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Five must-haves for every advice business in 2021

Building a successful financial advice business is a hard slog these days, especially considering the regulatory requirements, rising costs, increased administration, educational standards, and the licensing and compliance obligations. That’s even before servicing the needs of your clients and the costs that come with it. Every advisory firm is grappling with the dilemma of unlocking more efficient and effective ways of conducting business but at the same time, creating value for clients.

  • As a result, HUB24 (ASX: HUB) got together some of the leaders of the advice industry to discuss what innovative and adaptive changes they were seeing across the advice landscape. This article will highlight commentary from some of the successful advice practices to show how they were able to adapt and change to thrive in this new world of wealth advice.

    The structural change that has taken place since the banking and financial services Royal  Commission has seen the dismantling of a number of vertically integrated licensed groups, and many advisers going on to start their own independent financial advisory business.

    According to HUB24, the number of advisers working for large licensees in 2018 was +11,000. That figure was 5,601 in December 2020. The number of privately owned licensees accounts for 62.4 per cent (1,356) out of a total 2,173 licensees. This restructure has now paved the way for innovation and disruption to bring about better client solutions. The advice industry is evolving, and innovation is the key in helping these new businesses succeed.

    According to Nicole Heales, principal of Nicole Heales Financial in Adelaide, “this has meant moving to a platform and adopting managed portfolios to facilitate the delivery of their value proposition.” And the starting point of any journey is to understand and look at what you have. Write down the assets in your business including skills and valuable relationships with clients.

    It takes an entrepreneurial mindset to create efficiencies and value to build a sustainable business. “Looking back at the past 20 years, the traditional licensee model and regulation has stifled innovation and entrepreneurship in advice,” says Paul Barrett, chief executive office of AZ Next Generation Advisory (AZ NGA). “AMP is a great example. Being told you can’t do this and can’t do that hinders innovation. Structural change to the traditional model has created a new world for advisers to think differently.”

    Barrett provides an example of an advice practice in Queensland which has a property advisory capability with a residential property licence, but it sits outside what is provided by its retail licensee. He says, “The retail licensee still plays a valuable role, but when it comes to property advice, that is delivered under a different licence, through a separate entity; same brand but a different entity.”

    Another thing to consider is that bigger isn’t always better. It’s often believed that bigger businesses will generate better profits. But this isn’t true. Quite often, bigger businesses encounter bigger problems, stifling regulation, revenue creep and more complexity.

    Barrett agrees, the bigger the business, headline revenue creeps-in and they become more complex. He says “medium-sized businesses paying between $500,000 and $1.7million in wages are outperforming. There’s an assumption that bigger businesses are more profitable but, based on our benchmarking analysis, large practices grow at around 13 per cent a year, a much slower rate than medium-sized practices, which clock in at 26 per cent.”

    When it comes to profitability, CoreData says 73.7% of licensees estimated they would be profitable in their own right this year, without government help or grandfathered revenue. While profitability is a critical part of running a business, it isn’t well understood or applied. The biggest problem is when business owners cut costs and corners just to increase profit margins. Barrett says an EBIT margin of 30 per cent-35 per cent is the perfect sweet spot of profitability. Above that, and future growth can be compromised without active reinvesting into the business.

    In summary, HUB24 says “Maintaining profitability is critical to practice success, however percentage profitability is not a measurement that reflects the big picture.” What is important is sustainability. Being able to service clients, using the right risk and resourcing are critical factors in achieving a successful business.

    Ishan Dan

    Ishan is an experienced journalist covering The Inside Investor and The Insider Adviser publications.

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