Defining a strong value proposition in an evolving market

With the blurring of what services financial advisory practices deliver, advisers need to define what drives value in their business to stay on top of their game, David Clatworthy writes.

In an evolving industry with changing regulatory and consumer demands, the lines of segmentation in the accounting and financial services industry have continued to blur, and defining value has become more difficult.

While in the past, financial advisory practices would have likely offered one or two services and promoted them through existing relationships and word of mouth, the introduction of new technology, social networks, and digital tools is making it easier for businesses to connect with the market more efficiently and understand what stakeholders think and want.

With this greater connectivity and shift in traditional industry segmentation comes an even greater need for principals and partners to clearly define what drives value in every aspect of their business — for clients, staff, their practice and themselves.

Our recent 2015/16 Accounting and Financial Services (AFS) Benchmarking Report provides insight into an evolving industry, and found the most profitable firms are making the most of opportunities by articulating a strong client value proposition.

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For many, this means accelerating towards a multi service model that builds on their existing business to drive revenue from adjacent services. While for others, a specialist approach which reinforces a niche value proposition is the best approach.

Multidisciplinary versus specialisation

The choice between expanding to a multidisciplinary service offering or remaining focussed on a more specialist proposition for clients is a key decision for firms.

Some are looking to business models that embrace a holistic advice model, while others are choosing to specialise in order to set themselves apart.

Both of these models can be successful, for different reasons.

Our survey found that as businesses grow in size, so too does their offering of in-house services as they look to build out scale and stronger relationships with clients.

Some 79 per cent of high profit firms believe adding value to existing clients is the most effective strategy to improve profitability.

Traditionally, businesses that adopt a multidisciplinary approach come from a tax and business services background.

Strategically, this makes sense as larger firms expand into adjacent service areas to increase their ability to add value to their clients, as well as their business through profit streams.

Smaller firms are more likely to specialise and tend to come from a financial planning and insurance advice background.

As clients' needs change, firms need to consider how they will continue to service them properly.

If a firm remains in a more specialised offering, strong referral relationships are increasingly important.

This means niche businesses can establish themselves as a trusted adviser with holistic oversight for client needs, even though some services may be outsourced or referred, and thus driving the perception of value and a cohesive experience for the client.

High performing smaller firms are doing this well, with our research finding 48 per cent maintain a referral relationship with an accounting partner, and 20 per cent outsource their tax and business arrangements to meet more of their clients' needs, while still focussing in-house on what their practice does best.

Ultimately high profit firms recognise the need to have an intimate understanding of their clients' needs and offer a range of multidisciplinary solutions to meet those needs over time.

Firms that are spending more time with clients and understanding a broader range of their needs will be those building lifetime value and a strong referral pipeline.

Outsourcing is also a key consideration for firms, regardless of size and business model.

As financial services and accounting businesses have tended to avoid the scale seen in other industries, with the majority of firms still operating as single offices, outsourcing to manage costs and keep staff focussed on core activities should remain a priority.

Larger firms understandably tend to be more advanced in outsourcing non-core activities, with IT, technology support, and marketing services most likely completed outside the business.

However our research has found that approximately one-third of larger and smaller firms plan to increase outsourcing over the next 12 months.

Attracting and retaining the best talent

In an increasingly evolving market, characterised by often complex regulatory changes, the need to attract and retain the best talent remains a key business value driver.

Despite successful practices identifying the retention of quality staff as a central driver of profitability, principals report they are still shouldered with the majority of client workload and spend more time working in their business, instead of on it.

Having a strategic and efficient strategy for developing key staff to manage core client relationships allows a firm's principal to invest time back into the business. Having the right staff in a business is a key growth accelerator, and setting up teams with focus and accountability allows business owners to be well thought-out about where they spend their effort.

Currently, more than half of firms rely on word of mouth as their main recruitment channel, but to drive success, the focus needs to be on building out a strategic talent pipeline which clearly defines the roles needed to support the business strategy and resources that will deliver future growth.

Rather than relying on quick fix solutions that attempt to plug immediate gaps in the team, firms should be considering what the services and value add they can bring into the office through new staff, what their relationship model is, and how will they will retain and up skill staff by investing in mentoring and training.

Firms with high profits also tend to have a younger staff base compared to their peers, suggesting a longer term approach to business planning and succession.

Our research suggests salaries increase across the board as the size of the firm grows, and above-average profit practices are allocating 51 per cent of their total spending to staff salaries — a significant 16 per cent more than the average firm.

This demonstrates the higher focus successful firms are placing in attracting and retaining good talent as a driver of profitability and a key part of the value equation.

For smaller firms, this suggests they will need to either keep growing or supplement salaries with non-monetary incentives to compete for and retain quality staff.

Interestingly, one-third of practices report not offering any additional incentives to staff, suggesting there is significant room to differentiate their practice by offering extra benefits such as additional annual leave or training days, particularly given the 15 per cent attrition rate the industry has averaged over the past three years.

Referrals the top priority

Regardless of business size or model, our research found that driving new and high value referrals remain the most important source of new client acquisitions, and the number one priority for more than a third of firms surveyed.

While we are seeing the bigger and more established practices generating referrals from existing clients, and smaller more specialist firms sourcing new clients from business partner referrals, a common concern we hear from businesses operating under both multidisciplinary and specialised models is how to best demonstrate the value their firm offers to prospective clients.

Around one in four firms don't currently segment their client base, and of those who are segmenting their business, they are doing so on the basis of the adviser or product — not the client's needs or value.

This can impact businesses' ability to really understand their ideal client and their needs, and also how they can serve them by bringing together the best of their service offering, expertise and referral partners.

There is a significant opportunity for firms to define their client value proposition, how they are marketing and reaching their ideal clients through referrals, and how their business is positioned to effectively meet the needs of these clients.

Analysing existing client data will also help you evaluate how resources are being devoted to existing clients, and if this could be done more effectively.

The opportunity ahead

Confidence among accounting and financial services firms remains high, with 83 per cent feeling positive about their business prospects. While some concerns over changes in regulation remain, our research points to firms attracting new, ideal clients as their greatest focus in the year ahead.

Successful practices are seeing the opportunity in an evolving market to clearly define their value proposition to clients and adjust their business model accordingly.

They are also focussed on generating more revenue from existing and new multidisciplinary clients serviced in-house, while other businesses are further refining their specialist offering and drawing on referral arrangements that allow clients to still experience a broader range of services while retaining the primary client relationship.

The opportunity is there for partners and principals to understand and recognise their own value proposition, and clearly articulate their firm's offering to both new and existing clients.

David Clatworthy is division director at Macquarie Wealth Management.