How to ensure broker practice viability in a post-RDR world
A well-defined value proposition is a critical success factor for independent brokers in a post-RDR world, as is an effective business model to ensure consistent delivery of the value proposition to a chosen client segment. A further crucial consideration concerns the financial viability of the broker practice. Jacques Coetzer, general manager of Sanlam Broker Distribution, says there are four main questions brokers need to ask when assessing their potential future financial success:
What is the implementation of your value proposition going to cost?You need to have a clear idea of all the costs related to the sustainable delivery of your offering to the segment of the market with which you want to do business. For some brokers, this may mean small tweaks to their existing business, but it could also mean major, costly changes. In this regard, it is important to distinguish between costs from an accounting perspective (for example, depreciation of an asset), and those related to cash flow of the business.
- Can your business generate enough income to remain viable in the long run? Your business income will be earned through a combination of fees and commissions, as well as other sources of revenue. “This of course depends on the category of clients you have chosen to provide your services to – and whether they offer you the best long-term value,” says Coetzer. “It also depends on your business emphasis – is your focus on managing relations with existing clients, or are you running mainly a transactional business?”
- What kind of fees can you realistically charge your clients? Your fee model will largely be a function of your value proposition within the context of clients you are targeting. “You need to understand your value proposition from the perspective of your clients. The value that your clients see and believe they will receive is the basis for what they will be prepared to pay for your service,” he says.
He adds that this depends mainly on your reputation in the market, and to what extent you are differentiated from your competition. The more your clients perceive that they are receiving a unique service, the more they may be willing to pay premium for that service.
- What other factors may also affect your financial viability? There are a number of other variables that need to be considered in conjunction with your fee structure, including the number of clients you are planning to service, and the number of transactions your business is likely to complete on a monthly basis. “For example, if you realise that limiting your client base to 200 may affect your financial viability, you may need to up this number to 400. But you may then need to increase your staff complement, which will impact your monthly expenses.”
Coetzer says Sanlam has spent a fair amount of time and energy to help independent brokers prepare themselves for the post-RDR world and ensure the economic viability of their businesses. Sanlam has also been actively participating in debates on the RDR and other regulatory and compliance issues with the Regulator and other parties.
“Given the risks broker practices have to take in a changing environment, we want to ensure they remain meaningful and relevant in tough economic times. Ultimately, the industry has to be viable and sustainable both for brokers and their clients,” he concludes.
