The received wisdom for the past 25 years has been that one man bands have no future and the only route to survival is growth. However that is clearly not the case argues David Shelton.
The received wisdom for the past 25 years has been that one-man-bands in financial advice have no future and that the only route to survival is growth.
There has been even more predictions of the death of the small firm in recent years, as the burden of regulation: both financially and time-wise has weighed heavily on advisers, and the timing means many advisers are heading for retirement and looking to exit, with a number consolidators eyeing their businesses.
However that is clearly not the case as there are several thousand advice businesses of one to three advisers and there are still many start-ups.
Even though there are fewer small firms since the retail distribution review, they still dominate the market in terms of numbers and collectively account for considerable market share.
There are two main reasons to be bullish about the ongoing role of smaller firms, in this example up to 10 advisers.
One advantage of being a small firm is being able to focus on a particular target market or area of financial planning so hone in and succeed in a niche area. They can also achieve a degree of co-ordination and consistency that is harder for larger firms.
Small firms can adopt a more local, friendly face business and with a well-defined target market, they can build a very detailed knowledge of clients and their particular circumstances. This means there is no confusion about what the clients require, how they should be dealt with and the processes that support this.
Because “every part of the business touches the customer” it is easier to make this happen in smaller firms which provides a real advantage with consistency of brand delivery and also means the business owners find it easier to ensure all staff are singing from the same hymn sheet, both in terms of business strategy but also from a compliance perspective. That is not to pretend that larger firms cannot achieve these benefits – it is just harder to make happen.
The challenge for larger players, in this example over 50 advisers, is management and organisation. Communication and control are the greatest enemies of larger firms and overheads can spiral which can be terminal if adviser productivity and revenues are falling.
Management teams risk remoteness from reality and clients as firms grow, which is very dangerous in a fast-moving market. The formal structures that large firms must adopt can bring real benefits if they are well managed and co-ordinated. However, they are also the greatest source of “diseconomy of scale” with convoluted decision processes, mixed messages and development of silos instead of team working across the business. A really streamlined and focused large firm is formidable competitor, it is just incredibly hard to achieve.
There are two reasons why the small firm will survive. The first is the availability and cost effectiveness of support services and the second is the fact that the adoption of good business practice is more likely to secure success than firm size. Given that all firms will experience some margin pressure over the next few years consideration of costs is very important. It is often argued that smaller firms, regardless of market, will inevitably carry a higher cost base – often to the extent that it makes them unprofitable. However, this is not necessarily the case.
It is true that if small firms try to do everything themselves they will carry higher costs and will fail under the weight of administration and compliance. However, with sensible out-sourcing this can be avoided because the wide range of services, from compliance to investment management, provides access to economies of scale which no single firm can achieve. Not every activity should be outsourced but it is important to review the possibility for as many functions as possible. The market is competitive and services can be acquired at excellent rates.
However, access to cost-effective support services and focused marketing are not the only reasons why small firms survive profitably. As indicated above, the application of good business practice is much more important than business size as a determinant of success. Effective management, team-working and defined processes are the areas to concentrate upon. In practice this means:
- Paying attention to setting clear business objectives, delegating where possible and recruiting and developing the right people
- Nurturing co-operation and commitment across the entire team
- Ensuring efficiency and consistency through well-defined processes aimed at achieving the promised client outcomes.
Focus on these key areas is essential and failure to concentrate on them is a major reason why firms become unprofitable. Most owners of small firms acknowledge that time is a real pressure given their client commitments and other management responsibilities. That is where management skills, delegation and out-sourcing play an essential part because this frees up time for clients which is vital.
However, there are many very honest owners of small advice firms who readily admit that management is not their strongest skill. A proportion of those will do something about it, either through their own training and development, or by allowing others to take on certain key roles. That is where team work is so important.
A majority of firms are made up of teams and heavily depend upon them for success. The issue is more critical in small firms because there is often just one team. This is why recruitment and training is so important because if the team fails in a small firm it has a far greater effect than if one of many teams in a larger firm fails. Research on the recipe for success in the advice market shows that firms who really work at these core people processes are likely to be the succeeding and profitable firms of the future. Another case where good business practice is more important than size of firm.
The final requirement for success is process efficiency. This comes back to economies of scale because without well-defined processes that are delivered consistently client service will fail and the dilemma of rising costs and falling revenue will emerge. Poor processes also destroy team work so it is essential that these are defined, refined and automated wherever possible. All firms have the opportunity to achieve this, but simplicity holds the key to success and smaller firms should have the edge.
The advice market is very diverse and there is room for firms of varying sizes. The key is to concentrate on how the business is managed and what people do within their jobs in the context of a well-defined service proposition with supporting processes. Small firms which follow this approach have as much chance of success as their larger competitors now and in the future.