With only moments from FoFA and Fee Disclosure Statements dictating some of your practices, it is crucial to ensure you are ‘price proof’ and able to deliver a convincing story of the value you provide and what it costs. Otherwise, you may be at risk of failing to convert ideal prospects to clients or worse, losing valuable clients you already have.

Clients pay your bills. Without them, it does not matter how efficient your processes are, how sexy your brand is or how beneficial is the advice you provide – you won’t get paid. So don’t let clients use price as the reason they choose not to work with you.  There are plenty of other reasons they could come up with on their own.

I am sure you don’t want your bottom line to be at the mercy of your pricing confidence (or lack of). Therefore, irrespective of what pricing model you use, one of the best ways to boost your pricing confidence is to nail your story around value. In the absence of understanding value, price stands out like sore thumb.

When addressing your pricing strategy, here are 8 key points to consider:

1. Knowledge is power. You can’t make a sensible pricing decision without all the facts. Yet many advisers still determine price as if they were at a casino gambling table. Know your minimum price that covers all your costs AND build in a margin for profit. If you are game, the best businesses are those that also use value to drive their pricing decisions. Remember, you did not go into business to break even, did you?

2. Every client should be profitable (unless it’s part of your pro-bono strategy). Discounting your ‘establishment’ value in the hope clients sign up for your profitable ‘ongoing’ can be risky business.  What if they decide to leave after one year?

3. Be aware of what price does to our perception of value.  Unless you are using a discounted pricing strategy to compete, remember the saying, “if it looks too good to be true”…

4. Consider what you put a price on. Are you attaching a high price to something of minimal value, and letting a huge piece of value walk out the door? All your IP, time and effort to develop the advice should be worth more than completing the paperwork.

5. Think carefully about when you confirm the actual price with the client. If you are delivering premium value, clients would not expect you to know the actual price when you first meet.

6. Keep it simple unless your strategy is to confuse. The more complicated you make your pricing structure the bigger the turn off. Clients actually want to know what they are paying for and what they get.

7. The first meeting is not free – someone foots the bills.  You need to be clear on who it is.

8. Consult your pricing committee. This involves ‘testing your price’ with someone other than yourself before you tell your client.  It could be a team member, a colleague, a PDM / BDM or a business coach.

At the end of the day pricing is all about people’s perception of value. Supercharge your pricing confidence and make the dreaded pricing discussion a thing of the past. Otherwise it is going to be a harder slog in the future.

Join the conversation on Twitter @_9rok or visit www.9rok.com.au

Finding, hiring and retaining good employees is critical to the strong performance of any financial planning practice 

Motivating staff to perform to their best is a common challenge that some practice owners face. In particular, dealing with employees can actually be quite a tough task for many practice owners as they grow their businesses. Often owners start out as a one-man operation and don’t have to manage staff, but as they develop their business over time they take on the responsibility of hiring and managing staff.

One of the keys to hiring right people into practices is ensuring a good cultural fit. This not only helps with retention and cohesion within an office, but also helps a practice in realise a common vision for client service and practice growth.

Some practices who value cultural fit conduct psychometric testing when they are looking to employ a specific kind of team member, while others, for example, conduct panel interviews to ensure there is a cohesive understanding and agreement around potential new hires. So the first step in getting the most out of staff is to ensure you have the right type of people in the business, so they want to come to work, like working with the people in the business and want to help the business realise its goals.

Once you have good staff on board and performing to the best of their ability, it is important to retain them. If you’ve trained someone up there is also a danger that they may leave and use that training for the next potential business opportunity they might have an eye on.

There are a number of ways to retain good staff. If there is an employee who you think is particularly good, there’s an opportunity potentially to offer them some equity or to purchase some equity in the business.

Another way go incentivise them is through growth targets. So if they’re bringing on clients and doing really well, it’s a good idea to have some sort of bonus structure in place which gives them both an incentive to perform for the benefit of the business as well as a personal reward in the form of extra remuneration – which is often a key factor in employees’ decisions to stay (or go).

There are a number of typical loan covenants that are applied to businesses operating in the financial planning industry

In my discussions with advisers around the country there appears to be a common misunderstanding about the purpose of loan covenants. This also includes the reasons why banks put them in place for lending arrangements whereby the primary security and repayment source for the borrowings is the cash flows of the business.

So why are covenants important and why do banks require them?

Covenants, if set appropriately and monitored regularly by both the business and the bank, can be an effective tool in highlighting early warning signs of increasing risk, but also in demonstrating the effect of management decisions on the business cash flows.

Covenants are also important when the security offered to the bank has a relatively fluid and dynamic business value such as a financial planning business. This value needs to be able to be monitored and measured on a regular basis to assess the ongoing risk profile.

For business owners, being aware of movements in key ratios at an early stage allows them to address the concerns before they escalate, which will help preserve and build long term business value. In a financial planning practice, business value can diminish quickly if matters concerning diminishing revenues or increasing expenses are not highlighted and fixed at an early stage.

It is important to note that you can have either negative or positive covenants. A negative covenant limits or prohibits actions that the borrower may take without prior written consent of the bank, such as limitations on the amount of dividends a company may pay. A positive covenant specifies an action that the borrower agrees to take or a condition that they must abide by, such as providing periodic financial statements to the financier.

A few of the typical covenants that are applied to businesses operating in the financial planning industry include, but are not limited to:

Interest cover – defined as the ability of the business to meet its interest expense from the Earnings Before Interest and Tax (EBIT). Measured as dividing EBIT by total interest expense. This is applicable where interest only debt is proposed.

Note that the EBIT figure should always be “normalised” to include a nominal figure for principal/s remuneration. This figure can vary dependent on the size and complexity of the practice. This is also referred to EBITAPR, Earnings Before Interest and Tax After Principals Remuneration. Businesses should be targeting interest cover in excess of two times, which then supports the ability to amortise debts. If businesses are only achieving one times or less then there are no surplus earnings to put towards debt reduction and often additional funds are required to be injected into the business to meet its commitments. This position was not uncommon during the GFC.

Debt Service Cover – defined as the ability of the business to meet its principal and interest payments from EBIT. Measured as dividing EBIT by total principal and interest (P&I) payments. This is applicable where debts are on a P&I basis.

EBITAPR should also be used in this calculation. Businesses should be targeting debt service cover in excess of 1.50 times, which then illustrates an ability to meet all P&I commitments and also allows for other payments such as taxation.

Setting of a minimum recurring revenue figure by which it must not fall below. This is to protect the secondary position being the asset value and to ensure that the loan to value ratio does not increase beyond acceptable levels.

Reporting covenants requiring the provision of regular financial statements to assess business performance and measure against expectations.

For a financier, covenants, if managed and monitored effectively, can be an early warning sign where a deteriorating trend is evident. If a breach is found to have occurred, a “right of review” is triggered to determine the extent of the breach, which allows the client and the bank the opportunity to discuss the reasons behind the breach and if corrective actions are required to address the issue.

Covenants are designed to provide triggers that highlight potential problems well before the issues get to the point where they cannot be resolved and the business is left with little or no alternatives.

Take for example the events of the GFC and its resultant impacts on both new and recurring revenue streams. Few, if any, financial planning practices were completely immune to the effects of the GFC on their revenue streams and as a result breached a number of loan covenants.

It is critical for the financier in these instances to have an understanding of the impacts such an event has on businesses operating in the financial planning industry and acts appropriately in a collaborative manner.

At NAB, we take the opportunity to discuss the impacts on the business and also if there are any other flow on affects as a result such as taxation and superannuation guarantee arrears. It is best for business owners to be open and honest and discuss with their banker immediately a breach is determined. The bank genuinely wants to work with the business to get the best outcome for all parties.
As business owners it is important to understand the impact of management decisions when exploring appropriate gearing positions for the business. Gearing covenants are effective in providing ongoing measurements for this purpose and also assist with understanding effective gearing levels that achieve the required return on investment by the business principal/s.

You clearly expect a minimum overall longer term return for clients when creating investment strategies, it is therefore prudent to articulate the minimum return on your investment in the business that you expect and monitor this regularly.

In summary, your financier wants to understand your business and its drivers better. Covenants are an effective tool in providing an ongoing measurement around some key areas that then present an opportunity for the business owners and the bank to regularly discuss how the business is performing, both the not so good and the success stories.

There are a number of key elements that contribute to and drive value within financial planning practices

In No More Practice 4, Sam Henderson is on a journey to grow his SMSF practice. A key part of my role in the show involves advising Sam on this process from a financial perspective as well as different options for funding his plans for expansion.

To assist in attaining funding for growth or expansion plans, one of the most important things any good financial advice practice needs to have a handle on is key drivers of value within the business.

1. One of the most common drivers of practice value revolves around having a client value proposition – whether it be for a standalone practice or for each individual business within a larger, diversified financial services firm.

So you really need to know the type of client that you’re looking to talk to and ultimately service. In this process it is good to segment clients into A, B, C and D categories, so the clients that earn you the most revenue could perhaps be in the A category. You might even want to segment them in terms of a particular niche area that you’re focusing on, and have individual advisers within your business focus on those key areas. Businesses that have a significant focus on particular niche areas generally run at premiums compared to other practices that don’t.

2. Another important driver of practice value is having great systems in place that allow you as the practice owner to transition clients over a period of time to a new owner if need be. Businesses that have systems in place to help monitor and effectively manage clients as they come in the door and through the lifecycle of the client journey are in a much more advantageous position with regards to client engagement and retention.

Good systems will not only help maximising the potential value of clients to a practice, but also assist in running a cost-efficient practice. If you have good reporting systems that talk to each other and minimise double handling of work, for example, then this can contribute to the productivity and overall profitability of a practice.

3. A key practice value driver from a buyer’s perspective relates to how a business is run to minimise principal dependency. If a practice is based on a corporatised model in which the business as a whole is seen the key provider of financial advice, rather than the practice owner themselves, then this will help in transitioning client relationships in an easy and seamless manner – which will be a key concern of any potential buyer of your practice.

4. Key to the above point is servicing clients. Apart from the obvious importance of provision of good advice, it’s often the little things that count here that will see clients stay for the long-term – and ultimately drive revenue and profitability. For example, you could have a client’s name tag on their parking space when they come into visit, you can wait for them at the door and also have a coffee waiting for them when they do come in; it’s the little simple things that help them feel like important individuals.

5. Get the basics right. Any potential buyer of your business will want to understand the P&L financials of your practice in a simple and transparent manner to better quantify its value. So practice owners need to be able to track how their business is performing and also demonstrate they are running a cost-efficient operation.

One thing that a lot of business owners neglect to do well is when they’re setting a budget at the beginning of the financial year, is to review this on a monthly basis and revise the budget in light of cost overruns or revenue downgrades. This process also helps in understanding where potential savings lie within the business.

Fully delivering on your client value proposition to your existing client base can be a very fruitful exercise for both the adviser and client

While competition for good clients is on the increase, there is still plenty of scope for advisers to communicate and further reinforce the true product they are selling: the product of their advice. This concept still does not resonate with some clients, so it comes down to making sure your client value proposition is clear.

Once a client really understands what they’re buying, which is a relationship that can help them with specific financial strategies to meet certain lifestyle and other needs – whether it be buying a first house, paying off the mortgage, protecting assets with insurance or maximising superannuation installments – we need to do more to not only sell the benefits of advice, but also work out which products meet the sweeter services that underpin those strategies an adviser delivers.

Too often, advisers in the current market are all too focused on trying to attract high net worth clients because they are a good target market. But more often than not, many advice businesses started out by meeting a particular client need.

The client has a specific itch in that they want something solved, so they want to build a relationship with an adviser and trust them before they take up a full financial service offering from an adviser. It could be just making sure their general insurance is in place, or ensuring that their home loan is correct before moving into a full strategic plan around what strategies are available for their wealth maximisation.

So make sure your client value proposition is clear and that you are fully delivering on this your existing client base. This should be your first point of call in increasing the share of wallet from clients and is often a very fruitful exercise for both the adviser and client.

Practice owners will need to re-examine their revenue models and point of differentiation in a post-FoFA world

The Future of Financial Advice (FoFA) reforms present the advice profession with a significant number of challenges. One of the most obvious challenges for the advice industry relates to traditional revenue models.

Post FOFA, financial advice needs to position itself as the product. Unfortunately we have grown up in a world where the goal is to put clients into an investment product or put them into a platform. The real leap for the industry will be to start costing and pricing advice without this goal in mind. Can you put a cost on specialist or differentiated advice that you can deliver to clients, so that they will pay for it?

This is going to be a challenge, because obviously customers aren’t used to paying for nonsubsidised advice, and it does cost money to actually produce this kind of advice.

If the industry really wants to change, it needs to progress its advice models and the subsequent revenue models that underpin these. Investment strategies need to be practical, from retaining Centrelink benefits through to helping with self-managed super funds – strategies that can actually help people not just save money with tax benefits but also accumulate wealth quicker. There’s a price for that and certainly that’s where advice needs to focus as those are legitimate revenue streams.

There are other opportunities in the post-retirement world as well as possible solutions for consumers en masse around savings and superannuation, and I think managed funds can still play a valuable role in helping accumulate wealth here.

The important thing for business owners here is to think about what it is that you can deliver that’s different. In a post-FoFA world, clients will look for something different. If you service high end clients then think about what it is that you can offer that is different as far as service, but if you want to stay in the mass market then you need to deliver advice in the most cost-effective way.

At its simplest, the best interests’ duty prevents advisers furthering their own interests over those of the client when giving advice.

What does this mean in practice? Quite a lot. For example, according to the new RG 175:

• Clients must be given non-product-related solutions where appropriate, even if that means the client is less likely to need future advice, for example advice on debt reduction or Centrelink benefits.

• Advisers mustn’t recommend a product or a service to create revenue for themselves unless they can demonstrate additional benefits to the client. This applies to strategies or products and even to the services themselves. For example, they can’t recommend an unduly complex strategy that will require ongoing advice if the client is unlikely to seek ongoing advice or be able to afford it.

• Advisers can’t accept remuneration that would reasonably influence the financial product advice you give (unless it’s grandfathered).

• But even if the remuneration is grandfathered, the advice isn’t. For example if an adviser recommends a client continue to use a platform when other better solutions (which would not be grandfathered) are available for the client, this would be a breach of the best interests duty.

Almost all the examples in the new RG 175 use a scenario where advice other than a product recommendation is most suitable for the client. Surely this is ASIC sending very clear message that a pure product focus needs to be a thing of the past?

So what does this mean for asset-based fees? ASIC takes the view that asset-based fees incentivise advisers to recommend strategies and products that maximise the assets they manage for the client.

It feels a bit like the anti-smoking legislation. Smoking is not actually banned, but it’s becoming increasingly difficult to smoke anywhere. Just recently NSW banned smoking in places like transport stops and entrances to public buildings.

Advisers aren’t specifically banned from charging asset-based fees either – but if this is the only charging model you have, you’ll risk either falling foul of the Conflicts Priority Rule or not being adequately remunerated for your work.

If you’re not actually managing a client’s assets or you’re only managing small amount of them, an asset-based fee may not adequately remunerate you. You’ll need a fee structure that remunerates you for the work you do. So we think there’ll be a trend away from 100 per cent asset-based fee structures.

Of course, you can – and most advisers will – use asset based fees where they are appropriate. For example where you provide an ongoing service and manage the clients’ assets, asset based fees will be suitable and easier to administer.

But if the advice the client needs is not product-related – and ASIC has made it clear that the best interests’ duty requires advisers to provide non-product-related solutions where appropriate – other forms of charging will be required. It’s likely that advisers will have a menu of options. Many advisers do this already – indeed some have moved completely away from asset based fees.

So what should advisers be doing to prepare for the new world order?

1. Identify the conflicts inherent in the way you currently advise clients. You’re probably not the best person to do this as you’re likely to be confident that there aren’t any. So get some advice from someone outside your business who can shed new light on things – and who understands the way ASIC is approaching best interests.
2. Reconsider your fee structure. How will you charge clients who need advice but don’t want or need you to manage their assets?
3. Develop an engagement process and engagement letters that makes your service proposition and the client’s fee commitment clear from the minute the client walks in the door. You’ll be amazed at how much easier it will be to manage the financial aspects of your client relationships

The first step in creating a fee-for-service financial planning practice is to provide the service. Don’t refer your clients off to competing institutions. Control the service provision function yourself.

Why give profit away? Why give goodwill away? SMSFs are a beautiful practice development opportunity. They are the perfect client-adviser integration tool, and they suit most clients if you understand them and the opportunities they create.

Clients want SMSFs. They want the control and security of their names on their investments, and knowing exactly where their money is all the time. Clients remember what happened to their superannuation balances in the GFC and they want to make sure it does not happen again. They want a conservative and safe way to invest their superannuation and to make sure it is there when needed in retirement.

SMSF suit most clients, from young couples just starting out to older, wealthier individuals with millions to invest.

Consider the strategy of a $100,000 SMSF 100 per cent invested in a CBA deposit. This has arguably the lowest risk of any superannuation strategy. Does it get any more conservative than a CBA deposit? The administration cost is well below 1 per cent, even 0.5 per cent, if the accountant is efficient: it takes less than two hours to prepare the accounts, tax returns and related documents for a SMSF invested in a bank deposit. The net return of about 3.5 per cent to 4 per cent beats the “capital stable” option for nearly every other superannuation alternative.

If you recommend a SMSF you have a client for the next 30 years, not just the next 30 days. This means you earn income for the next 30 years, not just the next 30 days, and your practice’s CGT free goodwill increases accordingly.

SMSFs create recurring annual business for financial planners. They are not one-off sales events. The financial planner advises on the set up of the fund, and the role it plays in the client’s on-going financial plans. Risk insurances are needed. As the SMSF grows and the investments diversify more regular and detailed investment advice is needed. The SMSFs are asset protected, and are an integral part of the long term retirement planning and estate planning processes.

The real beauty of an SMSF practice lies in bringing the SMSF administration and audit process under your roof. I know one financial planner who administers more than 200 SMSFs, at an average profit of $1,500 per SMSF per year. He charges each SMSF a fixed fee of $2,500 a year, and sub-contracts the accounting/audit/tax function at a fixed fee of $1,000 a year. That’s $300,000 extra net cash flow a year, and about $1,000,000 of CGT free goodwill.

What’s better, previously the 200 SMSFs had their own accountants, and each of them was competing with him for the advice work. Now his clients have a much better (ie lower price) service and he is the primary adviser, the person his clients trust with all aspects of their retirement planning and other financial planning needs.

He is the primary adviser. He provides the services, not some institution or other potential competitor, and he gets the fees and the associated goodwill. He has the personal satisfaction of being truly involved in his clients’ affairs and knowing he is providing excellent value and service.

This is what creating a real fee for service practice is all about.

There are a number of ways in which advisers can best generate good revenue streams. The key here is your definition of good – as not all business is good business – an old adage I know but a pitfall for many advisory firms

Good revenue streams for me means, repeatable, enduring and increasing income flow, and I feel the only way to guarantee this for your business is to run a true relationship model that fully contracts your clients on an ongoing basis.

Your fees have to relate to your offer and the complexity of the work being undertaken – not the amount of time or dollar base of funds under advice.

Know your business model
Be clear on your model: are you a generalist or a specialist? It’s possible to have a general advisory firm with an individual adviser specialty focus ie financial planning plus aged care, but you will need scale in your business to deliver this model, as a broader offer brings greater diversity across your client segments.

If you are a specialist make sure your depth of competency is very deep as your expertise will be your price gatherer. Pick your niche based on your skill set rather than chasing a certain market segment. The payoff will be better for you and your clients.

Deliver on your promise and then some … and then some more. There are many definitions of value. Mine is simple – it’s when I receive “something” (a service or offer) that I wasn’t expecting and that’s relevant to me, but more importantly, it enhances my position (ie: a tangible benefit).

We all know that clients will pay when they see or perceive there is value for them, so you should be continually delivering beyond expectations. Move beyond newsletters, seminars, investment briefings etc and make it personal.

Think about all the generic email you receive; sure it’s personalised with your name, but is the message relevant to you? I’m sure you just scan it and delete it, so be sure your clients are not doing the same with your service offer.

Plugging revenue gaps
Not all business is good business, and similarly, not all revenue is good revenue. Advisory firms – not just financial planning firms – are renowned for under-pricing their offer.

Make sure you know your cost base across your advice delivery model and spend time refining your efficiencies. Technology is a good enabler here, then leverage up using profit margins as a base indicator.

Your focus should be on both sides of the ledger, so turn your revenue focus into a profit focus and then re-segment your client base. You’ll be surprised by the results.

Separating advice from service
There are many differing views on this, so make sure you are clear on your position. My position is that advice is an investment of doing business and it should never be free, whereas a service offer is all about enduring value.

Clients expect to pay for advice when they visit a professional adviser, so make sure your initial pricing model is profitable. There should be no loss leaders and base your pricing on advice complexity, not dollars to be invested – it opens up the opportunity for you to more prospective clients.

You should be able to articulate your offer and value are critical. Don’t let glossy brochures do it for you; do business on a personal level, make it relevant and be passionate about the value you deliver. After all, our businesses are all about relationships and not documents, aren’t they?

Remember that language is the software of the brain so choose your words wisely. Be concise and clear – engagement is valuable and should be priced into your ongoing service model.

In an increasingly tough and competitive market, practices need to be at the top of their game to succeed. While there is no silver bullet for practices owners in making their business successful, good practices have a number of elements in common. These elements are core drivers of long-term, sustainable practice value and can mean the difference between success and failure in business.

Good people
Without doubt, better practices have good people working in them. The most expensive cost in running an advice business is the people, so having good people in your business drives value for it a number of ways. A more engaged and stable workforce can make a significant different to your client base.

Clear job descriptions are important in businesses that are able to maintain good people, so employees are clear on their role and expectations. Similarly, remuneration has to be closely linked to businesses objectives and goals, and many of the more successful practices also offer long-term incentive arrangements such as equity in the practice.

Having good people in bigger practices can also assist in eliminating key person dependence so that clients will come to a practice to obtain advice and will not necessarily be tied to an individual in the business. This can also assist in driving a lot of value.

Strong planning
In good practices, business owners tend to spend as much time working on the business as they do in the business. While some practice owners who have been in the game a long time tend to be the rainmakers and key salespeople who see important clients, the highly successful ones are very strong on business strategising and planning as well. In those cases where the owner may be the true rainmaker in the business and best placed to continue seeing clients you will often find they acknowledge the need to still spend time on planning and as such will employ appropriate people to manage the business and help formulate the strategy.

These owners spend a lot of time making sure they are clear on business strategy, client segmentation and have a very clear and targeted client value proposition. This is also clearly communicated and understood in the business, so anyone right down the receptionist at the front desk can clearly articulate in a very short conversation the target market for the practice and what it can achieve for clients.

Long-term planning is also important. Rather than just looking at the next six to 12 months, good practices take a longer-term view and plan a long way into the future over two, five or even ten-year horizons.

Capital
Another common hallmark of better businesses is that they are appropriately capitalised.

When a business is highly geared with lots of external debt, this can leave them vulnerable to having less control and flexibility because they have to pay back interest on an external loan. Being highly geared leaves you with less flexibility in being able to take the business where you want it to go.

It is better to be in a position of managing growth in your own way. As soon as things turn in the market or there are other hiccups, being appropriately capitalised will leave you and your business less vulnerable to external conditions.

Access to information
Good businesses have access to good information and a lot of it. If asked, they are able to provide detailed information in a timely way while less well-run businesses can sometimes take months to provide data and when this data is provided often it is not accurate.

Good businesses can quickly assess their client base and know who their key clients are. They are also able to analyse trends in their revenue streams, work out how these might impact key clients and understand the key offerings that drive the majority of their activity. This in turn translates into being able to better understand and manage cash flows in order to drive growth.

So regardless of whether you are someone looking to buy the practice, acquire part of it, a licensee or an external consultant, good practices have their finger on the pulse and are able to provide you with stronger and more accurate information in a timely manner.

For many owners, a business is more than just a business. It’s often a labour of love, a nest egg, an investment of time, a social life, a series of personal achievements, an expression of personality and even a small part of ourselves. It’s only natural to want to others to place a high value on that.

One of top ten questions Elixir coaches get asked relates to businesses valuations. There are numerous reports and regular market commentaries freely available on average multiples and general trends. However, it’s a subjective topic which often simply comes down to what others believe it’s worth to them. However, there are some core factors that even the most subjective valuation model can be generally relied upon to recognise.

Ready?
Before we start talking specifics, we need to first assume you’re at the stage where it’s “right” to worry about business value. By that I mean your business is financially self-sufficient, you can afford to pay yourself a market salary and the days of worrying about income are behind you.

However, simply being financially stable isn’t necessary enough. Achieving maximum valuation also means that you’ve ‘cracked’ a business model that enables you to deliver a consistent service that clients will buy and you make a significant margin on.

Many businesses confuse longevity with maturity. Sometimes when we look inside an established firm, we can discover there is no “core formula” to their success. Many produce highly inconsistent margins across their service proposition and are purely reactive to whatever opportunities arise. Often, they grew before they’d thought about how to sustain that growth. These businesses are valuable, but there is another level.

Model first, growth second
Conversely, businesses that cracked their business model first (usually through five or six incarnations) then put the foot to the floor are far more likely to be in the sweet spot for achieving top dollar.

In which case, having demonstrated the ability of your model to achieve consistent historical returns, it boils down to one over-arching consideration. Ultimately, the value of your business is most likely to be dictated by how much it will make an incoming investor in the future, and how predictable that figure is.

Seven key factors
In which case, there are seven key factors that can maximise your chances of pulling a big number.

1. Continually increasing profit – this is not just about the number, it’s also about upside. Nothing brings down a valuation faster than a principal who is clearly over the business and ready to get out. Conversely, if the outlook for your business is strength-to-strength, the valuation is logically more likely to be heading north.
2. Defensibility and differentiation – how easily could another business replicate what you have done? Positioning yourself in specialist niches, offering a distinctive range of services, diversifying your revenue in a smart fashion, using technology well or developing a signature “way” can show it makes more sense to pay a premium to buy your model than try to replicate it. It also serves to protect your business from competitors.
3. Great governance and reporting – the easier it is to understand and run a business once inside, the more attractive it is. Information is power in this regard. It’s a well-worn saying not to invest in anything you don’t understand. Company accounts might confirm a story, but great data that delves beneath the numbers and confirms a structured business model is what people pay big bucks for. As a minimum, you want to have ready-to-go at a moment’s notice your last three years financials, any relevant legal documentation (leases, loans etc), adjusted income to account for full cost of your services, history of the business, employee files, important attributes about the business and surrounding area, what you would recommend to a new buyer to increase business once they take over, the competition and all client contact info – ideally including an up-to-date CRM showing service levels and dates of contact.
4. Brand and reputation – the greatest fear of most incoming investors is that the success of the business they are buying is based upon some secret ingredient that exists only in the DNA of the former owners. Whilst it’s unrealistic to believe that key person dependency can ever be completely offset in a relationship-based business, having a brand that isn’t individual-dependent will make the world of difference in offsetting that concern.
5. Systems and processes – they may not be sexy concepts, but its ‘boring old fundamentals’ like these that give solace to investors and add value to the business.
6. Formal contracts with clients and suppliers – “No man is an island,” says the phrase. The same is true of businesses. Formalised agreements relating to suppliers’ part in making your business an ongoing success is important. A structured service offer, formal client service agreements, proof of regular client engagement and client feedback results show an ability to sustainably manage client expectations, regardless of whatever legislation does.
7. A great management team – ask any M&A person what dictates corporate value and very early on in the conversation the topic of management will come up. Advice businesses are not that different. Experienced, capable, performing individuals, who are invested in the future success of the business, will demonstrate a stable, ongoing concern that will withstand the loss of the founding principals. In contrast, a roll call of former junior staff that left nothing but footprints and old payslips can be an indicator that the business is dependent on key senior people who don’t know how to delegate.

FOFA is drawing closer. Strategies to create a fee-for-service practice are essential. Step one is to first provide the services. And to provide the services you must first establish yourself as your clients’ primary adviser, ie the primary service provider.

Your competition is strong and varied: it includes banks, solicitors, accountants and, of course, other financial planners. Unless you control the advice process, that is, unless you are your clients’ primary adviser, the advice role will be taken from you, and you will lose your client.

To control the advice process you have to control two things. You have to control your client’s advice decision and you have to control your client’s relationship with the other advisers, ie the banks, solicitors and accountants.

To control your client’s advice decision you have to present as competent in at least nine core disciplines. These core competencies are:

1. risk insurances
2. superannuation
3. tax planning strategies
4. business advice
5. finance and debt management
6. property
7. tax compliance services
8. shares and other direct investments, and
9. estate planning

You need a working knowledge of each competency, or a relationship with a trusted associate. You do not need to be an expert yourself. Most client presentations are simple, and basic advice on each of these competencies will be within your skill set, or able to be contracted in.

Part of being a good financial planner is knowing your limits and when to contract in complementary or additional skills. A good medical GP knows when to call in a specialist. And for the GP-specialist relationship to work the specialist must respect the primacy of the GP-patient relationship, adopt a support role, and not subsequently compete for the patient’s custom.

Exactly the same principles apply to your referrals.

I can recall an acquaintance, let’s call him Joe, gleefully telling me he about his 10% referral fee from a local accountant. Money for jam, he thought. I counseled caution, and a protective contract. He pushed on regardless. Two years later glee turned to grief as the accountant employed an in-house financial planner to take over the financial planning process. Joe lost half his practice.

Joe’s mistake was to cede primacy to the accountant. He let a crocodile into his pool.

The message is simple: you have to be the primary adviser in the nine core competencies. You must be the go to person, the guy your client trusts the most. You have to present as being across all relevant issues, all nine core competencies. If you do not have the competency you have to control the referral process, ie control the other service provider.

Joe should have insisted on a “no-advice” role for the accountant. The accountant’s function should have been restricted to accounts and tax returns, with no advice, and no other contact with the client. If the accountant advised on, say, a tax matter, that advice should have been channeled through Joe as the client interface.

The accountant should have been prevented from advising on “overlap” areas of advice, such as SMSFs, business advice and debt management.

The same principle applies to each of the other core competencies. For example, if you refer your client to a buyer’s advocate you should remain responsible for the general advice, including cash flow estimates, finance, tax planning and long term strategy. You should limit the advocate’s role to the specific purchase transaction, and nothing else. You should handle the post-purchase functions, such as instructing a conveyancer, arranging finance, selecting the purchase entity, arranging tax depreciation reports and liaising with a rental manager.

In short, you should provide the overall client service and only contract out specific tasks, and nothing more.

Remember, step 1 in creating a fee for service practice is to first provide the service. You have to provide the service to get the fee.

I’d think the last thing we’d all want to do with our precious time is continually look for good staff, retrain them in “this is how we do business here” – only to lose them shortly after and then repeat the same process, most likely for the same outcome. The old adage “time is money” is no truer than when it comes to people management and especially so at the front end of the process with recruitment and induction.

Improving recruitment
Like any area of expertise, it pays to know your limits. Be prepared to use reputable recruitment and selection firms and make sure your needs and people offer are clearly articulated. Don’t just advertise a job; advertise a career. If you haven’t had experience in interviewing prospective employees, go and get some, because they will judge you by how well you preform, as much if not more than you are judging their suitability for your business.

Most of the prospective employees I meet with are looking for a “home” where they can make a difference, so make sure your offer provides scope for those who want to achieve, and that you are readily prepared to reward those who do.

Improving retention
Once you’ve located a “star”, do all you can to retain them. You don’t want to become the training house for their next job, as this can be an expensive exercise.

You need to ensure reward and recognition delivers to each individual’s need; for some, money, although important, is not always the answer. Being prepared to have different offers for different staff is okay, and I have long made sure that I play favourites. Socialising of bonuses only disengages your best performers, because you need to make sure you reward the right behaviours as well as the right people; it’s not always about hitting the sales number target.

Lastly, make sure any initiatives are simple to understand, fully transparent and reported regularly. It is pointless making an employee work towards a target or offer they feel they can never achieve; the outcome is counterproductive for everyone, with bad client outcomes, disengaged employees and HR headaches for business owners.

Think about collaborative targets for your staff and bonuses that are paid from profits. This way everyone contributes to the end goal and then enjoys the benefits.

The role of practice principals
You can’t change or develop a culture without the right people, and if you want to change the culture within your business be prepared that you may need to change your people.

The path you take will depend on your view – is talent innate or can it be developed? Employees on their own won’t develop a culture, or they may even contribute to the wrong culture.

Leadership is the key to attracting and retaining talent, and ensuring everyone has the focus your business may require.

Ask yourself: when was the last time you showed real leadership in your business? If the answer is later than yesterday, then you are already too late. As a business owner you need to demonstrate leadership to your team each and every day. After all, don’t you expect each of them to deliver exceptional outcomes for your clients?

We can probably name our best and worst managers we’ve each worked for over our own careers, so learn from your own experiences, communicate clearly and often with your team and lead them to your combined success. Achieving success through others is a wonderful experience; after all, I’m sure if your current and/or past staff do talk about you, you’d want to make sure it’s positive.

Do planners who belong to a dealer group which is owned by a large institution behave any differently to those who belong to an “independent” dealer group? The answer is ‘yes’ but that it is not to say that they behave better or worse.

This is one of the issues to be discussed at the No More Practice Live conference, with three heads of major dealer groups being quizzed on their views. They are Matthew Englund of BT Financial Group, Steven Davison of Genesys, and Mark Ballantyne of Financial Wisdom.

The owners of those three dealer groups – respectively Westpac, AMP and Commonwealth Bank – account for a big share of the advice industry. But what of the advice their planners give?

The little evidence which is available suggests that such planners are more disciplined in their approach to providing a plan; less likely to deviate from a script given certain client information. They are also more disciplined in eliciting the relevant information.

The good part of this is that they are probably less likely to make a mistake or give “bad” advice. The less good part of this is that the lack of flexibility means they may miss a truly unique case which should get a truly unique strategy.

One interesting question is whether such institutionally guided planners are more or less likely to use managed funds and possibly less likely to recommend an IMA or direct shareholdings for their clients.

Clearly, from the decline in total managed fund assets which has occurred in each of the past three years, there appears to be little correlation between the two, at least at aggregate level.

Greg Bright will be participating in No More Practice Live on 9 August along with 30 other industry experts.

So for every extra dollar of additional revenue a practice earns, the licensee takes an additional percentage, thereby reducing the practice’s margin. However, a business can improve their EBIT and bottom-line profit overnight by working with “business-minded” licensees that charge fixed fees for their services.

Most licensees predominately charge a component of a percentage-based fee. Some have a hybrid model, some charge a flat fee, and a lot charge percentages from dollar one and tier down from there. This can range from 15 to 17 per cent for businesses with less than $300,000 revenue, while those between $300,000 to $700,000 will come back to about 10 per cent and businesses with more than $700,000 revenue can come down to as little as 5 per cent.

Some businesses then have a flat dollar fee with a percentage on top, and that flat dollar fee could be around $20,000, with a 2 to 3 per cent percentage-based fee on top of that additional revenue.

Flat dollar fee models
We were like most other dealers in that we charged a percentage-based fee, but earlier in the year we changed our dealer model and moved to a flat dollar fee basis. With FoFA coming in and related issues around grandfathering and volume bonuses, dealer groups need to add value through providing tools, mechanisms and other support to assist advisers in transforming their businesses.

Our view is that we can’t ask our advisers to operate a professional flat dollar fee service business under FoFA, but have us in the background still taking a percentage of the revenue they create. So all the way down the value chain you have to get that alignment in order to take the industry to a more professional level.

If we can assist businesses to operate professionally, they can use whatever administration platforms they need to use in order to run their business. But rather than relying on providing shelf space for product, if they have a good value proposition and a good service model for their clients, they can actually charge a larger fee to the client and get a better margin in their business.

Take for example a $500,000 business that is on a 15 per cent dealer split. They’re paying a significant amount of fees, but if they increase that business to $750,000 they have to pay an additional 15 per cent of that extra $250,000 to their licensee.

Improving EBIT
If a business has more cash flow and a better EBIT, their financials look a lot better so they are able to go back to their bank and talk about acquisitions. So they can buy another business and bring another $200,000 to $300,000 worth of revenue into their business – but they haven’t got that incremental percentage-based cost so they are getting an immediate cost saving out of the other businesses.

EBITs normally run at anywhere between 10 and 15 per cent, so it’s a pretty exceptional business in our industry that has a 30 per cent EBIT. Where an adviser is looking to sell their business and develop a succession plan, if we can get a business that has a 30 per cent EBIT, 3x occurring is equal to 5 x EBIT. It doesn’t matter from a seller’s point of view how someone values their business, it’s still going to come out at the same figure.

So by moving to a flat dollar fee basis you can have a 10 -15 per cent EBIT but overnight you can go to a 20 per cent EBIT just by having a flat dollar fee arrangement.

The feedback we have had about flat dollar fee arrangements is positive. It’s good for cash flow, makes adviser’s financials look a lot better, and they can go back to their bank to discuss that acquisition they wanted to make.

A recent Elixir Consulting report, for example, found that financial advisers are using a hybrid of flat and asset-based fees first – but gradually shifting to a full flat fee model. Interestingly, many advisers who are either accelerating their business evolution or starting to address the issue of fees would not do so had they not been compelled to.

The report also found that clients appreciate the shift towards a fee-for-service model, with 86 per cent of advisers finding that their offer was accepted by more than 90 per cent of the clients they presented it to.

Good advice does not necessarily come cheap, so advisers need to have confidence in the quality of advice they provide. With the shift towards fee-for-advice models, quantifying and communicating your value proposition is critical in getting clients to understand and pay for advice in a post-FoFA world.

Debt – money lent to you by the bank or some other source on terms – is typically cheaper given that the interest you pay on the debt is tax deductible. While this may make it sound initially more attractive, the downside is that typically the lender requires repayment whether you make a profit or not, and generally will secure their debt against your private resources. Debt arrangements may be somewhat inflexible so the key to this form of financing is obtaining the right price over the right term and with a repayment arrangement that meets the cash inflows expected from the growth strategy.

The cost of equity, on the other hand, lies in you giving up an ownership interest in your business and is represented by a loss of future dividends and capital gains. If the business does not make a profit then there is no immediate cost to the equity financier making it somewhat more flexible than debt. The lesser immediate cost of equity makes it appear more attractive than debt, however, in my experience very few equity arrangements between unrelated parties succeed in the medium- to long-term, typically due to differing ambitions and aspirations and a lack of shared goals and visions.

In Australia equity financing sources are rare for small- and medium-sized businesses, and where they do occur, they will generally be among friends or family. Therefore, your most obvious source of finance will be debt and it will most likely be your bank.

Your rewards from future growth will come from ensuring that the arrangements you negotiate with your bank are at a reasonable cost and repayments are synchronised with the cash flows from future new clients.

There are opportunities in the legislation for practices, and it’s important to strike a balance in looking at FoFA and understanding where these opportunities are.

For example, advisers will need to carefully look at their business and revenue models to make sure they comply with FoFA, but take a step back and think about long-term sustainability of your business and value creation – for both your practice and for your clients.

Competition is also on the increase in the advice space, and this presents practices with an extra challenge. There is direct competition, competition from industry funds as well as competition from the banks and other major institutions. We are seeing certain companies looking to make inroads into the advice market by going in and offering incentives for people to move, and I think that sets a dangerous precedent – but that is a sign of the times and as confronting as it is to the industry I don’t see that changing.

So what do you have to do to overcome this? Have a good hard look at where the industry is going. Talk to other people in the profession and get a sense for where the opportunities are. Look for alternative revenue opportunities that might not fit with traditional business models. Whether it’s the way you charge your fees to clients or extensions of advice to areas such as real estate or streamlining your business through technology, look at areas that will help you grow your revenue and your client base at the same time. If you happen to employ advisers, think about retention as well and what you need to do to make them stay with you and not be tempted to go elsewhere.

As much as you need to make sure you are on top of FoFA and compliance obligations, think about your business model to ensure you’re making the most of other opportunities and capture these through a profitable and sustainable revenue model.

The evidence is unassailable: over very long periods – say 20 –year data points for the past 150 years (you can actually only do such a long time with US data) – equities have outperformed bonds, cash and property by at least 3 percentage points. So, if a person is 20 years off retiring and another 20 years off dying, on average, he or she should have a big exposure to equities. No question.

Well, some professionals operating in a slightly different framework have already been questioning that for the past several years – well before the global financial crisis. These are the sponsors of defined benefit pension plans in the UK and US who have moved en masses to Liability Driven Investment (LDI) strategies. Perhaps, just perhaps, Australian planners should take note for some of their clients.

An LDI strategy takes a totally different approach to designing an appropriate investment portfolio. It does not try, simply, to make the most money for the least risk for the client given all the relevant factors of age, health and so on. It maps out the known and expected cash requirements to cover the legal liabilities of the fund (pensions) and then puts together a no-risk investment portfolio to ensure they are covered. In this way, the fund acts more like an investment banker than a funds manager.

LDI investing is an ultra-conservative way corporations with worker pension liabilities have limited their downside. The company or plan sponsor has given up on trying to make money out of the market to cover future liabilities. It has, instead, built a portfolio to almost-guarantee the bare minimum required. In today’s corporate world, near enough is good enough.

The main point for Australian planners is that a pure LDI strategy will usually include NO equities. It can still be quite a sophisticated portfolio with inflation bonds and various hedges in place for its sovereign bonds, high-yield and other debt securities, but it has NO equities.

Here’s an example set by the staff pension fund of a large European bank, Deutsche Bank:

The Deutsche Bank’s staff fund, with about $US12 billion in assets and 101,000 employees, has phased in its LDI program over the past 10 years. The bank decided that to have a traditional pension plan investment strategy held too much risk, given that the bank had undertaken to pay many workers on a defined benefit basis (guaranteeing a certain level of pension depending on salary levels in the final years of employment).
So, very gradually, the fund moved away from what was roughly the German norm of 50 per cent bonds and 50 per cent equities to an asset allocation of: 10 per cent bonds, 70 per cent “spread” products and 10 per cent equities and alternatives. The “spread” products include: emerging market bonds, European corporate bonds, ESG (environment, socially responsible and governance) corporate bonds, US high-yield bonds and long-duration credit ETFs. The 10 per cent growth assets allocation of equities and alternatives is seen as a total alternatives bet, with no concern for diversification within the equities portion. Overlayed across the total portfolio are three swaps to further contain risk: a credit default swap, interest rate swap and inflation-linked swap.

Now the past 10 years have covered some unusual and turbulent times but the end performance, since the changes started being implemented in 2002, is worth noting. The Deutsche staff fund has a 10-year annualised average return of 7.34 per cent with a monthly volatility of 7.12 per cent, as of February 2012.

No planners will have a client with $10 billion to implement such a strategy, but components of the LDI philosophy are worth considering in order to inject some rationality and sophistication into the current debate. It’s actually not about bonds versus shares. It’s about a building a portfolio targeting a defined outcome.

We’ve welcomed the fact that the industry has moved away from commissions such as product commissions. We still think that there is some refinement to be done around how this is currently addressed in FoFA. The government has backed down from the proposal to ban commissions on risk insurance in superannuation, so they’ve scaled that ban on commissions back to the barest minimum. But ultimately the key with any remuneration arrangement is to remove conflicts and to make sure that it is transparent.

In terms of acting in the client’s best interest, I believe that financial advisers wholeheartedly support the concept of a best interest duty across the industry. The way the government has currently drafted it still leaves a lot of uncertainty in terms of how it would ultimately be applied. In the legislation there ought to be some very clear steps that an adviser has to go through in order to comply with the best interest duty requirements, so there is room to improve the current definition of the best interest duty.

On opt-in, what the government is proposing to do is to force people to re-sign contracts with their advisers on a regular basis. If a client takes a view that they’re paying too much or they’re not getting a good enough service, of course they should be able to either discontinue that relationship and go to another adviser – or stop taking advice altogether – and that’s what the current government is proposing to do with FoFA as it currently stands. We would get rid of the opt-in provision which we think unnecessarily increases red tape and costs for both businesses and for consumers, and would reduce choice and diversity in the marketplace.

So remuneration arrangements need to be fully transparent, conflicts need to be removed, advisers need to have a very clear understanding of what is expected of the requirement to put the client’s interests ahead of their own, and there needs to be minimal red tape which will only increase the cost of doing business for advisers.

We need to have a sensible look at the regulatory framework as it currently applies and look for opportunities to help advisers get on with their business, which is helping people with their financial health and wellbeing. And ultimately the best person to make a judgment on whether or not they’re getting value from the advice relationship is the client – not the government.

Clients come to me to discuss a potential purchase and the proposition before them. I’ve seen cases where sellers tout 10 times recurring revenues for a sale. My first questions to a client in such a case are: what are you going to make out of this and where’s the real profit in it for you?

There is a process to work through in establishing the answers to these questions. Firstly, lock down what you think the future revenues are going to be, then determine what it will cost you to generate those revenues. In these steps, there is a lot of work in analysing the seller’s clients, the services provided to them and forecasting future revenue streams. There is just as much work on the other side of the profit/loss statement to determine what it’s really going to cost you to drive the business to generate those revenues.

When you go through that process, the outcome is what we call future maintainable profits or future maintainable EBIT. This paints a much more realistic picture of what a practice is worth. When I say to a client, “you should be valuing this potential purchase at 3 or 4 times that profit” sometimes they are surprised because the seller is spruiking their practice for 5 or 10 times that profit.

In my world, a good financial planning practice should be trading on a multiple of between 3 to 4, and that’s after adequate remuneration has been allowed for the principals that are working in the practice.

For example, a recent survey conducted by consulting firm Leap of Faith found that 75 per cent of financial planning clients would prefer an alternate way of paying fees to that of the current industry standard. One third said they would prefer a success fee based on performance and taxation savings, while 29 per cent would opt for a flat fee and 13 per cent an hourly rate. Only 12 per cent were happy with a percentage-based fee on FUM.

In contrast, ASIC’s recent shadow shopper survey of financial advisers found that 78 per cent of advisers were paid through product commissions or fees that were based on a percentage of the client‘s assets or investments under advice.

Unsurprisingly, where advice fees were contingent on a product recommendation, advice often appeared to be geared towards recommending or selling financial products, at the expense of optimal strategic advice for clients.

Success-based fees are a sensible and reasonable approach as far as clients are concerned, and forms of success-based fee payment exist in many other industries. Of course, this ‘sing for your supper’ model does place more responsibility upon advisers if they are to make a nice living. Financial planners should keep these kind of stats in mind in considering what model they might adopt in a fee-for-service post-FoFA world.

Furthermore, financial advisers who successfully reengineered their businesses to turn a profit had fully embraced a fee-for-service model, according to the research.

There has been a lot of resistance from the financial planning community about a move away from commission-based business models towards fee-for-service under the Federal Government’s Future of Financial Advice (FOFA) reforms.
Even though FOFA is just around the corner, many financial planning businesses are still operating on a commission basis. A recent ASIC report, for example, found that the 20 largest licensees (representing around 70 per cent of the country’s advisers) still relied heavily on commissions. In fact, they earned about 90 per cent commissions and rebates from product providers, while only 10 per cent was made up of client fees and neutral product payments.

It is human nature to resist change, but if the Wealth Insights research is to believed, fee-for-service is a pretty attractive incentive to change. However, it would seem that the financial planning industry has a long way to go in embracing the fee-for-service model – and not just for the purposes of compliance – but for the sake of the bottom line.

Recent Investment Trends research found that as the financial planning industry prepares for a move to fee-for-service, some planners are looking to reduce their reliance on outsourcing investment services through fund managers. It found that 40 per cent of planners believe direct shares allow them to differentiate their client value proposition, while 18 per cent use separately managed accounts (SMAs). Almost two-thirds of planners were interesting in knowing more about SMAs as a way of reducing administration while offering improved investment expertise for clients.

With a shift away from commissions under FoFA’s proposed fee-for-service changes, financial planners will need to demonstrate the value they add to clients more than ever. The above research highlights this fact as well as the need for planners to look at innovative ways of maximising cost efficiencies within their businesses.

On the other side of the fence, however, it appears that clients prefer both fee-for-service and opt-in. A recent study conducted by MSI Global Alliance found that 68 per cent of business owners want financial planners to invoice them based on a fee-for-service remuneration model, while a further two-thirds regard the two-year opt-in proposal as a positive move.

With these changes, it will be vital for financial planners to communicate and demonstrate the value they add for clients. This is not always a natural strength of the financial planning industry. Getting to know your client, understand their needs and provide truly tailored advice will be critical. In times of market volatility, helping clients manage downside risk will be especially important – and this is a great opportunity for financial planners to take a proactive role with clients in truly demonstrating the value they add in good times and bad.

Different clients have different needs, so it makes sense to develop scalable advice models with corresponding fee structures. A recent industry survey also found that the CEOs of wealth management firms believed strongly that whoever successfully achieves a scalable advice model would have a distinct competitive advantage.

The survey, conducted by PricewaterhouseCoopers and the Financial Services Council, also found that greater exploitation of low-cost direct and digital distribution channels will play a key role in the future provision of financial advice. Many industries around the world have been adopting these kinds of business models for years. They are key to sustaining improving profit and overall competitive advantage. For some financial planning firms, scalable advice under FoFA could mean the difference between annihilation and healthy business success.

However, getting clients to understand this is another thing altogether, and there is a considerable gap between what clients are prepare to pay for advice and what advisers think they should charge. ANZ research has found that it costs $3500 to provide a client with a holistic financial planning solution, yet clients are only prepared to pay $300. This advice value dilemma is a perplexing challenge for the financial planning industry, and one that must be addressed in the move to fee-for-service.

Financial planners are very interested in what their competitors are charging for advice. While this might provide some competitive advantage and also help in determining market rates, there is a missed opportunity in adopting this approach to fee establishment. There are a range of remuneration models available to planners, and FoFA presents planners with the opportunity to seriously reevaluate the value of advice and how this is articulated and communicated to clients in order to bridge the gap between they are prepared to pay.

The one thing that may offset this is the extension of scalable advice. If this was introduced, it would allow individual advisers to shape a simpler practice and offering for clients that have simpler needs, and charge a corresponding fee. It is true that FoFA will create more work and potential headaches for financial planners, but it presents an opportunity for firms that are willing to get on the front foot and think about improved business models, client value propositions and the client engagement process ahead of FoFA. Now is not the time to put this in the too-hard basket.

If you’re struggling with how FoFA might impact your financial planning business, No More Practice 2 is an invaluable resource. Professional Investment Service’s Robbie Bennetts has written an insightful whitepaper in which he looks at the impact that the fees versus overrides and commissions industry debate will have on the value of a business.