The Financial Advice Industry’s ‘Fixing’ Period

“We are in a significant period of change. The landscape is evolving and it is moving very quickly. Our industry, our businesses will look very different in years to come.”

This is how Forte Asset Solutions principal Steve Prendeville introduced his recent webinar where he discussed a case study he conducted on behalf of HUB24 (Redesigning a practice: A case study). In it, an advice practice introduced managed accounts which was the trigger for transformational change in their business.

In the case study Prendeville said it is no surprise advisers are recommending managed accounts to their clients given they can be a great way to lift client engagement, business value, and business efficiencies.

Prendeville highlighted that Managed Accounts may not suit all clients, so an adviser’s first consideration will always be “is this in my client’s Best Interest?”. In this case study, the adviser completed a full review of individual client circumstances to determine the suitability of a Managed Account solution, before making any recommendations.

He also noted post the Hayne Royal commission, there is an opportunity in-front of many advice practices now that is not dissimilar to the Post-FoFA environment.

“After FOFA, better businesses were built and greater valuations were achieved because of that retooling of our businesses. This is exactly the opportunity that we have at this time.”

By retooling, Prendeville is referring to the adoption of technology and fixed fees. These he identified as transformational vehicles because of their power to positively influence the service levels and profitability of a business.

For privacy reasons, the practice used in the case study was fictionally called Alpha. It was established in 2001 and moved to a smaller licensee in 2013. Its funds under management was $82million across 176 clients, with recurring revenue of $565,000 based on an average fee of 68 basis points per client.

Alpha was experiencing increasing costs in compliance and personal indemnity insurance, which was leading to static profitability.

“While staff were at full capacity, Alpha wanted to deepen their client value proposition,” said Prendeville. “A full review of the business identified key strengths and weaknesses, shaping their strategy for change.”

With the use of an external consultant, a three-year plan was devised which involved some significant changes to the business such as the repositioning of the client value proposition, segmenting the client base, reprising to fixed fees and outsourcing asset management.

In the first year, Alpha ran a tender for a managed account provider and outsourced asset management. This took 4-6 months.

Prendeville notes this was an effective way to demonstrate clients best interest and fiduciary care. Further, an experienced transition teamwas an essential aspect of the managed account migration.

This first year also involved the movement from percentage-based fees to a fixed fee structure which had a positive impact on recurring revenue which grew to $799,800 with an average fee of 86 basis points.

By year two, approximately 40% of clients had migrated funds under management to the new offer in the first two months. The principal attributed the uplift in revenue and profitability to the new segmented service fees.

By year three, the migration process to the managed accounts represented 89% of funds under management. A general manager was established and a board of advice created. The fixed cost of the next structure was $180,000. Over the three-year period, the business FUM had grown by 30% and gross revenue by 85%.

Prendeville said key to the transition is leadership and a clearly articulated vision which outlines the benefit to all the stakeholders. This is particularly important as the benefits of the change do not all come at once.

“While the change is not immediate, once you make a single significant change it allows for more changes to be introduced,” said Prendeville.”

He added: “Clients want you to be the subject matter expert on what is best for them given their personal situation. You are the GP outsourcing to specialists as required and project managing the clients’ needs. Successful advisers identify where they and their people add value and outsource where possible.”

Want to know more about the Alpha case study? Check out our managed portfolios education HUB.