Vital signs

“Get fit” featured high on many New Year’s resolutions for 2015. Yet as the first quarter draws to a close, most of us are still stuck on the couch, choosing sitcom reruns over working out.

The advice industry is no different – while some practices are operating at their highest level, most could afford to streamline, tighten up and reinvent.

What does it mean for a practice to be at the top of its game? Rubik Financial believes it has an answer.

The technology provider partnered with practice management group Business Health to produce the Future Ready VI Report (Future Ready), which measures the advice industry against benchmarks for ‘healthy’ practices.

For the 2014 edition, the authors drew on data from 328 firms that have used the Business HealthCheck service since December 2012. In addition, the report uses results of Business Health’s CATScan client satisfaction survey to provide insight into client attitudes.

Whether your practice is a bit out of shape or in peak condition, using the Future Ready benchmarks can help you identify areas for improvement. We take you through high-risk factors, areas to watch and a few accolades for a job well done.

Critical condition
A high number of practices are operating smoothly but have been left vulnerable to future crises.

Planning for the future
One chronic issue facing advisers is key person risk. Practice principals tend to have a central role in advice businesses, with almost two-thirds of practices run by a single owner.

According to Future Ready, 43 per cent of principals said their practices would not be able to operate without them and a further 36 per cent believed the practice would survive, but not grow.

Despite this risk, less than half of practices have a ‘key person plan’ in place to account for scenarios where the principal may be out of the picture.

Future Ready warns practices without a plan are in a dangerous position.

“Should the adviser die, be disabled or leave for some reason, the question must be asked, ‘What happens to the client?’” the report states.

“All businesses need to be able to answer this question with conviction but it seems likely that this would be impossible for many, given the results of this analysis.”

Similarly, practices are also in jeopardy when it comes to succession planning. Just 39 per cent of practices have a clearly documented succession plan or buy/sell agreement in place, the report shows.

Even practices that already have plans may not be adequately protected – 30 per cent of plans fail to account for death, disability, retirement or resignation, which are the four major triggers of ownership change. In addition, one in two plans do not identify a successor who has formally agreed to take over.

When ownership changes, a well-constructed future strategy safeguards against chaos.

Yet the benefits may extend even to day-to-day operations – the report found practices who had successfully implemented a succession plan brought in 151 per cent more profit per principal than those without any plan at all.

Recruiting the next generation

People close to retirement naturally worry more about their finances than those starting out, meaning advice clients tend to skew older.However, the Future Ready research suggests this trend is careening out of control.

The CATscan survey identified 44 per cent of advisers clients are already retired and 53 per cent are aged over 60. As these clients age, advisers may see their client books shrinking.

“Clearly new clients are needed now by most Australian practices to compensate for the potential impact of this client transition,” the report states.

Yet practices are unlikely to attract new business with their current marketing efforts, Future Ready warns. Principals report spending on average less than 1.5 per cent of total revenue on marketing.

In all, 20 per cent of practices don’t have a website and 46 per cent have no social media presence.

Many practices are taking a blind approach to their promotion efforts, with two-thirds having no clearly defined and documented marketing plan for the next 12 months.

Advisers are also struggling to give clients what they want – mainly personalised, relevant attention.

Just 43 per cent contact their A-level clients more than 10 times a year while around 16 per cent of practices make contact less than five times a year.

This comes despite CATScan results showing a link between frequent high-quality client communication and referral of new business.

Many practices are also failing to seek out opinions from their clients, with just 30 per cent taking a structured approach to client feedback.

Yet seeking feedback can have a correlation with practice profit.

In practices that have no process in place, the average profit per principal was $181,468; where feedback was actively sought, profit per principal jumped to $382,968 – a difference of 111 per cent.

If advisers fail to account for these two crucial elements, they may find their business flatlining in coming years.

Urgent check-up

In certain areas, practices have shown improvement but could use a tune-up.

Client reviews are a chance to prove your value to the client year after year.

But just 77 per cent of practices conduct comprehensive reviews, covering all relevant issues.

Even then, clients may not be walking away satisfied. CATScan results suggest reviews are the “worst performing area of their adviser’s service,” according to the report.

Business planning is also an area that could use attention. All up, 42 per cent of principals have a documented three- to five-year plan in place.

While low, this is the highest level in the eight years since the survey began.

A further 42 per cent have a business plan in the principal’s head or partially recorded. These practices could see a bump in profits if they put that plan on paper – the profit per principal for practices with partially recorded plans was $225,292, versus $305,478 for those with documented and implemented strategies.

In terms of people management, principals could do more to support their staff.

Around 58 per cent of practices provide individual performance objectives for the next 12 months, and 59 per cent have given their staff a review in the past half year. This leaves a significant number of employees with no formal feedback or goals to work towards.

Clean bill of health

On a positive note, the advice industry has significantly improved in some aspects.

Practices have wholeheartedly embraced the digital age, with over two-thirds providing staff with remote access to their work materials and 9 out of 10 making all business data readily accessible on a network.

Advisers are also feeling good about the quality of their work, despite a changing regulatory landscape.

Over 90 per cent of practices report feeling confident their advice was provided on a reasonable basis and 88 per cent were confident they had the right disclosures.

The report found the industry was improving, with 62 per cent of practices classified as “fit” compared to 24 per cent in 2012.

But, businesses with good fundamentals may still face challenges.

While the report’s benchmarks are not a cure-all, working towards improvements could immunise your practice.