Cost control is extremely important for a financial adviser business, writes Mickey Morrissey - indeed, it will make the difference between scaled-up businesses being profitable or loss-making
Optimism is in the air for financial adviser firms, with many looking forward to a good year ahead. After conducting some research in partnership with Discus, we discovered almost three-quarters (73%) of advisers are ‘very optimistic' about their business prospects for the next 12 months.
And while Brexit negotiations loom large, many of those we polled believe the UK leaving the European Union will ‘increase' (33%) or ‘significantly increase' (47%) the number of clients they will work with in the next two years. The message is clear - the outlook for those providing professional financial advice is a positive one.
Dealing with increased client demand is a nice problem to have but it does still require some serious attention. Put succinctly, how should businesses grow their operations so they can work with more clients, while at the same time remaining profitable?
Providing financial advice is a people-intensive industry, so the obvious way to grow is simply to hire more staff. Firms can take on trainees and support them with their professional development but this, of course, requires a time commitment from senior personnel. Alternatively, they can bring in experienced hires from competitor firms - or even buy entire businesses.
What is particularly interesting, however, are the strategies for firms in scaling up their non-core operations - things such as administration and investment operations that are often not client facing, but are essential for delivering a quality service. They are for the most part costs on a firm's profit and loss account and yet do not contribute revenue.
There is plenty of anecdotal evidence of financial advisory businesses encountering spiralling costs from investing in expensive infrastructure, such as IT systems, that does not achieve its objectives. Projects in this field can often run into problems because those commissioning the upgrades do not understand what is required. And why should they? Financial planners are not IT specialists, after all, but there to provide a dedicated service to their clients.
Running clients' investment portfolios in-house can also prove to be expensive and time-consuming - not least given all the regulation and compliance requirements investment businesses must now satisfy. Perhaps this helps explain why, according to t research, 73% of financial advisers also expect their use of outsourced investment services to increase over the next 12 months.
Working with external investment partners not only reduces regulatory costs, but also allows financial advisers to focus on what they do best - delivering professional advice. Outsourcing to a discretionary fund manager frees up planners' time so they can work with more clients.
Core and non-core
Forward-thinking advisory firms are clear about what constitutes core - that is to say, fee-earning - activity and non-core operations. They recognise that scaling up the former enables a business truly to grow and yet, if not managed carefully, the latter group can lead to ‘white elephant' expenditure that can only result in unprofitability.
Given Brexit and pension freedoms - and the accompanying complexity and perceived uncertainty this environment brings for clients - the role of financial advisers has never been more important. By seizing this opportunity and providing a professional service, then - with a lot of hard work - they can grow their businesses. But cost control is extremely important - and will make the difference between scaled-up businesses being profitable or loss-making.
Mickey Morrissey is head of distribution at Smith & Williamson
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