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How to build a valuable financial advice practice

Lessons from the Big Five.

Financial advisors face a challenge: they need to look after their clients’ financial health as well as their own.

This creates a dilemma.

The first Fais Ombud, Charles Pillai, emphasised that instead of worrying about compliance, advisors should worry about their clients. If they looked after their clients, compliance wouldn’t be an issue.

The same applies to the financial health of the financial advisor’s business, argues Rob Macdonald, advisor consultant at Fundhouse. Against the backdrop of a changing financial advice industry, advisors need to carefully consider what it is they offer and what their true value proposition is. It is no longer about product or sales, but about a client’s life and helping clients live the life that is best for them.

Macdonald says before advisors consider how they can build value, it is important for them to understand their genetics. Using the ‘Big Five’ as an analogy for the various types of financial advisor practices, Macdonald discussed the pros and cons of each type of business at the Alexander Forbes Investments IFA Symposium.

The first business is the individual practice with one or two support staff but where one advisor looks after all the clients. This business is represented by the leopard.

“The benefits of being a leopard obviously are that you are completely autonomous, completely independent. You eat what you kill, and you play to your strengths.

“The challenge of being a leopard of course is what happens when you get knocked over by a bus? What happens to your clients?”

Macdonald says many leopards have succession plans based on buy-and-sell agreements, but often these agreements don’t work out as planned. One leopard’s clients may move to another leopard, but this would mean that one advisor suddenly goes from having 200 or 300 clients to having 500 or 600 clients, which can be a problem.

Michael Gerber, author of The E-Myth, points out that if a business depends solely on its leader, the person in charge does not really have a business, they have a job.

Effectively, Gerber argues that the value in the leopard’s business is in their book of clients, but that value is not necessarily the whole book, because not all clients will be transferred if the business is sold.

The leopard is the dominant financial planning model in South Africa.

Where two or three leopards get together, share office space and staff and possibly even a brand, it is considered the ‘rhino’ of the financial planning world.

“But the reality of this business model is that you remain wedded to your own book – hence the horn. Each rhino has their own value, their own horn and if you remove the horn, the value is gone.”

Macdonald says while this is not necessarily building a business, there are benefits to this model, as it addresses the succession problem. Operating under a brand may also build the perception that a business is being created.

The lion is considered the ultimate model in the independent advice space, he argues. It represents a wealth management business that only offers advice, but the advice is provided by the business. There is no individual book belonging to an advisor and a client can be serviced by one or more advisors and will have a team of administrators working on their affairs.

And there are no issues around succession.

“What is clear is that the clients belong to the business, not to any one individual and often the best of these businesses that we work with are businesses that have taken the very bold step to pay their advisors salaries and move the mindset away from ‘my revenue is linked to the income of one particular client’. The revenue of this business is for everyone to share in and so we start introducing the concept of profitability, not just revenue.”

An independent, integrated business is represented by the buffalo. This is effectively a lion who recognised that they have built a business of great value, but that they are missing out by providing products to clients that are provided by other service providers. In response to this, they create an independent, vertically integrated business where they not only offer advice, but products – whether it be funds, wrappers or a platform.

Macdonald says some buffaloes argue that this is not about making more money but about providing a better service to clients, which is a valid point, but it does create the possibility of doubt in the client’s mind as to whether it is in their best interest or in the best interest of the advisor.

The problem gets compounded to some extent with the corporate integrated business – the elephant – which is a vertically integrated advice business that is part of a larger financial institution.

“This is a very powerful animal because not only are you providing a fully integrated service, but that business itself can get referrals internally from other parts of the financial institution.”

Yet all of these business models have merit, Macdonald says. The challenge for financial advisors is to think about their current genetics and how they can build value in their businesses. This can be done by serving clients’ interests, focusing on operations and having the right people in the right roles.

Macdonald says with regard to clients, it is important to consider what your value proposition is as an advisor and to identify who the clients are that you want to work with.

When advisors do client analysis exercises, 20% of clients invariably provide them with 80% of their revenue.

“To build value, you want to change that ratio.”

Advisors also need to consider what clients are paying them for.

“In the world we are moving into, what clients pay you for is not access to product. What they pay you for is the value that you add in their engagement with you.”

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Ingé….you always leave these…”caveat emptor’s” in your final paragraphs

Thank you

Good article Inge’. Rob MacDonald’s insights are excellent. The problem in the industry is the sheer number and complexity of products from all the companies, overlayed with the extremely onerous red tape and legislation.

Good quick read which I hope many financial planners benefit from when thinking about their business models. Liking the Big 5 analogy – the broad shoulders of the Elephant to support your business… giants of the wilderness… 🙂

Shiraz Khatib

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