stackpool explains.

They also need to recognise traditional rules of thumb are changing. He says the “magic number” is now 40 per cent per client per year, with the revenue split being 40 per cent profit, 30 per cent for overheads and 30 per cent for wages. (This includes a normalised annual wage for principals of $100,000-$150,000.)

Stackpool believes a profitable practice needs to be realistic. “You need to recognise some clients represent the past and some represent the future,” he says.

“You also need to accept you can’t be there for everyone. Every client deserves respect, but not everyone deserves service.”

Getting it in the door

While improving the numbers and productivity are vital, winning new business is also essential.

Practice experts agree ongoing marketing and promotion have an important role to play in building profitability.

“You still need to do it. Planners need to go back to how they started the business in the 1980s and 1990s. It’s about getting your message out,” Prendeville notes.

“You need to understand how clients get your message and how to stand out. You need to give clients more information and it needs to be more personalised and tailored.”

Knight agrees this is vital, as technology is lowering barriers to entry and radically changing the operational aspects of many professions. In the accountancy profession for example, practices are starting to offshore routine tax and compliance work to Malaysia for completion by Australian-trained accountants.

“Practices need to reassess who their competitors are. They may not be other financial planners, they may be SMSFs, banks and accountants. So what does this mean? Your competitors may not be who you think they are,” he notes.

Mackenzie believes it is important to focus on the fundamentals of practice marketing.

“Be clear on what the client value proposition is and who the target market is and how the business addresses their needs. Getting this right is important for the practice’s marketing and the type of messaging it uses,” she says.

“It also increases your confidence when talking to clients. For staff, it highlights that these are the things which are important in the practice, such as whether it is ‘high touch’ or has a quick turnaround time.”

Mackenzie also recommends auditing the practice’s marketing collateral, noting it needs to be very professional and aligned to the business’s goals. “Ensure your website is up to speed and consistent with everything else in your marketing.”

However, when it comes to marketing expenditure, Knight cautions that careful monitoring is required, as the goal is getting a signed authority from the client, not a huge number of hits on a website or tweets per day.

“Marketing is an area of massive waste and people hide behind strange measures such as brand awareness, but in a small business it’s about getting customers to sign up for the service.”

What is the average?

According to Macquarie Practice Consulting’s 2012 Financial Planning Benchmarking Report – The Business of Advice, the average practice looks like this:

* $93 million – funds under management

* 481 – clients

* 185 – clients per adviser

* 69% – active clients (contact level once per year)

* $1,710 – revenue per client

* $316,350 – revenue per adviser

* 87 – clients per employee

* 2.6 – advisers

* 0.6 – paraplanners

* 1.6 – support staff

Top tips for improving profitability

Undertake a detailed review of the practice and its business model.

1. Evaluate whether you have the required personal energy and drive to change.

2. Identify operational areas within the practice requiring improvement or restructuring.

3. Ensure appropriate systems and workflow processes are in place and fully documented.

4. Evaluate the practice’s performance against industry benchmarks and identify areas requiring improvement.

5. Look for ways to improve personal productivity and time management within the business.

6. Review new technological offerings that may improve productivity.

7. Review staff utilisation and carefully evaluate employment expenditure against revenue.

8. Consider alternative options for the practice premises.

9. Carefully evaluate the client base and return per client.

10. Refocus on marketing to win new business.

11. Focus on the clients and their needs.

Source: financialplanningmagazine.com.au