The five building blocks of success

Global asset manager Dimensional, which manages $340 billion for institutional investors and the clients of fee-based financial advisors, surveyed from than 700 firms in the US, Australia, the UK and Europe over the past two years.

Of the 65 Australian financial planning practices who took part, nearly 30% had assets under management of more than $100 million. A further 32% had between $50-100 million and 38% had less than $50 million.
Profit margins and other metrics were strongest in the biggest firms – those with more than $250 million in assets under management. For instance, operating profit as a proportion of average revenue was 36% in these firms, against 29% among all survey participants. Average staff numbers in these most profitable firms were around 12, against 5 in the overall sample.

The five building blocks to success identified in the survey were:

1. Taking a collaborative approach to wealth management
2. Clearly identifying the ideal client and the resulting engagement process
3. Systematizing core business processes
4. Documenting business growth plans
5. Committing to an investment philosophy

Of all the firms surveyed, the most successful in terms of revenue, operating profit, client engagement and growth in assets under management were those who clearly articulated and maintained processes around those five core competencies.

For example, having a clearly articulated, defensible and consistent investment philosophy was a common attribute among the more successful business.

On the collaboration front, 75% of the most profitable firms were focused on developing relationships with new centres of influence versus 42% of all participants. The most successful practices were also more likely to host events for clients or prospects and systemise workflows.

The key, said the top performers, was making their businesses process-dependent rather than people-dependent. That started with defining the ideal client, segmenting the client base, systemising processes, streamlining the service package and, finally, protecting profit per client.

Outsourcing or delegating non-core activities was another common attribute of top firms, the survey found, leaving advisors to focus on strategy and generating revenue rather than working on client service, administration or compliance.

In terms of organic growth, client referrals were the single biggest source of new business at 47%, followed by centres-of-influence referrals at 23%. While only one in three firms had a process in place to ask for referrals, those with a process were 44% more likely to have a target client profile.

As to the reasons clients don’t refer, the most cited among advisors was that they had never asked them to, followed by a feeling that existing clients did not understand the sort of people the advisor wanted to work with.

Another significant source of growth was the holding of regular client events, with those hosting them receiving twice as many new clients over the past two years, as well as 100% more client referrals.

The more profitable firms also had a higher ratio of overhead staff to advisors, which led to the servicing of more clients per staff and leveraged the skills of frontline staff in areas where they can best pursue business growth.

A poor staff structure tends to lead advisors spending too much time on responding to routine client questions, designing statements of advice and managing back-office operations, and too little time on meeting existing clients, developing new business and working on strategic management.

Ultimately, no single element appears to be driving the success of planning firms. Rather, it comes from the connectivity between the client identification and engagement plan, the systemisation of business processes and a staff structure that focuses advisor time on revenue generation.

The Dimensional survey concluded that the best practices in financial advice are not accidentally successful. They develop and maintain a clear vision, they focus on their core competencies and they build value through collaboration, process improvements and staff structure.

Without systems, advisors don’t have a business. And without processes, they have no way of measuring their success. The effort put into articulating and creating these structures pays off with more sustainable, faster growing and more profitable firms.

About Joel Teasdel, Vice President, Dimensional

Joel Teasdel is a Sydney-based vice president in the Financial Advisor Services business of global asset management firm Dimensional.

For 16 years, Joel has worked with leading private wealth managers in Europe, the UK, and Australasia to improve their clients’ investment experience and their firms’ profitability.

He holds a bachelor of business degree in marketing, management, and international business law and a diploma of financial services in financial planning.