By Jayson Forrest - Managing Editor  - IMAP Perspectives

1. Planning horizons

Most of the advice businesses Chris works with have a three-year strategic business planning cycle. However, he believes that a three-year timeframe may not be enough, as he often sees many businesses overestimating what they can actually achieve in that period.

“As a business, if you’re really thinking about where you are now and what’s your ideal business in the future, then it might take more than three years to achieve that. So, you may need to map out a longer term plan that extends out to, say, five years. Remember, everything has a tendency to take longer than you expect.”

2. Business size

The size of a business can vary greatly, from boutique to mid-sized through to large scaled offerings. But according to Chris, the size of a business will depend on what the objectives are of that business. For example, when it comes to a scaled offering in the advice space, he says it becomes a numbers game, where the volume of clients determines the resources required by the business to service these clients.

“If you’re going to look after thousands of clients, you’re probably going to become a business that has between 20-50 employees, maybe more. And that means more controls over processes and procedures, more management, an effective communication structure, risk management frameworks, resourcing, and perhaps outsourcing. This all adds to the complexity of running a business,” Chris says.

But at the other end of the spectrum, boutique businesses - while not necessarily small - generally have fewer clients and therefore, fewer employees and costs, but may still be generating considerable profit.

Tony agrees that when it come to targeting scale for an advice business, it really depends on what the business is doing and the client segment it is targeting.

“Are you a niche business, doing something that you’re very good at that others are not, or are you a business that is doing lots of things that tend to be low margin, which many other businesses are also doing? If it’s the latter, then you need scale, otherwise your business model won’t work. Whereas if you’re niche, you don’t need scale.”

3. Client segment

Tony believes advisers probably don’t think enough about the types of clients they serve. He adds there is a common perception across many advice businesses that to be successful, they need to get their message and products out to as many people as possible. 

“That belief is based on: ‘If I get my products out to as many people as possible, then even if a small percentage of them buy that product, then I’m growing my business.’ But it doesn’t work that way,” he says.

“That’s because when you get your message out through advertising channels or social media, most people simply don’t care. It’s a huge expense for little gain. Instead, it’s more efficient to get your message out to a small, highly targeted number of people who actually do care about what you’re trying to sell. This approach means you’re likely to be more successful and on-target with your messaging.”

As a responsible manager, Ironbark Asset Management has a broad community of practitioners and practices that it’s involved with. About 80 per cent of these clients are similar across the different advice businesses. As such, Chris believes there is still not much niche marketing or specific targeting of client segments occurring in the advice sector.

“Although there are some advice practices that target the likes of medical professionals,  pharmacists or professional athletes, I haven’t seen a lot niche targeting. However, there is a lot of room to develop niche client segments in the advice industry,” he says.

4. Services offered

As the needs of clients change and evolve, so too must the range of services that advice practices provide.

At Ironbark, most of the advice businesses that Chris deals with have a large established client base. These businesses offer traditional financial planning services, with many now also offering a managed accounts solution.

He is also seeing a growing move towards ‘advice convergence’, where advice firms work with aligned professionals, like accounting practices and finance/mortgage brokers, to augment their service offering.

FinClear deals with a range of different client types, from the traditional financial planning model, where advisers do a “little bit of everything”, through to specialised wealth managers and niche adviser models.

“I don’t think there is anything wrong with any advice models, so long as you are clear on what your model is,” Tony says. “Where businesses struggle is trying to be ‘everything to everyone’. They fear that if they don’t provide clients with everything they want, then they will lose them. Instead, they should be focusing on doing what they’re really good at and delivering a value proposition based around that.”

However, for advice businesses choosing to go down the full service delivery path, Tony warns “it’s an expensive path to take”.

“Clients are always asking for things, like specific services, but if you you don’t have those services or capabilities, then that’s okay. Refer them to a trusted partner. However, some businesses think that because a client has asked for something then that means they have to have it, which only adds to the operating costs of that business.”

Chris reiterates the trend towards advice convergence, not only as a way of reducing business costs but also for strengthening a business’s value proposition. 

“Through your own in-house capability and working with partners, an advice business can become a one-stop shop for the finance needs of all their clients,” he says.

5. Business resourcing

Whether it’s about fully or partially outsourcing your services or capability, or doing everything in-house, resourcing remains a pivotal component of any advice business. Tony is of the opinion that businesses should outsource functions that they struggle to do internally.

“Just consider your investment capability. Do you want somebody else to pick your investments, or do you have the expertise to do it yourself?,” Tony asks. “In some cases, you definitely want somebody else with the experience to pick your investments, because you’re not an investment manager. That’s not your expertise.”

Chris agrees, adding that businesses need to clearly determine what they are good at, so they can apply their internal resources to that aspect of the business. And for other business aspects they are not so good at, then outsource that function.

“Increasingly, businesses are outsourcing and offshoring some of their functions, like paraplanning. Offshoring is about one-third the cost of what it is to do in Australia, which is quite compelling,” Chris says. “Partnering with other businesses to get the best result for your end client and business, is likely to be the most efficient and cost-effective way to achieve that.”

6. Investment capability

FinClear generally works with two types of financial planning clients: the ones who want to explicitly project themselves as stock pickers, and the others who are advice orientated. Tony concedes that while stock picking is getting smaller, it’s not dying, and there remains a place for stockbroking and stock pickers.

“I believe stock picking or stockbroking is evolving into something that people are much clearer about,” says Tony. “A couple of things that have changed dramatically in managed accounts is technology and the availability of listed products. Twenty years ago, there was no technology available, so if you wanted to buy products, you’d have to go to the likes of a Macquarie wrap or BT wrap.

“Now, there is plenty of technology available that allows advisers to manage products. Managed accounts are a good example of how an investment structure and technology is working in tandem to make it much easier and cost-effective to access investments and listed products.”

Chris agrees, adding that a practice’s investment capability really depends on what its value proposition is.

“Most of the businesses Ironbark deals with might be considered traditional financial planning businesses, so not necessarily stockbrokers or having a heavy bias towards selecting listed assets as part of their portfolio management. And most of these businesses have recognised that to be a portfolio manager requires external expertise, as provided by asset consultants, to sit on the investment committee,” Chris says.

“However, as some of those practices grow, I can see them internalising some of their capability. Some businesses already have the capability of an internal investment management team. So, it then becomes an issue about whether a business has enough scale to pay for those additional resources on a full-time basis.” 

7. Pricing services

When it comes to pricing advice services, Tony concedes it is “really hard to do”.

“Pricing can be low but there has to be an element of the service that is contributed by the client,” he says. “If a client wants a cheap price, then the business could provide them with a self-service tool, where clients do some of the work themselves.

“Pricing is tough. When you’re building a practice, there’s always the temptation to take on non-profitable clients or business, thinking you can build on it to generate profit. But that seldom works. You need to be disciplined with your pricing model.”

At Ironbark, Chris is seeing many advice businesses now charging separately for their managed accounts solution. He expects more businesses will increasingly move to pricing models that charge separately for the services offered.

8. Capital requirements

Chris believes when it comes to a business’s planning cycle, not enough thought is placed on capital by business owners. He says issues like succession planning and technology investment are all issues requiring capital expenditure that business owners need to consider.

“And then there’s the issue with the banks. Even though money has never been cheaper to borrow, banks will still only lend about half of what a business is worth. So, as an equity stakeholder, you still have to work out where the shortfall is going to come from,” he says.

He warns there is going to be a need for greater investment in technology, as it’s unlikely that external suppliers and fintech providers are going to be able to build all the technology capability that advisers want.

“So, unless the big institutions drive technology development, like enhanced user functionality on mobile apps, it’s unlikely we’ll see that sort of technology rolled out. But unfortunately, that’s the type of technology and interface clients are increasingly expecting with their investments.

“So, it will be up to the advice sector to deliver on technology, and that’s going to cost money.”    

Chris Wrightson is the Head of Wealth Management at Ironbark Asset Management) and Tony Lynch is the Chief Commercial Officer at FinClear.

They spoke in a session on ‘New business models: Which one fits your capabilities and your clients’ needs’ at the IMAP Adviser Roadshow 2021.

The session was moderated by IMAP Chair, Toby Potter.