A central pillar for any business, in any industry, is to be profitable. If businesses cannot turn a profit, they either have to change the way they work, use up their (or their parent company’s) reserves, or go out of business.
An advice business is like any other – if it has enough customers, but its costs are out of control, it will fail.
Likewise, if its costs are well managed but it can’t get enough customers, it will also fall over.
Striking that balance comes down to costs, fee structures and how much it costs the business to grow.
Below we look at these in more detail.
The main cost to an adviser business is its staff. The people giving the advice and doing the administration are vital to the success of the business, and they are therefore a key outlay.
What differs across adviser businesses is the approach taken on areas such as fee splits. Some firms agree a share of fees earned to their advisers, while others pay them a salary plus bonus, and there is no exact number that ensures success.
However, some clear pointers can help firms be successful. Firstly, we often see adviser businesses chasing turnover by giving away some aspects of their service for free.
Turnover is important, of course, but chasing a high volume of clients will not make a business succeed if the fee splits internally are wrong.
We have seen numerous examples where an adviser business will split the revenue generated by an adviser’s clients on a 60/40 basis or something similar, incentivising the adviser to go out and chase more work.
This can help firms expand quickly, but if too much revenue is given away to advisers in this way, it can destabilise the business and leave it with too little to maintain the day-to-day functions. Clearly advisers need and deserve to be paid for their work, but as a business owner you need to find a balance that works.
Relationships at a firm level
Advisers naturally have close relationships with their clients, and this is in the interests of all parties, but it’s important to ensure the wider business is recognised by the client as well.
If your business gets into a situation where it's all about individual relationships, and there is no semblance of a relationship between a client and your firm, it can spell disaster if an adviser subsequently wants to leave.
People change jobs all the time, and it is something all advice businesses need to be prepared for, but there are ways to make clients more 'sticky'. This includes making sure they deal with more than one person at your business – something that should occur naturally to some extent because the adviser should not be handling every element of the relationship (such as admin etc).
Some advisers deliberately hold on to the entire process and interaction with the client in a bid to keep them personal to them. That is a warning sign.
There should be multiple contact points with other people in your business – be that administrators, paraplanners etc – to both offer a fuller service and build that wider relationship with your brand.
Cost of acquisition
Adviser businesses grow in a number of ways. They either buy other advisers or adviser businesses, buy in leads from lead generators, or use word of mouth and client recommendations to get more clients.
These approaches have their pros and cons, but there is an underlying principle here that is key: how much does it cost to acquire clients?
Whether it be time out of the office meeting and socialising with potential new clients, paying for leads from lead generators, or spending time chasing new leads from existing clients, it will take man hours to develop and bring on new clients. Some individuals and firms believe that personal recommendation leads come at zero cost. However, if you look deeper, that is unlikely; even just picking up clients because you are a member of a club or social group still carries a cost.
Some of these approaches are easier to analyse than others, but it is absolutely crucial to understand how much it costs the business to grow its client base in order to be successful.
Do a simple test – work out the acquisition cost of a recommendation from a professional connection versus buying a qualified lead. The latter is easily identifiable, but the former is trickier once you add in the time spent with a particular accountant or solicitor, entertaining, going to seminars and similar activities. When you do that for all other forms of new client acquisition in your firm, it is quite illuminating.
If a business does not know what its own growth costs, it is a major red flag and needs to be addressed.