Appearing on the latest episode of The ifa Show, senior consultant at Elixir Consulting and GSD Lab founder Lana Clark discussed VBP’s 2024 Advice Operations Research Report and how introducing a manager can benefit a business and increase profit margins.
“What we know is that there is no tipping point, really, for when a business should get a practice manager into their business,” Clark said.
“I think for us, we used to say maybe three, maybe four advisers, maybe five, but I think that in the research, it really clearly shows those who have a management role in their business and a turnover of $1 million or greater, their EBIT was 26 per cent, with a satisfaction score of 3.9 out of five.
“Whilst they were above the benchmark, they still weren’t outstanding businesses in terms of financial performances, but when we compared them to those who didn’t have a practice manager in the business, their EBIT was 22 per cent, which is significant.”
Clark said the finding highlights an interesting balance between profitability and achieving scale for a business, and how greater turnover doesn’t always translate into greater profit margins.
“I think it is the old problem where if you’re a really small business, one or two advisers, and you’re turning over half a million dollars or less, your EBIT can be quite high because the business owner is typically on the tools, working the business,” Clark said.
“Then there seems to be this dip in profitability, if you like, somewhere between half a million and a million. I think the average EBIT there went all the way down to 16.6 per cent.
“At that point, you’re really bringing on staff, spending money on technology, to make yourself more efficient, for the business to run faster, better, all those sorts of things. It’s not until you get up and over that million-dollar hump, if you like, that profitability tends to return.”
The different roles of a practice manager
Looking at how an advice business owner may employ a manager within their firm, Clark explained that they tend to take on one of two roles, noting however that the actual responsibilities of a manager tends to shift dramatically from business to business.
When looking to employ a manager, a business owner may want someone who can take a primary role running their business, handling compliance and such, allowing the business owner to take on more time in a principal adviser role.
“They don’t want to run and manage their business. They’re happy being an adviser and they know that that’s what they do best, and so they’re looking for the concept of the practice manager,” Clark said.
She noted that the skills needed to be a financial adviser are considerably different to those needed to successfully run a business, meaning there is a notable benefit to bringing someone in to do so, particularly if the business owner would prefer to be in a client-facing role.
“I don’t meet many advisers who are whizzes in ops and can do back office things super well … We’ve met lots of advisers and it’s typically not something that advisers love doing. It is definitely a skill set in and of itself,” Clark said.
Alternatively, she said the business owner may want someone to simply manage the day-to-day activities of the business and staff, ensuring daily operations run smoothly, while the business owner takes a step back from an adviser role, focusing on running the business.
“There are also others who maybe are getting to a stage in their career who don’t want to do that. They’re just happy to manage the business now. They might also just go, ‘You know what, I don’t want to give advice anymore’,” Clark added.
“They just make that decision, ‘I want to run the business and so I’m going to get other advisers in who are going to do a great job of looking after the clients’. So, it feels like there’s no ability to pigeonhole necessarily. It’s just where that business owner is at, at that stage.”
Clark explained that while a general manager would typically be in a large business, there are still considerable differences between what someone in that role may be expected to do depending on the preference of the owner and the needs of the business.
“I think it’s about deciding what your practice manager or the role of the practice manager does in your business,” she said.
To hear more from Lana Clark, tune in here.
Well done Lana, this was a great piece of research, but I would have loved to have seen it broken down into EBIT ranges. i.e. This was what firms with an EBIT < 20% were doing, this is what firms with an EBIT of 20-30% did, 30-40% & 40%+. Then we business owners can take away info from the level above us to learn how to improve. I thought the research was thorough, but as a practice with an EBIT well over 40% (approaching 50%), how am I to discern what pieces of information might help me lift form here? Using averages across such a wide range doesnt really tell me what the top quartile firms did, I'd love next year (assume this will be annual?) for it to carve out or at least highlight what the top 10% or top quintile were doing that was working for them. And for that matter, all of the articles and podcasts in our industry that showcase advisers and businesses are really entirely useless unles sthere is some disclosure around the profitability of those businesses. What is the point of the Ensomble Engine Room podcast, which showcases how businesses operate their back office, if for all I know the systems being talked about are those being used by a firm with an EBIT half of mine?
Dear Anon, thanks for taking the time to write. Your points here are excellent & if you’re open to chatting please drop me a line on LinkedIn, I’d love to chat with you about this further. Thank