Firms across the globe are looking to transition their business models as a result of regulatory change.
Effective risk management is achieved by combining regulatory requirements – the must-do – with good business principles – the how-to.
The golden thread that runs through all regulation is, first, creating a sustainable business model and, second, placing the customer at the centre of the business and ensuring all financial advice is suitable.
Our practice management programme is designed to assess the potential within an adviser firm and then create a blueprint to help the business transition to its optimum model of profitability and sustainability.
We start by evaluating a business, looking at its income streams in terms of both upfront and ongoing commissions and fees.
Typically it is the ongoing commission and fees that build value and, as a result, sustainability and profitability.
We then assess the business practices, through the advice process and back office.
What goes on here will either position the customer at the centre of the business or drive them away.
This, in turn, builds or destroys income, value, future sustainability and profitability.
There are fundamental steps an adviser can take to build a sustainable business.
Build a business plan
In many adviser firms, the business owners also give advice.
This creates tension between working within the business – giving advice – or on the business – planning for the future.
It is crucial that the business owners take time out from giving advice to analyse their business, develop strategic and annual business plans and consider all the internal and external factors that could affect them reaching both their goals.
For example, businesses should create a business plan that focuses on revenue targets over three years.
These targets should be divided into upfront and ongoing revenue, and be broken down into income obtained from new and existing customers.
Other key indicators, such as services offered, reviews provided and the quality of advice, should also be considered.
These are just some areas that drive strategic direction, and research shows that effective business planning can increase profits by as much as 246%.
Invest in a CRM system
Creating long-term sustainability means investing in a quality customer relationship management (CRM) system and gathering as much information about clients as possible.
Customer data is like gold dust and is a key factor in customer and therefore income retention. Many advisory firms do not have a centralised customer database.
Instead, each adviser within the firm tends to manage their own customers, and the business owner, who holds the licence and is ultimately responsible should anything go wrong, may be unaware of the adviser practices, for example, advice process, products, reviews and service.
These practices make it nearly impossible to evaluate the value of a firm. Research shows that having a centralised customer data system improves profitability by 154% and can help reduce reputational and financial risk.
Develop a robust process
The more robust the advice process, the greater the opportunity to reduce the cost of advice and capitalise on the lifetime value of a client.
The customer fact find or financial needs analysis should focus on identifying customer needs, objectives and their life stage.
This ensures advice given is based on a client’s needs rather than on how much they have left in their budget to spend.
A robust sales process is crucial in reducing risk within the business and ensuring any products offered are matched to the customer’s profile.
Delivering solutions to customers will help increase business sustainability and persistency, improve trust and lead to future sales.
Holistic financial planning
The more services and products offered to a customer, the greater the chance of retaining their custom.
Though this may be challenging due to licence requirements and the need for specific technical expertise, holistic advice adds value to customers and helps protect the business from competitors.
In some jurisdictions where charging fees for advice is still in the future, past experience shows the more value delivered to the customer, the more they will be willing to pay for advice and ongoing services.
Masthead is a network for independent financial advisers in South Africa. It is part of the Old Mutual group and was established in 2004 with the advent of the Financial Advisory and Intermediary Services Act in South Africa. The purpose was to assist advisers to successfully make the transition from old to new business models.
Skandia International has sponsored the practice management programme with Masthead for the last two years.
