Bigger could be better – for profits

The introduction of the Financial Services Reform Act has had a major impact on practice profitability — especially for smaller businesses that do not have the scale to easily absorb the additional governance costs.

Bob Neill, managing director in the consulting division of HLB Mann Judd, says: “We see small businesses coming under some real profitability pressure. And by small businesses, we are talking perhaps two partner practices with a couple of staff.”

Steven Rowley, managing director of London Partners, agrees: “Compliance costs are becoming a ridiculous burden, professional indemnity is a ridiculous burden ... so I think technology has to drive our business a lot more — in the software you use, the platforms, the method of communication with clients.

“We are very systems driven, so when a client comes in we set them up in our database, and it automatically generates tasks to be done, and to be done by the right people.”

Neill also believes that client expectations are being raised, and over the coming years they will expect specialist knowledge in a variety of disciplines, putting more pressure on small financial planning firms.

He explains: “We think you are going to have to have businesses with sufficient depth of capability to offer the specialist advice that clients are going to continue to demand. You are going to have to get some scale to get the efficiencies out of technology, and research, and information that flow through your practice. Especially if prices get leveraged down, which people are expecting to happen over the next few years.”

Geoff Rimmer, managing director of dealer group FS Partners, believe dealers have an important role to play in ensuring the continued profitability of member firms. He says: “If you are doing your job properly and within the spirit of the legislation, then you have to be part of a dealer group which adds a lot of value.”

But he warns that advisers need to be careful when considering dealer services. “To me, there are two types of dealer groups. Those that say ‘we are a high value organisation, and this is what we are trying to achieve’.

“Then there are those [dealer groups] where the adviser tells them ‘I don’t need all that stuff, I’ll give you $15,000 a year and I’ll run my own show’. I think those practices are in a lot of trouble.”

So are the days of two-man band financial planning practices a thing of the past? According to Neill, “yes — absolutely”. He explains: “If you want to run a viable business, it’s not a question of whether you achieve some scale and infrastructure, it’s how you do it. Because if you don’t get it you’re just going to get buried — you’re going to become non-competitive.”

Rowley adds: “You are going to need either scale or a niche market that will allow you to do things you need to do, and get away with it with the right fees.

“Compliance costs are a major concern, and unfortunately it’s got to a stage where some clients with smaller problems and fewer investable dollars just can’t afford financial planning advice.”