Are you a proactive or reactive financial planner?

A record number of advisers are selling their businesses at the moment. The ones making the big dollars are those who run the most proactive businesses, according to Grant Abbott.

Sometimes simple questions can provide the best guides for business success. In the professional services game, there is none better than asking yourself whether you are a proactive or reactive financial planner. The answer to this question will provide an insight into the type of financial planning business that you run.

Many years ago when I was a tax manager at one of the world's largest accounting firms, I vividly remember management embarking on an exercise to find out what their clients wanted. At the time, this was a revolutionary move for a professional services firm at the top of its field. The firm in question hired a team of expensive market researchers to interview the senior personnel of their top 100 clients to find out their clients' real needs and wants.

Hundreds of taped interviews and $20 million later the answer was simple. The clients wanted a proactive adviser. Now this was a major shock for all concerned because they expected clients would want accuracy, effective reporting, skilled advice and minimal costs.

However the response to questions posed by the market researchers along these lines was that the client expected all of these of their adviser. These were supposedly a given for a professional adviser. What the client really wanted was an adviser who could see and understand the client's financial affairs and business and then initiate strategy and ideas based upon this background.

Are your clients any different? What do they expect of you? For example, the majority of financial planners have clients with a family trust housing their investments, business and, in some cases, the family home.

The proposed new tax rules for family trusts, including taxing such trusts as companies, plus the loss of the capital gains tax (CGT) discount and new imputation rules means that some serious strategic planning needs to be carried out immediately. This planning includes a review of the family trust deed to assess whether it allows the trustee to accumulate earnings or maintain a franking account among other things. It also includes assessing whether a family trust is the best vehicle for your clients given their specific background, financial circumstances as well as their needs and wants. All of this must be carried out before 1 July 2001, the proposed date of commencement of the new trust rules.

Will you be reactive or proactive on this issue? First we should assume that the client's accountant will be in a position to handle this big issue. It is no secret that the accounting profession will have their noses to the GST compliance grindstone for the next 12 months. This may be a great opportunity to show your proactivity by bringing the new trust rules to the attention of your clients.

A reactive business is built for income not capital gain. If the business is continually chasing its tail with no thought about how to build the business, then the chance of a third party wanting to buy the business is minimal.

At the moment, there are a record number of accounting firms up for sale courtesy of the sweeping changes the government has made to the Australian taxation system. Unfortunately the majority of these businesses will not be sold for two reasons. First and foremost, the business is not in a saleable state. It is a business that is based on a frantic rush from client to client.

Moreover, the principals in the business are highly involved at every level of the business. Secondly the businesses themselves are not highly profitable. They bring in solid gross revenue but not a great deal of profit. It is not unusual for a ten person accountancy practice in Australia to have net income per partner of only $60,000. And this is with the partner working up to 70 hours a week. Would you buy into a firm where you have to work 70 hours a week, get involved in all areas of the business, have to feed a number of employees, be continually stressed and all for $60,000 per annum? From a health point of view, it would be better to go work for somebody else and get rid of the stress.

In contrast, a proactive business is one where the business runs like clockwork with members of the firm focused on the strategic direction of the company. It is a firm where a lot less clients are happy to pay more. It is also a business where the principal attends to important issues, such as distribution through building referral networks, rather than writing financial plans. It is a business that is building for growth not for income. It is a business that is highly attractive and will attract a high price when it comes to being sold.

Furthermore on the rewards of proactivity we cannot escape the taxation consequences of running a reactive versus a proactive business.

As noted above, a reactive business is one built for income and not capital gain. As such, ordinary income tax rates apply to income provided to the principals of the firm. In contrast, a proactive, well run business will attract a strong sale price. This means capital gains and more importantly the raft of CGT concessions when it comes to selling a business. For many financial planners that are able to build a strong proactive business, CGT will be next to nothing when that business is sold. Tax at marginal rates for a reactive business versus CGT concessional tax rates for the sale of a proactive business. Which one would you advise your clients to aim for?

In the next issue of Money Management, we will consider some of the best tools that you can use to take your business into a new era of proactivity.

Grant Abbott is a director of The Strategist Group.