With so much focus on professionalism and education, practice principals can lose sight of the bottom line. ifa has enlisted the support of industry experts to show you how to build a more prosperous and scalable advice business.
These days you could attend a financial advice conference and easily forget the majority of attendees are small businesspeople.
The content at PD days and association-run events tends to focus primarily on technical knowledge, professionalism and textbook ethics. While these are important topics, practice principals and managers in the financial advice community often miss out on the crucial information they need to grow their business and better serve their clients.
The 2017 ifa Business Strategy Day deviated from the norm, focusing on the twin themes of profitability and scale. Delegates across four states heard from some of the country’s top business minds on a range of topics designed to help them build sustainable, growth-oriented advice practices that are inoculated as much as possible from the constant regulatory and technological change. Here we share with you some of the highlights of the roadshow’s top presentations, from building a scalable service proposition to getting the compliance gorilla off your back; deepening client engagement to increasing efficiencies through outsourcing; setting and exceeding profit goals to learning how to sell the value of advice; and seizing control of your business decisions so you can take advantage of emerging technology.
BUILDING A SCALABLE SERVICE PROPOSITION
Stewart Bell, founder and business coach, Audere Coaching and Consulting
Too many advice practices are structured around an old-school business proposition, therefore a ‘progressive offer’ is necessary to drive growth in a digital age.
When I look at financial services and at the topic of service propositions, I see a lot of propositions that appear to be differentiated – gold, silver, bronze – yet underneath they're pretty much the same. With where we're at in the digital world, this isn't cutting it for most clients and it's not cutting it for most advisers either.
I can talk about technology and suggest some of the tools and apps that make life easier for advisers, but the problem is you can grab technology, you can have a crack at it, it's going to make things better but it's not going to solve your problems. Because this isn't a technology problem; it's a business model problem and there is an issue with the way current service models are structured.
When I talk to advice firms about their service propositions, one of the three problems that consistently arise is they bring on clients with a promise of advice, yet as their business grows, it's often them as the adviser that becomes constrained. The business ends up owning the adviser rather than the adviser driving it and they become a prisoner within their own practice. Many firms have an offer but the reality is that clients can sometimes set the agenda.
They determine how they communicate with the adviser, they set the expectations and they choose, knowingly or unknowingly, how they want the relationship to work. This puts the adviser on the back-foot from day one. Another common problem I see is when an adviser puts together an offer and it's convoluted, undifferentiated and complex. The worst case scenario and the danger is that clients stop engaging.
Flipping typical advice models
If you think of most advice business models as a pyramid, most offers are built so that at the top, the clients get access to the adviser. That's where the primary contact is.
Underneath that you have a team who help the adviser with the management side of things. But let’s face it – clients go to management a lot less than they come to the adviser.
Underneath the management team, an advice business might have some resources. It might offer some webinars, some member sites, seminars or some downloadable tools and information but let's be honest, it probably doesn't get used as much and the adviser is the first port of call.
At the very bottom of most advice business models you may have some things that you charge additionally for, but most businesses will just bundle it all up together. This is what a premium advice offer is today. The problem is a lot of businesses I see are not charging a premium price for that. The trick is we have to flip the offer.
Instead, clients get access to the adviser but they don't buy the adviser. The adviser is there to help them when they need to apply information but not to explain the information in the first place. The management team does more of the heavy lifting.
Principles of scale
There are four key principles that underpin the idea of a scalable service offer. The goal is to break away from the idea of the adviser as being the central servicing element.
The adviser can't do it all and as the business grows, you need to protect yourself. Clients buy the advice, they buy your system and philosophy, but they don't buy the adviser.
If they do buy the adviser, the business begins to build with clear constraints that are going to bite. If an adviser finds it really hard to say no, then they should get into the habit of delegating the saying no. An adviser can give someone a copy of their schedule or calendar or diary, and what I’ve found is that other people are much better at saying no to people than I am.
Outsource the ‘no’ to others, give them rules and the adviser decides who gets into the VIP area. Principle two is that advisers have to stop giving clients a choice. A service package is not a choice, it’s a recommendation. Advisers are building a business that has a process behind it, a philosophy and a methodology, of which ongoing management should be a big part. Therefore to get the result, clients need to follow the process.
Clients need to understand that the process is something they need to follow over time in order to achieve financial freedom.
Principle three is centred on the fact that achieving financial freedom is a commitment and often is about behavioural change. A lot of behavioural change must be fostered by the adviser by providing benchmarks, accountability, expertise and help to get it done. When it comes to client behaviours, there are a thousand things that an adviser can't control so the decision on how to work with a client should include an assessment of what it's going to take to get a result.
Principle four is centred on a common error I see in advice businesses, which is creating the expectation that paying a fee means the adviser does everything. An adviser must get the client to meet them halfway and set boundaries for advice, letting them know exactly what the adviser does and what they do as a client is a huge part of the value equation. The means and mechanisms that the adviser uses to get their clients involved are crucial in order for the adviser to be able to show value.
PANEL: QUEST FOR THE HOLY GRAIL
Practice principals share their personal experiences of growth, profit and loss, providing P2P insights into some different approaches to the business of advice
Moderator: Aleks Vickovich, managing editor, ifa
Aleks Vickovich: There has been talk around the tendency for practice principals to become a prisoner in their business and to have many constraints that stifle growth. Is this an issue that you struggle with in your business, and how do you manage to deal with that?
Adele Martin: Any processes that I can’t automate are outsourced. For example, I use Time Trade so that clients can book their own appointments with me and I don’t have to have a receptionist, while virtual meetings to record meetings, which then become my file notes, and my CRM system automates my marketing processes. I outsource things like the building of my campaigns and design work to the Philippines and I use outsourced para-planners. For me that's how I’ve been able to make sure I’m not the one juggling all of those different hats.
Jonathan Elliot: I believe the most challenging thing for me as a managing director of a firm that does both accounting and financial planning and has 28 people in our Hobart business and 10 people in the Philippines, is getting all those people working together for one cause. Technology is not the solution, it certainly helps the journey but it's the people understanding where they want to be and having a clear, unified vision.
Mark Nagle: For us it's been taking everything out of the hands of the advisers that they don't need to be doing. That's given us a lot of additional scale. Fundamentally, we don’t think advisers are necessarily the best people to actually be doing the investment advice.
Our advisers are good communicators, very good at educating clients and good at some of the behavioural side of things and less savvy at trying to identify stocks and pick managed funds. We recognise that there is actually no value in the advisers doing that and then we just outsource the investment piece. What it has meant is that we're not divorcing ourselves from the responsibility of investment advice. I think that's a misconception, in fact we now communicate to our clients much more strongly than we ever did around the investment piece.
Jonathan Hoyle: You have to focus on what you're good at and where you add value, and where you don't add value, outsource it. What we specialise in is money management, like implemented portfolios, and that is a core area of expertise. Looking after high-networth clients can be very time consuming and what we’ve done is take a three-person approach.
Licensing is so relevant to this discussion of scale and profitability because we hear of so many firms who are constantly locked in negotiations with their licensee. Some of you have taken the decision to leave your licensee and to go and get your own licence.
Jonathan Hoyle: Well we were with Genesys and they made the decision for us by going bust. We were forced to do something and frankly we’d been lazy for a couple of years. The decision to get our own licence wasn’t around cost, rather it was around freedom and control – being able to introduce new service offerings and new products without having to go through months and months of bureaucracy to get the slightest thing approved. The big banks are consumed with handling ASIC and they are not interested in being innovative, and if you want to be innovative in your practice then having your own license is a very strong step towards that.
Mark Nagle: The whole concept of the way licensees are structured in Australia is interesting because they've all come from a background where they've been used as distribution channels and in essence that has created all of the problems that we've seen. If you think about the way licensees are structured, it’s really about product distribution as a primary, and if that is the case it causes compliance issues, which means licensees have to spend enormous amounts of time around compliance.
Jonathan Elliot: We found being with our previous licensee, Godfrey Pembroke, the experience overall was quite good, however I found I was constantly asking for permission to bring innovative ideas and implement them into the business. Being self-licensed has definitely added an extra level of rigour to our business because we have to step up and do a whole lot more, and that's been a learning curve.
Adele, you have moved in the opposite direction and have gone from partnering with a self-licensed firm to joining an institutionally-aligned business and are adamant that that is the best thing for your business.
Adele Martin: For me, cost definitely came into it. I don’t have the pockets to spend millions on the latest innovative software and they have a flexible and innovative work-style environment that means costs are driven down for me and allows me to continue to grow my business. I work in a co-op style work environment, so there are six of us that get to share the licence fees, we get to share admin support and we have shared rent as well. With six different businesses running under the one licence, it’s a fifth of what I was paying prior.
GETTING THE COMPLIANCE GORILLA OFF YOUR BACK
Brett Walker, founder, Smart Compliance
For many advisers, growth is a goal that is inhibited by costly regulatory requirements. But there are ways to lessen the compliance burden.
What are your main compliance obstacles? I think you’ll all agree that having multiples regulators is certainly one of the obstacles to your business. I’m prepared to bet a sizable amount of money that I know the top two risks you face.
I believe the first risk is the risk of being sued by somebody. The second major risk I think you face is the risk of having a regulator knock on your door and wanting to come and have a look at your business. There is a risk that the regulator will come to you if there is a complaint or to perform what they call a random check. The outcome may well be that they come back and requisition you to do something to your business or, worse still, put out in the public arena that you’ve been taken to task and you’ve had to change your business.
There are other risks that most businesses face: internal fraud, getting things wrong, upsetting the clients, having some technology failure, having people that just shouldn’t be in your business and coming under financial stress.
So how are you going to address these risks? The first one is litigation risk. The first idea is systematisation, which may come as a surprise to most of you. I think most people have a technology platform they favour for preparation of advice. The other way to manage this is by having PI in place. Everyone has got professional indemnity insurance. I had an interesting conversation just last week with a PI insurance broker around the issue of territoriality and the limitations in policies around territoriality.
The third way to manage this litigation risk is obviously have clients who don’t want to complain because they are actually educated enough to understand what you’re trying to do for them and they can see the benefits of what’s coming out of their experience with you. As for regulator risk, be confident about your business. Understand your business so if a regulator wants to know about what you do, you’re able to very quickly explain to them what you do and feel confident that you’re doing the right thing by your clients. Also, be aware of your rights. You don’t have to let anyone in. The only person you probably need to let in is a federal police officer carrying search warrant.
Finally, the key way to deal with internal fraud is to segregate duties. Don’t let one person control too many steps in the chain, don’t over-rely on staff.
RETHINKING CLIENT ENGAGEMENT
Andy Marshall, regional sales manager, APAC, SuiteBox
The process of financial advice as it stands is not in keeping with what the modern client actually wants. The modern client wants collaboration, they want value, they want a modularised approach, and they want ebb and flow in the advice process. It’s something that the standard six-steps of financial planning just can’t do. So when you look at the financial planning process, you’ve got the steps, the plan preparation, implementation and review.
Let me pose you a question. Are these steps compliance steps, or are they engagement steps? They are compliance steps. They have nothing to do with the client. What this actually does is assume that the prospect is ready to move forward into an advice relationship with you and ready to relinquish control of their affairs to you. That’s just not the way the modern client is thinking. So there is a disconnect.
So how do you do it? It is said based on a lot of research that people either have a smart money mindset or they don’t. But what they want is, in short, a master’s degree on growing up. And what do they want in this master’s degree? They want to have digitised, modularised curriculum that covers a whole gamut of things, from basic savings to understanding of investments, right through to retirement planning.
But then on further to lifestyle issues as well. How do I plan for parenthood, how do I save, how do I pick a good, cheap bottle of wine? The question is if they want all of this and they want to identify with a brand as well, who is actually doing this? The team that had been around the US looking at all these systems and modules and different businesses and fintechs, they are trying to build this. There is a group in the US called XY Planning Network. They’re huge and they deliver this. They’ve identified what education people need and they deliver it in different forms, be that digital, be that by the blog. But they are also connecting with their clients with efficiency. Sixty per cent of their meetings are done by virtual means.
Right now, all the businesses I generally deal with are preparing for the heirs. These guys are preparing the heirs for the assets. So they’ve built everything that is relevant to this age group. It’s a really smart age group to go for because out of 30 to 49 year olds who are actually engaged in advice, 50 per cent of them are dissatisfied with their current wealth provider.
When you ask them why, it is because they want the most up-to-date digital financial planning tools that they can change with and work out where the gaps are, work out what their goals are, work out what plan they want and then they will come and engage you.
PROFIT GOALS AND PROFIT REALITY
Sue Viskovic, managing director, Elixir Consulting
When you're looking at the plans you're making for your business in the next 12-24 months, you want to have a think about the risks that you've got that might impact your earnings before income and tax (EBIT). There are three external risks to your profit. Two of them are out of your control but you can do some things to work on them. One is absolutely within your control. The first one is the Life Insurance Framework (LIF). You can't control the fact that this is coming.
Within a few years, anyone that's been writing upfront risk commissions is going to see their upfront revenue halve. The second risk that is out of your control is LIA. This is what I call legacy income attrition and this refers to the passive customer trail books. The last external risk to your advice business is apathy.
This is absolutely the external risk to your business that you can do something about. Advisers have to realise that they can no longer continue to do business the way that we have in the past to build the financial advice businesses that we have today. It has to change if you’re going to grow a sustainable business with great margins in the future.
Improve your ‘profit reality’
There are four things you can do to improve your profit reality: you need to decrease your costs, improve your service offer, improve your pricing (this doesn't mean lift your prices) and grow with the right clients. One of the keys to successful businesses is 'the ideal client'.
Do not say ‘yes’ to everybody. You want to define who you’re looking for and that’s who you build your service offer around. Say ‘no’ to people who don’t suit the offer that you're creating. This is still the Achilles heel of a lot of businesses. There are heaps of ways now that you can lower your costs in an advice business. Whether it be offshoring or outsourcing, the concept of getting people at a lower hourly rate to do some of the work that can be done by people outside of your business is a great way to reduce costs.
The way that you structure your staffing is important as well. There are some brilliant people that can do what needs to be done in your business on a part-time basis. Staff training is key as well – getting people to actually be effective when they turn up to work. Automate your processes, integrate and get your software talking to each other.
Get your processes right and be as efficient as you can, make it easy for clients to do business with you. Now let’s talk about pricing models. The research that Elixir Coaches conducted a few years back in the third edition of our Adviser Pricing Models Research Report, found that the popularity of the flat retainer fee model had surpassed the asset-based fee model.
We know as we talk to advisers that the Australian market, in particular, has moved far beyond the concept of 'I’m an investment manager'. Most Australian advisers are very good now at helping clients understand that investment is just part of the advice piece, and pricing models are following suit. Another pricing model being used is a hybrid of the flat retainer fee model.
This is where clients have access to the adviser’s ongoing services in the flat retainer model and then a small asset-based fee is applied to the assets managed. We are seeing an increase in the number of businesses using this hybrid model. Making a flat fee model work is not as easy as one may think. They have their own challenges within a business.
Taking up flat fee model
There are some tips advisers can use to make sure this flat fee model works for them. Firstly, you have to decrease your costs and improve your service offer, as we discussed earlier. You have to know your minimum recoverable amount (MRA) for all of the work that you do in your business – do not guess at this.
There is also the concept of scope creep. This is where you take on a client, you quote your fee and then when you start doing work for them you find little bits of work creep up and your initial pricing does not reflect the extra work that piles up on top and this is not profitable.
An effective thing that some advisers do is articulate what the flat fee is for the year and instead of charging a fee for in case something unforeseen arises in the future, advisers will reserve the right to charge the client a project management fee at the time that extra work is required. This is a good way to define your scope and keep the door open in case they want to throw extra stuff at you.
It is all in the timing. You have to position the fee at a time where the client can see value in what you’re offering and they need your services so they’re happy to engage. You also want to structure it well for each client. As their adviser you will know the most cost effective and tax effective place for them to pay their fee from and so you define that for them. It’s up to you to help them to see how they can afford your services.
Definitely review your model regularly. Don’t set it in stone. Finally, deliver an outstanding, ongoing service.
PANEL: ROBO-ADVICE AND WHAT'S HINDERING INNOVATION
Technological change is now as much of a constant as regulatory change, but advisers can turn disruption into opportunity.
Moderator: Aleks Vickovich, managing editor, ifa
Aleks Vickovich: Our next panel session is made up of four very different businesses, which are going about the process of providing solutions to a lot of the issues that we’re raising. David, as for robo-advice, I think we’ve moved beyond the discussion of whether it is an opportunity or threat, but do you think that it’s feasible to be actually used in practices?
David Heather: I’d say it’s getting there. Everyone understands robo to be a mechanism that stands at the front of a product flog. That’s how robo has been seen by the community. If you look at the technology, it’s a question-and answer- type structure that leads to an algorithm that spits out something at the back end. If robo can be used to help you actually put in more of a standardised model, and allow you more time as an adviser to spend on the fringed type information that needs more strategic decision making, then I can see that robo has a role to play. Albeit, it is always going to be used as a product flog front end. But I think it has got a role to play over time.
To the rest of you, same question. Do you see a role here for automated investment within an advice practice? Or are there other areas where you think automation is more applicable?
Neil Rogan: I think on the robo piece, there is certainly a space where practices may be able to capture clients that they are not capturing today. It may appeal to a market that you’re not capturing.
Piew Yap: I think robo-advice at this point definitely plays a role in the industry. It will only get better from here. When that’s going to happen? I’m not too sure. The reason I’m saying that is because up until maybe 20 years ago, no computer had ever beaten a grand master in chess.
Now that actually happened. Computers will only keep getting better. But it does rely on the algorithm, which needs us to create. So I see the best way to implement robo is having a combination.
You can’t rely fully on robo, you need to have a combination of face-to-face meetings and the whole relationship. Robo can’t completely replace a financial adviser. I think we are a long way from that.
Hans Egger: I actually wrote an article that quoted the stuff that you’re talking about, Piew, and absolutely a robo did beat a grand master in chess. But then a few years later, they had some people who weren’t grand masters that used a computer to help them in the next competition. And so what happened was some amateur chess players with a computer beat the grand masters. And I think that’s the crux of what’s exciting for financial advisers. We can use that technology to give better advice, to leverage our advice and beat the robots that don’t have a personality.
We’ve heard today a number of times this idea of an open API philosophy and it’s something that advisers who are switched on to these issues clearly want. They want to be able to plug into different pieces of technology as they emerge and not be locked in. How do they go about this and where does the responsibility lie? Is it the software provider? Or is it licensees that are controlling it?
Hans Egger: I think the old software providers that are out there at the moment have kind of closed their doors to it. They don’t want that to happen, because they’re trying to be all things to all people. But more and more, when you’re in the fintech space, people are talking about how we can integrate our services because we don’t want to be all things to all people. We want to provide the best solutions for what we do and we want to plug into everyone else.
Would you agree with that, Piew? Is it the software providers themselves that are perhaps inhibiting some of the practices in the room from joining this new world?
Piew Yap: It’s exactly that. A lot of practices here I’m sure are using two of the major software providers and you might ask for integration. Let me just say from our perspective, unless that provider opens up the gate, there is no way the other smaller and more innovative providers can integrate. It is a two-way street. And because the incumbents are afraid of change and the innovation that is happening in the fintech space, the safest way is to hide and close the gates.
So how can you get around that? If you’re advising, and there is a practice out there and they are dealing with a software provider and perhaps they have a licensee that doesn’t want them to change software providers, how would they go about it?
Piew Yap: The practices themselves need to embrace change as well. A lot of practices that I’ve seen are basically sitting on their hands and waiting for change to happen. They are waiting for their dealer groups to take up new technology, try new products. We need to work differently now. If you have a solution that you really like, and it’s helping your business, helping you advise, then you should push from the bottom up. If enough of you make noise, your licensee will listen.
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