Understanding the factors and what they mean for your financial planning business

For financial planners, like most industries, 2020 continues to present a litany of challenges that colour the future with a particular shade of uncertainty that appeals to only the most hardened opportunists. And that’s just the pandemic part. With the transition of financial planning to a profession with massively increased educational and regulatory burdens, the planning industry is under more pressure than most.

As the industry rapidly consolidates, how are the smartest and most adaptable financial planning practices adjusting to the myriad challenges being presented? And where are the opportunities to turn these challenges into upside, build resilience and create additional value in your business?

Where is the value?

So far, we have seen some negative impact on the value of financial planning practices. Not surprisingly, given all the change occurring in the industry, there has been a clear split in the pack with an increase in planners leaving the industry and a consolidation in the number of licensees. The businesses that are holding their values are those that can clearly demonstrate value for the fee for services they charge as opposed to merrily relying on traditional trail-based models.

As a result, we’ve seen an uptick in stronger planners approaching us for larger loans to fund acquisitions, or buy out partners, as they sniff out opportunities for growth.

We have identified seven factors that influence practice value and what you need to look at when buying a business or preparing your own business for sale at the optimal value:

1. Book stickiness and client database. Loyalty, quality, longevity and product diversity of clients is key.

2. Age demographics of your clients. Wealth builders versus wealth users.

3. Educational standards. Your own educational development demonstrates a clear commitment to the business and industry more broadly.

4. Scale imperative. Higher costs and increased compliance burdens mean that merging to enable economies of scale can be highly beneficial for smaller practices.

5. Quality of revenue streams. This points to business sustainability. There’s little value in grandfathered trail and it’s essential to provide and charge appropriately for services commensurate with what your clients are receiving.

6. Access to debt funding. Having the ability to access funding for business growth. In other words, your business bankability.

7. Capital for equity. Possessing capital to be able to attract talent and make business improvements and enhancements.

And a dollop of better, smarter, faster will not go astray

Innovation is not necessarily about scrum masters and setting the world on fire. It can be as simple as getting the basics right. If you look hard enough, there are quick wins out there both from a resilience and value-building perspective. Check out our five tips to help prepare your business for what comes after COVID-19.

Our purpose as a business is to help small to medium-sized financial planning businesses, and other white collar professionals, thrive. Get in touch if we can help you do just that.

Next time, we’ll take a look at how to create additional value in your practice.