What sort of business do you want to run, and what sort of clients do you really want to work with? Brett Davidson discusses how to restructure your business to suit the post-sunset clause world.
The ‘sunset clause’ is intended to restrict the influence that product providers may have had on distribution, and to introduce greater transparency of costs to consumers to ensure platform charges are known and understood. All of this allows for easier consumer comparisons.
A 10% profit margin (after you get paid a fair market rate for your job as an adviser) is not enough. A 25% net profit is what good looks like.
As with all change, it provides an opportunity to either grow and develop, or to merely suffer. The way I’ve phrased it makes this choice sound like a ‘no-brainer’, but it’s not that simple. Growing and developing hurts too, yet it leads to much more satisfying outcomes.
There are a few issues arising from the sunset clause that I strongly support:
- Total transparency - When everyone knows the truth they are empowered to make the best choices for themselves.
- The cost of investing must fall - Investment management is overpriced for what it delivers and needs a shake up. We (the adviser community) need to put investment managers under more pressure by acting in our clients’ best interests; looking for lower costs and only paying higher costs where there is demonstrable added value.
- Advisers should be working with higher value clients - That means getting comfortable with moving up the food chain; not standing still. You can do it. Don’t fight it. Online options are coming which will service lower-level clients directly. Yes, in some cases those online options may allow advisers to service smaller clients more cost effectively, but I wouldn’t be sitting on my hands waiting for that. Know who you work best with and focus all energy, time, money and marketing effort on working in a space that is appropriate for face-to-face, full-service advice. Make it narrow and defined. Generic doesn’t work and will come under more and more pressure as time goes on.
What’s the real issue? It is vital that you get your business sorted.
A 10% profit margin (after you get paid a fair market rate for your job as an adviser) is not enough. A 25% net profit is what good looks like. That 10% leaves you too exposed and vulnerable; acting as the bank and taking a pay cut to keep your business afloat in tough times (which goes down really poorly at home).
To get to the real issue you need to ask yourself what sort of business you want to run? What sorts of clients do you really want to work with? When you think about that dispassionately and honestly, all sorts of choices open up.
For example, if you make a conscious choice to let a bunch of clients go, it’s ok to shrink revenue in the short term. If that’s what is required then evaluate your current structure and costs and shrink them too. In my consulting work this is often the process firms go through initially.
I don’t want to make this sound like a walk in the park because it’s not. However, consider the alternative; continuing to try and write more business in order to support the overheads and team size that you currently have. That’s like saying “I can’t quite live on what I earn, so if I earn more then I’ll be ok”. We all know from personal experience that it doesn’t work. It just becomes a never-ending hamster wheel of “I need more”.
Think of a business restructure like a home renovation. The first step is sanding back the floorboards and stripping off the old wallpaper. Halfway through that process you want to cry but, pushing through to the point where the place is repainted and put back together, it’s better than ever.
There is some great analysis and advice in this Nucleus paper. However, you can simplify your thinking even further if you’re brave enough, and I strongly recommend that you be brave and bold in your decision making here. It’s an opportunity to address the real issues within your business.
Ask yourself the following questions and think seriously about your answers:
- Where is your business headed?
- What does your ideal business look like in 3 years time? In 10 years time?
- Which of your current clients fit that future business vision? Which don’t?
Keep the clients that fit and get rid of the ones that don’t. You can do that humanely with a bit of effort. Restructure your business aggressively to suit the new world. If that means smaller, tighter and less overhead then great. You can always ‘go again’ from that position if you have ambitions for growth and scale later on. Focus on the fact that with the right structure you’ll end up with a much more profitable and enjoyable business for the future.
To find out more about the sunset clause and how you can get ready download the Nucleus whitepaper, The sunset clause: making informed decisions.