Monday 28 November 2016
What business model is right for your advice practice?
Monday 28 November 2016
What business models do advisers use and which one is right for your practice?
Whether you have your own Australian Financial Services Licence (AFSL) or not, you are essentially running your own business. But that doesn’t mean all advisers aspire for exponential growth, or are focused on building the value of their practice to maximise the sale price in the future.
In fact, the model you choose for your advice business is likely to be influenced by a number of factors, not just financial or regulatory considerations. For many advisers, there are lifestyle and family considerations that come into play too.
So what are the advice business models in the market, what services do they offer, and which one is right for you?
This is a very common structure for both financial advisers and accountants. In this model, there’s typically one principal adviser, a paraplanner and one support staff member. The sole practitioner owns the business outright.
According to Macquarie Wealth Management Division Director Rob Hayward, this business model is typically used by advisers who are interested in deriving an income from their business to support their lifestyle. And the amount of income a good sole practitioner can extract from their business can be substantial.
“We’ll often see the earnings before interest and tax (EBIT) returns are actually very high as a percentage. For example, you might see a sole practitioner earning $1 million gross, but taking home around $650,000 to $700,000,” says Hayward.
“In comparison, we see larger firms that might be doing $5 million, but the EBIT return might be 40% instead of being 65%. The percentage is lower but the dollars are higher.”
However, Hayward points out that a sole practitioner’s business might not be as ‘saleable’ compared to other types of practices, because this model is very dependent on the principal’s relationship with his or her clients. These types of businesses are often sold as a ‘book of clients’.
“People often aren’t willing to pay as much for these practices because they’re worried about the client linkages to the one principal,” notes Hayward.
A two-four person partnership
These practices are often made up of like-minded people who get on well and want to share resources such as support staff, and have a bit more flexibility when it comes to things like going on leave. Like sole practitioners, this business model supports advisers looking at lifestyle considerations such as having flexibility and focusing on income rather than just growth.
“They might split their revenue based on who earns that revenue. It’s almost like a group of sole practitioners sitting together because it makes sense – they share the brand, office cost and support costs, and if they go away someone can take the calls,” says Hayward.
Business models of all sizes are questioning if they should consider ways of including new service lines.
The next level up in terms of size is a business with between two and five directors or partners, and they are typically much more focused on growth. They are looking to attract clients from a range of sources and are more likely to be in a CBD location, whereas some of those smaller practices are more likely to be in a suburban or regional area.
The equity splits in these models aren’t necessarily equal. For example, in a five partner practice, you might find two younger partners with 10% equity each, and three older partners with the remainder split evenly between them.
“The partners have a base salary but the main return they’re looking to increase is the EBIT of the firm, so that they can increase their distribution. They see the practice as an asset they’re building to sell and so they’re very focused on growth,” says Hayward.
“If you go back to the two previous models, it’s not to say they don’t want to grow, but some of them are more focused on the income from the business.”
Multi-disciplinary corporate structure
This is often described as the ‘one-stop shop’ model. These firms typically offer financial planning, accounting, mortgages and SMSF administration in-house and are set up using a corporate structure.
Their equity structures are varied based on the people working within them, to align the different interests.
“Whether you offer different services such as accounting or mortgages in-house, or if you refer them out, or decide to not do them at all can very much change the complexity of your business model in terms of size and staff,” says Hayward.
Offering different service lines may also be driven by a desire to attract and retain younger generations of clients, in an effort to future-proof the firm.
“Some businesses deliberately look at being in the mortgage space to attract the children of their clients as clients – their main needs are simple superannuation and mortgages,” says Hayward.
“It’s a deliberate decision from a service line point of view to ensure the relationship is maintained over time.”
Other businesses move into aged care services and bring wills and estate planning in-house and use this to secure aging clients as well as a means of interacting with the next generation to ensure they are not a loser when the wealth transfer occurs.
Service lines and regulation
With the current theme of ‘convergence’ in the market, business models of all sizes are questioning if they should consider ways of including new service lines, such as accounting, insurance, SMSF administration or mortgages, in their practice. After all, new revenue streams can have a positive impact to the bottom line and multiple service lines with a client can create a greater level of entanglement and retention
But with new service offerings comes regulatory considerations, time and costs.
“With the introduction of the Future of Financial Advice (FOFA) reforms, there were a lot of changes in respect of AFSLs. There’s also been a whole lot of changes in Australian Credit Licences (ACLs) and the National Consumer Credit Protection (NCCP), and accountants have their own changes with things like accountants’ licensing,” says Hayward.
“Every regulatory framework seems to have their own changes coming through on a one to three year basis, and the more regulatory frameworks you operate under, the more complicated your business can become.”
It’s not that it’s necessarily expensive, Hayward adds. “The regulatory expense is not necessarily getting a credit representative under an ACL as an example. It’s the overhead of the knowledge, qualifications, the training, and finding someone to license under – it’s the management of it and the time.”
Hayward challenges the view in the market that to be a large firm and to achieve high rates of growth, you have to be a ‘one-stop shop’ for the client. He says some of the businesses he sees can be highly profitable because they don’t have the complexity of having multiple staff, service lines and overheads.
“We see some really big firms with over $1 billion in funds under management (FUM) who really just do the superannuation and investment advice piece. People think ‘surely you can’t be that size and just do that’, but we do see it.”
“To some extent a large part of their success has been because they haven’t brought all of that in house- they’ve serviced the client by referring them to a joint venture or a referral partner. It’s meant that their own internal model has remained less complex.”
Ultimately, the right business model will depend on what’s most important to you.
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