The proportion of financial planning practices deemed to be in poor health has doubled from 25 per cent to 50 per cent over the past two years, according to the latest Future Ready whitepaper from Business Health and Securitor.
Planning businesses have faced a ‘perfect storm’ over the past few years due to the global financial crisis, ongoing market instability, Future of Financial Advice (FOFA) reforms, continued industry rationalisation and the aging adviser demographic – factors which have combined to take a heavy toll on practices, the Future Ready V whitepaper stated.
Practices are still falling down in key areas, with a significant deterioration in areas such as succession planning, seeking client feedback, maintaining an effective business plan and a documented value proposition, and seeking external advice or guidance.
Other areas of weakness included risk management (including a lack of key person insurance), client acquisition and data backup.
There was some good news though. Key client retention remained strong, practices continued to migrate to fee-based remuneration models and overall compliance was good with a low rate of professional indemnity claims.
There was a huge drop, from 67 per cent to 46 per cent, in the proportion of practices conducting at least 90 per cent of client meetings onsite. This could prove costly, with practices conducting most meetings onsite recording one third more profit per principal than those conducting less than half their meetings onsite.
The practice of client segmentation has slipped compared to the 2010 study, with just 71 per cent of practices now segmenting their client base compared to 86 per cent in 2010. More than a third of those that do segment clients hadn’t reviewed that model in the past 12 months, and 13 per cent of them offered the same service to all clients, regardless.
This means almost 40 per cent of practices offer the same level of service to all clients, despite the fact the average practice had 836 clients. This had a direct effect on profitability, with practices that effectively segmented clients three times more profitable on average than those with no client segmentation.
Business Health director Terry Bell told InvestorDaily one of the most surprising and disappointing findings was the lack of practices seeking client feedback. This was a major issue in the previous survey, when just 30 per cent of practices surveyed clients. This figure halved again to just 15 per cent in the 2010 study. Practices that sought formal feedback from clients were 73 per cent more profitable than those that did not.
The number with an effective business plan had halved from 57 per cent to just 28 per cent of practices, while much of the remainder had a plan that was only partially documented or infrequently updated. Practices with an effectively implemented business plan were two and a half times more profitable than those with no plan.
The data was based on results from more than 300 firms that have completed a business health check since the 2010 paper, representing a wide cross section of the industry, from institutionally aligned practices to self-licensed businesses, according to Mr Bell.
The paper said practice benchmarks were set “unapologetically high”, and that not since the 2004 study had so many practices been in need of assistance and guidance.
