Speaking on a Netwealth webinar last week, Peloton Partners’ co-founder, owner and principal consultant, Rob Jones, urged advice firms to consider how they can increase profits with existing clients rather than looking to acquire new ones.
In the current climate of mergers and acquisitions, Jones said firms ought to consider ways to increase profit internally before spending large amounts of money on acquiring client books and hoping valuation has been done correctly and the projected profits occur as hoped.
“They should look inward before they look outward when it comes to acquiring revenue,” Jones said.
When consulting with advisers about their client’s fees, Jones said too many are undervaluing their services and inadvertently putting a cap on their potential earnings.
“Too often, advisers are telling us when we go to price their clients … ‘Oh, this client’s really easy to manage. They’re quite simple, we don’t really do that much for them.’ And that is absolutely not true,” he said.
“When you say that, you invariably are almost putting a ceiling on your own fees, and that’s not ideal. Or worse, you’re thinking perhaps the client is paying too much when you give a response like that.”
His firm’s data, which analysed the record of numerous companies, identified a number of barriers to increased profits found in firms across the board, regardless of the size.
Some of the barriers identified included “pricing is not fully aligned to client complexity or client value”, “pricing framework becomes settled but legacy client fee arrangements are retained for fear of client losses occurring”, and “return on investment not achieved”.
The cost to provide advice has continued to rise over the last decade. This can be attributed partly to predictable factors such as inflation and the overall increase in CPI; however, Jones also attributed it to regulatory reforms.
Using data collated by his firm, Jones revealed that yearly expenses increased between 3.5 and 8 per cent most years between 2013 and 2023; however, there were peaks in years when significant regulatory reforms were implemented.
In 2015, expenses increased 17.1 per cent with the introduction of the Future of Financial Advice (FOFA) reforms, while there was a 10.4 per cent increase in 2019 on the back of the financial services royal commission, and in 2022 and 2023, there was an 18.2 and 11.6 per cent increase, respectively, which he attributed to “wage inflation, technology and licensing cost impacts”.
As regulatory reforms and increased levies continue to impact the financial services industry, Jones said more sophisticated pricing is necessary to maintain profits.
“[If] you decided to apply a basic CPI increase to your revenue each year, you would be falling behind because these costs are well and truly beyond the basic consumer price index increases each year,” he said.
“This industry isn’t static. Your expenses are never static, and we must apply, as far as we’re concerned, adaptive pricing methodologies that can move and deal with these types of changes that impact your bottom line.”
Jones said when repricing client fees for firms, he aims for a profit margin of 40 per cent EBIT, and a 30 per cent or higher profit margin after tax.
“That is a good and fair return and I’ll challenge anyone to suggest otherwise because that’s what’s needed to run a business these days,” he added.
“A right and fair fee for the client and a right and fair return for the firm.”
