Watch out for emerging trends

Financialplanning practices have reached a stage that I would describe as mature. However, financial planning businesses are struggling to deal with an old business model as well as trying to redefine their role and value proposition.

A financial planning practice is the small to medium size, single site business that delivers advice. A financial planning business is the large licensee (dealer) that services a number of practices.

Financial planning businesses follow a model that has been used for 20 years — a central dealer provides support services to a number of practices located at external sites.

Typically the dealer has no equity in the practices and their association is by an agreement that can be terminated by either party. The dealer largely relies on the quality of support services it provides to maintain the loyalty and association of the practices. But the business environment has changed so much over the past 20 years, particularly with the use of technology, that you have to question how long this model will last.

The services dealers typically provide such as training, compliance, licensing, software, research, investment management and business advice are increasingly being delivered by other companies and consultants. With the exception of licensing, they are becoming off-the-shelf commodities. How does one financial planning business differentiate itself from a competitor? The answer is price and the quality of support services. Leaving price aside, business advice becomes the differentiator.

Now look at financial planning practices. Most were started 10 or more years ago and have grown through the entrepreneurial skills of their operators. They now require management skills to operate efficiently, capitalise on the client base and position themselves for the next stage of growth.

Typically their owners are good at building the business and being financial planners but they are not good at managing the business forward. They need management consulting advice to help them make their business more profitable and more valuable.

Financial planning businesses all say they will supply practice development advice to their associated practices, however few succeed. This is paving the way for a whole new management consulting service specialising in financial planning practices. Manage- ment consultants who understand the dynamics of financial planning practices could put forward a new business model whereby the licensee outsources training, compliance, software, research and investment management (some compliance and training functions would need to be kept inhouse).

The focus of the licensee (apart from compliance) would be to reposition each new associated practice by designing and installing automated workflow processes, management information systems and modelling the business to create five year projections of cash flow, profitability and capitalised value. The licensee would then dedicate two days each quarter to review the business and make forward decisions with the business owners.

This is what adds value to financial planning practices.

Then we come to the issue of equity.

I have always found it interesting that someone will buy a financial planning business where the price reflects funds under management (FUM) even though the FUM may not be owned by the licensee. Examples have occurred where, after a financial planning business was bought by an institution, some of the associated practices left and took their clients and FUM with them.

There are two profit centres in financial planning. One is with the financial planning practice that delivers advice. The financial planners earn a good income and build a business of value. A typical practice will sell for 2.5 times recurrent income. The other profit centre is in the ownership of the FUM. This is usually a master trust, wrap account or managed fund. These entities can sell for 10 times recurrent income. In between you have a distribution business (dealer) that can operate at break even or it may put profits back into distribution.

Financial planners now recognise that by distributing into someone else’s platform they are creating capital value for that business. This is why we are seeing a proliferation of master trusts and wraps and why badging of platforms has become popular. It is also why we are starting to see offers of equity in these platforms.

A new financial planning business model in which the licensee also had a badged wrap and offered equity in the whole business spell great value for everyone involved.

Wes McMaster is a consultant to the financial planning industry and adjunctprofessor (Financial Planning) at RMIT University.