Surviving the tough times

by Peter Rawle

Those of us that have been around the industry for a few years will clearly understand just how good the last five years have been (2002 - 2007). Many of the newer entrants into the industry are now only just starting to come to terms with difficult investment markets and the impact this can have on personal and business revenues.

It is in times such as the these that all businesses need to examine their sources of revenue and their expenses and develop a business plan that is sustainable during these more difficult times.

Typically, revenue will be derived from sources such as entry fees, implementation fees, ongoing commissions, insurance, mortgages and fee-for-service whilst expenses could include dealer splits, rent, staff, software, IT, compliance, a professional development, research to name a few.

It stands to reason that when revenues fall and it is improbable that they will rise sharply in the short term that we will need to examine our expenses and seek more efficient operational procedures within our businesses so that the return on equity and time spent in our businesses remains worthwhile.

The debate of fees versus commissions has been raging for many years but in essence it really doesn't matter whether you call it a fee or a commission, as at some point, the client will transfer an amount of money from one of their accounts to their adviser.

The real debate should be whether they pay a dollar-based fee or a fee based on a percentage of assets under management. Those practices that implemented a dollar-based fee for service over the past 10 years are now enjoying much more consistent revenue than those based on reduced assets under management as the markets decline.

Of course clients who previously agreed to pay a dollar-based fee will only continue to pay that fee if they perceive they are continuing to get value for money.

It would appear that in the current markets even the very best advisers will lose clients who simply are unable to accept the level of risk of any investment outside cash during the current circumstances.

We have seen many advisers who have retained clients in these circumstances by agreeing to move their money into cash on the basis that as the economy of the world improves it is their intention to move back into growth assets.

It would be fair to say that during the heady times of the last five years expenses have grown at a record pace. I'm sure that we have all either experienced directly or know of peers that have experienced dramatic increases in rents, staff costs not to mention the increase in dealer splits and professional indemnity insurance.

When times are good, you have plenty of new clients and strong revenue growth in the business and there is much less incentive to focus on engineering the business to optimise costs. This would allow you to focus your attention in the direction which will provide the type and level of service that you want to provide to your clients whilst at the same time ensuring that the business provides to its stakeholders an adequate lifestyle and level of return.

It is clear that in the current markets much more time has to be spent face-to-face with existing clients and in ongoing communication so that they retain a strong belief that their planner is committed and able to look after their affairs.

Many advisers are currently saying that there are fewer new clients and as such this should provide a window of opportunity for advisers to examine their businesses and develop a strategy for the business that will enable it to grow with the most appropriate support and value proposition.

Some of the areas being explored by planners include a change of dealer group, their own AFSL, specialisation of service, merging and aggregation with like-minded practices and consolidation of some of their core expenses.

Many advisers are unaware of the minimal costs involved in obtaining their own AFSL and how inexpensive it is to maintain their business under the AFSL going forward.

We have recently worked with many practices who have established a new AFSL including policies and procedures manual and SOA and FSG templates for approximately $20,000 and have ongoing costs with two advisers of approximately $40,000 per annum.

This is enabled by the development of businesses which are non-aligned to platforms or product that specialise in complete back-office assistance to AFSL holders.

The assistance generally includes the AFSL application and transition of the business into the AFSL, policies and procedures manual, establishment of software, research, ongoing professional development and ongoing compliance reviews of the AFSL.

It is refreshing to see that the industry has moved away from product manufacturers being the only suppliers of the above services in return for inflows into product or platform.

Practeq Solutions can assist you to analyse whether your business is suitable to your current dealer, a new dealer or your own AFSL including calculations surrounding volume bonuses, dealer rebates, platform selection, outsourcing investment management and redesigning your value proposition.

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