In its whitepaper, The Profit Gap: The Cost of Operational Blind Spots in Advice Businesses, Effortless Engagement found that many firms that appear to be operating well have hidden inefficiencies within their operating model costing around 11 per cent in profit potential.
While the financial advice profession has been hit with increasing costs and suffered significant losses in talent in recent years – and potentially even greater exits that have yet to be understood thanks to the 1 January education deadline – the high level of demand for advice has largely meant practices have still been able to rake in profit.
Indeed, according to the paper neither talent nor lack of demand from clients is the culprit, instead this profit gap is coming from “subtle misalignment in how work is structured, capacity is deployed, opportunities are converted, and strategy is translated into day-to-day execution”.
“On paper, many advice businesses look healthy,” said Dean Lombardo, founder and chief executive of Effortless Engagement.
“But when you look beneath the surface, friction inside the operating model is quietly eroding margins and limiting enterprise value. This is what we define as the profit gap and for most leaders, it remains invisible.”
Among the report’s findings is that the blind spots can have a significant financial impact.
It makes the example of a $5 million advice business operating at a 28 per cent profit margin – or around $1.4 million in profit annually – with the research showing that it could have a potential missed profit of $550,000 each year.
“Over time, this compounds into more than $3 million in unrealised enterprise value,” it said.
According to the report, there are four areas where the “leakage” happens, namely organisational misalignment, workflow complexity, capacity misuse, and conversion friction.
“While the four leakage areas are presented separately, the Profit Gap is inherently systemic and integrated. There issues reinforce one another and compound over time,” the whitepaper said.
“Organisational misalignment weakens standards, accountability and commercial discipline. This misalignment manifests operationally as workflow complexity and adviser variance.
“Complexity absorbs capacity, leading to capacity misuse and rising direct costs. Misused capacity and inefficient workflows slow opportunity progression, creating conversion friction. Delayed revenue and margin pressure further erode discipline, reinforcing the cycle.
“Addressing any one area in isolation may deliver short-term improvement, but sustainable profit recovery requires an integrated approach.”
According to Effortless Engagement, these losses are not inevitable, and the profit gap can be reversed.
“This is not about asking people to work harder or chasing growth at any cost,” Lombardo said.
“It’s about designing a business that works as effectively in practice as it does in theory. When that alignment is achieved, profitability and enterprise value follow.”
