Profitability in an advice practice

As part of the Business Health HealthCheck, we asked principals how they saw the next 12 months – and it’s generally an optimistic outlook. But there are challenges ahead for the industry, like disruption through technology and competitors, regulatory change, industry rationalisation, demographic change and evolving business models.

But despite these challenges, as outlined below, advice principals remain optimistic:

• 94% expect to increase their practice revenue;
• 89% expect to increase their revenue generated by fees;
• 80% expect to increase the number of clients they service;
• 61% will build on the number of third-party referral partners;
• 42% will recruit more income producers to their business; and
• 46% expect to appoint more support staff.

However, without an effective business plan in place, principals will struggle to face the challenges ahead. An effective business plan is the major driver of profit, and without a structured business plan in place, businesses will struggle to navigate the challenges.

For a plan to be effective, it needs to be:

• clearly documented, so the business can be held accountable to it;
• comprehensive;
• contain the following – ‘who’s’ going to do ‘what’, by ‘when’ and ‘how’; and
• quarterly monitoring of a ‘progress to plan’.

Yet, Business Health data reveals that one in four practices (24 per cent) do not have a business plan in place, which is concerning.

But for those businesses that do have a business plan in place and are implementing it effectively, they are significantly more profitable – up to 209 per cent. This demonstrates that an effective business plan, which is implemented properly, will generate more profit for a business.

Managed accounts

So, how does the world of managed accounts look?

The HealthCheck data we have compiled for the managed accounts sector is based on 93 respondents and was run over the first three months of 2018 – January to March. The respondents comprise of a mix of businesses. This research was sponsored by Colonial First State.

The data shows that practices using managed accounts are seeing real benefits to their businesses. The top five benefits include:

• 87% – have seen a reduction in administration (i.e. no ROAs);
• 47% – more time spent with clients (i.e. face-to-face meetings);
• 73% – have experienced improved client engagement;
• 70% – have seen improved risk control; and
• 83% – have recorded improved client outcomes.

Table 1 compares managed account practices to mainstream advisory practices without a managed account offering.

In compiling this data on managed accounts, it’s crucial to note the importance of client communication in the advice process.

For example, one of our other tools at Business Health is a client survey. We confidentially ask clients on behalf of a practice, how they consider their adviser across a number of areas, including nine KPIs. After 15 years of doing this survey, ‘communication’ comes in as the bottom KPI across five countries (U.S., South Africa, U.K., Singapore and Australia).

As part of your business plan, it’s vital that you look at your communication program. Look at the acronyms you use in the advice process, how you convey your messages, and how you actually talk to clients. And if you do have a communication program, make sure it is resonating with your clients? So, how do you do that? You simply ask them.

However, only 34 per cent of planning practices are currently seeking feedback from their clients, which means that two-thirds of practices have not sought feedback. So, a regularly reviewed communication program should be added to any business plan – in fact, it’s critical for your notional profitability.

5 key takeouts

We have uncovered five key takeouts of our research into managed accounts. These are as follows:

1. Benefits accelerate as solutions embed.

Our research shows that those planners who have been offering managed accounts for more than three years are significantly more profitable than those planners who have been offering them for less than three years (Table 2).

So, if you’ve begun the managed accounts journey, my advice is to continue that journey because there is payback at the end of the line. It makes sense, because managed accounts are a whole business solution.

And the second profit driver for businesses is the fact that clients become invested in the managed accounts solution. For example, those planning practices that offer managed accounts to more than half of their clients are more profitable.

So, the longer you’re involved with managed accounts, the better you’ll become with them. And the more embedded managed accounts become within your practice, the greater the profitability to your business.

2. Higher profitability.

A managed accounts offering is bringing businesses higher FUM, higher revenue and higher profit for principals. At Business Health, we calculate a $110,000 difference for principals running managed accounts versus those who don’t (Table 3).

So, managed account businesses are more profitable.

3. Communication is key to any relationship.

The key to any successful and longstanding relationship is clear and effective communication.

Businesses that contact their ‘A’ class clients 10 times a year or more, are making 31 per cent more profit than those that don’t (Table 4).

So, customised communication that is done meaningfully and frequently, produces a higher level of profit for practices. That’s because clients actually think their planner is actively working for them, as they are regularly hearing from them.

4. Higher profitability for those who segment.

Client segmentation is alive and well in planning practices, and for those businesses that are unable to offer differentiated services, they will struggle to survive going forward.

Every client has to be treated with respect and fairly, but not necessarily equally. Eighty per cent of revenue is coming from 20 per cent of clients. So, client segmentation is a big issue. According to Business Health data, those businesses that are segmenting are significantly more profitable than those that aren’t (Table 5).

So, client segmentation does work and it’s a big driver of profit. It frees up a practice’s time and resources to work on those ‘A’ class clients from which the practice draws most of its revenue. And our data shows that 90 per cent of managed account businesses are segmenting their client base, compared to 77 per cent of all practices.

5. An even more valued service.

Eight-seven per cent of the marketplace charge a fee for the preparation of an SOA, whereas 97 per cent of managed account businesses charge a fee for preparing an SOA. Managed account businesses are more confident about charging explicit client fees (Table 6).

Why are managed account practices more profitable?

There are three key reasons that help to explain why managed account practices are more profitable.

1. Efficiency: The Business Health data shows managed account practices to be more efficient. The key points being:

• With experience comes confidence;
• A reduction in administration time and costs;
• Improved risk control; and
• Managed accounts are integral to these businesses.  

2. Confidence: Managed account businesses tend to be more confident. They charge more for their fees, they are confident in their offering, they have improved investment outcomes for their clients, their existing clientele are happy, and they have an expanded range of services.

3. More time: Managed account businesses have more time for clients. This includes more time put aside for face-to-face meetings, more client contact, more client reviews, and greater client segmentation.

These findings are Business Health’s high level take on the data currently complied on the Australian managed accounts sector. It will be interesting to see how this data evolves over the coming years.

Terry Bell is a Partner of Business Health. For more information, go to businesshealth.com.au

The Business Health Managed Accounts research was sponsored by Colonial First State.