Practice pays off

Practice management has become a much-maligned term in financial planning. While all advisers understand the benefits of business tools, actually implementing practical measures such as a succession plan or conducting customer surveys can come second to the priority of looking after clients’ investments.

For small practices it can be even more difficult — while having the best intentions in the world, a shortage of staff or resources means the needs of the business are often neglected.

However, new research from Business Health demonstrates that practice management shouldn’t just be an optional extra for those advisers who have a bit of spare time on their hands. After surveying over 500 financial planning firms in Australia, the results show that it is possible to attach a monetary value to different practice management measures.

Rod Bertino, partner at Business Health, says: “What these results do is put a cold, hard dollar value on how much more people can earn by doing this. They show that this isn’t an academic exercise, it isn’t wishy washy — there’s real money in this.”

With the average age of adviser now between 55 and 57, and many looking to retire and sell their practice in the next five years, a serious focus on how to improve the business will be essential. Bertino explains: “We are finding people are now more willing, more open and more receptive to initiatives that will increase the capital value of their business.”

Keeping in touch

The Business Health research shows that the principal of a practice that contacts it A class clients more than 10 times a year will earn around $63,000 more than the principal of a firm that touches base with clients less than five times annually (see table 1).

Most advisers realise how valuable client contact is to their business, but often have an out of sight, out of mind mentality. For practices that focus on risk, this is a very easy trap to fall into — after a policy is sold, advisers may only contact individuals on a yearly basis to ask if their circumstances have changed.

However, Terry Bell, managing director of Business Health, says: “There is a direct correlation between client communication and referral business. Where clients score the communication they receive from their adviser highly, they are far more likely to have already referred new clients to the business, and they also have a much higher propensity to do so again.”

Geoff Rimmer is managing director of dealer group FS Partners, which has made a pledge to all member firms to increase their gross turnover by 50 per cent in two years. Part of this process includes a formal practice management program that all firms are asked to participate in. He adds: “The more contact you have with your clients, the more your income grows.”

Sharing information

According to the research, less than 30 per cent of businesses ask for client feedback (see table 2). And while the majority said they had a documented client review process in place (see table 3), Bell says “clients rated this service as by far the worst performing area”.

The latest technology now enables advisers to update clients regularly — on market conditions, legislative changes, alterations to portfolio construction — but Bertino says clients want information that relates to their personal aspirations. He explains: “Advisers are quite good at telling people how their investments are going, but clients need to know how that ties to their goals — for instance, does it mean they can retire at 55 like they had planned.”

Steven Rowley, managing director of London Partners, has segregated his business in order that customers get the tailored feedback they require. “My business is a bit different to most in that I have strategic planners, and their whole focus is just to look after the clients — to do their planning and strategic work, and make sure their plans are on target.”

“And then we have an investment team to look after the investments. I think it’s a different mind set; a different skill.”

Grouping your clients

According to Rowley, he “segmented the business 15 years ago. I can’t understand any business that hasn’t done that. It just staggers me”. However, the results show that over one-third of businesses still fail to analyse and divide their client base. Those that do are $50,000 more profitable (see table 5).

Bob Neill, managing director of HLB Mann Judd Financial Services, which offers consultancy services to financial planning practices, says segmentation is essential. He explains: “Everyone would say that if you don’t understand your clients, it’s a bit hard to differentiate the level of service you give them. And therefore it’s difficult to differentiate the price.”

Rowley adds: “I can tell you how much I earn from each individual client. You have to segment your client base to know what you earn from them, or how can you make a decision as to what service you’re going to provide, and how you’re going to provide it?”

At the office or on the road?

Advisers who arrange client meetings in their own offices are more likely to be profitable than those that don’t (see table 4). The main reason is that travelling to visit clients takes up valuable time. “If you are having three appointments a day externally, that could be seven a day internally, because people come to you,” Rimmer says.

Bell says the research also found that meetings at an adviser’s office increase client satisfaction with the service as a whole. He explains: “Clients now rate the professionalism of their adviser’s premises — such as furnishings, equipment, image, location — as one of the top two performing attributes; second only to the business relationship they have with their adviser.”

But with the increase in mobile technology, advisers need to find a balance between office-based work and being on the road. Bertino explains: “We would never tell advisers what to do, and when you’re starting up, and all business is good business, you might drive from one city to another to get a client.”

“But when the business is established, you need to ask whether you are travelling for competitive advantage or just out of habit. Is it the best use of your time? And are you really leveraging the investment you have made in your premises, the rent you pay, etc?”

A plan for the business

Despite the entrepreneurial nature of financial planning, almost half of all practices surveyed did not have a documented business plan (see table 6). However, 74 per cent of those that do track their progress on at least a quarterly basis.

Bertino says that for new practices, a business plan is a priority. “Depending on the maturity, you may not need a 50-page McKinsey business plan, but you should have a plan for your business.”

Rowley, who set up his current practice 15 years ago, says he kept a plan in his head during the early years. But he adds: “It’s only in the last eight years that I have really documented it. It was always a business plan, but it wasn’t as regimented as it should have been.”

“There’s a simple saying that the money is in the planning. You have to plan your business in the same way that you plan client’s affairs.”

Rimmer adds: “Look, if you don’t know where you are going, how can you hope to get there?”

Sorting out succession

According to Business Health, only one in two principals plan on being in their business in five years time, but 75 per cent state they are unlikely, or unable, to take advantage of a buyer of last resort arrangement.

It can be difficult to see how having a succession plan can impact directly on practice profitability, but Bertino says “the numbers don’t lie — the businesses that do it well are far more profitable”. He explains: “Our take on it is that if a practice has their succession locked away, they are well-run businesses because they have addressed all the issues during the discussions and negotiations [with the successor]. You are probably running a well-run practice, addressing the key issues, and monitoring them regularly.”

The research shows that practices with an effective succession plan in place are potentially $100,000 richer as a result (see table 7).

Neill says many principals looking to sell their practice have not maximised their profitability. “They may not have diminished the transitional integration risk, they are key person dependent or their systems aren’t documented.”

He adds: “Our analogy is, when does your house look its best? At auction. When does your car look its best? When you trade it in. So you should always have your business looking like that so if someone does come in, it’s ready for sale.”

Rimmer agrees, saying: “To get yourself ready for succession forces you to get your business in shape.”

According to Rowley, succession is a “big problem” in the industry, and he counts himself lucky to be passing on the firm to his sons.

Getting external advice

More practices are using the services of consulting groups and business coaches (see table 8). The incidence of boards of advice is also on the increase. Rimmer cites an example: “One thing that has worked very well for us is external boards. Our best result is from a business in Melbourne. When he joined our program, he was earning $500,000. This year, he’ll do a tad over $1.8 million. And he credits that to having an entirely external board.”

Unusually, this principal included two of his clients on the board, as they had both successfully run and owned their own businesses. “He found people who he respected, and had a very good history of creating value themselves, and it has worked wonderfully well. But he has also been prepared to do as his board suggested,” Rimmer says.

Financial planners generally have strong sales skills, says Neill, but when their practices start to grow they often need professional support to ensure the right systems and processes are in place. “Very few practices have that skill set, so you are seeing more people buy that skill set in through the use of consultants, or boards, or people coming in to hold strategy days.”

Neill also believes the quality of third-party business advisers is improving. “Without being unkind, we’ve had a wash-through of fairly soft consulting-type people with generic management solutions. Now we are starting to see people emerge who actually understand why financial planning businesses are and where they are headed. Because even though it’s a professional advisory business, it’s very different to an accounting practice or legal firm.”