Local statistics offer interesting insights

Are you tired of reading US or Australian statistics? With the launch of the SA Best Practice of the Year award in 2007, very interesting information about local practices is beginning to emerge.

With the launch of the SA Best Practice of the Year award in 2007, Celestis and its associates, FAnews and Business Health of Australia, are now in a position to analyse hard data about local practices.

Each participating practice in the SA Best Practice competition must complete the HealthCheck, an online practice assessment provided by Business Health. The approximately 130 questions that make up the assessment form the basis for the evaluation of the participating practices.

Averages and trends

The information is absolutely confidential, but Business Health was able to provide us with a report based on the averages, trends and other information extracted from the responses.

Consequently, we can tell you that for the 73 competing practices that completed the HealthCheck, the total assets under management was R193 million and that these practices (on average) employ 8.5 staff (including 1.7 advisors), with each employee generating revenue of R320 987 for the business. We also know that 70% of the participants derive more than half of their income from existing clients and that half of the practices show a client retention rate of 100% for 2007.

All very interesting, but how can these statements really help the rest of us? As usual, the devil is in the detail and we need to look beyond the "interesting snippets" at some of the specific facts that emerge, in order to benefit from the report.

Client management

Most of those who participated in the competition maintain electronic client management systems (CMS) in which comprehensive client data is stored. In general, SA practices have embraced technology and use it effectively. Interestingly, those practices that store prospect details on CMS generate three times the profit of those that do not.

Only a third of the practices segment their client bases and, more concerning, nearly 60% of them do not differentiate the services offered to their clients. It is impossible to be all things to all people and with a growing, nonsegmented client base, some inefficiency and over-servicing to the detriment of your best clients is inevitable. Clearly there is room for improvement here and this will result in enhanced profitability.

Another profit dampener is the fact that more than three of the practices conduct the majority of their appointments at clients' offices. Sky-high fuel costs aside, a reduction in travelling time will meaningful improve profitability.

Nearly two thirds of the practices state that their advisors conduct regular client reviews and the benefits are obvious with those that do so generating more than double the profit per advisor than those that do not.

While service levels are generally good, most practices do not have a structured approach to seeking client satisfaction feedback. Three quarters of the practices communicate with their A-list clients less than 10 times each year. In a service industry dependent on effective communication, there is room for improvement here.

Business continuity

This is probably the area that most of us need to reconsider. Only a third of the participants have documented business plans, and those that do review their plans regularly. Equally few participants have a disaster recovery plan, a worrying situation given our dependency on technology, for example.

Only 27% of the practices have a documented succession plan in place and only 19% of all participants have a buy-and-sell agreement in place. With the average age of advisors in South Africa at 49 and ageing, the situation is grave. Our clients are heavily dependent on financial advisory practices and the death or retirement of an advisor should not put their financial welfare at risk.

Staff management

Given the total numbers of employees affected, it was pleasing to note that the majority of practices that entered have written job descriptions for their staff members. More than half of the practices document individual performance objectives for employees and an even greater number conduct annual performance appraisals.

Nearly half the practices stated that employees had attended personal or professional development programmes during the previous year. Understandably, low staff turnover was a feature among the participants.

Most practices hold regular team meetings and more than half of them share their business goals with their employees. This was a distinct characteristic of the eight competition finalists whose employees were able to discuss the practice's core objectives – a clear sign that they are in tune with where the practice is headed.

Financial management

On the revenue side, financial management among the participating practices is healthy and the high proportion of income that stems from existing clients is a very pleasing factor. However, over a third of the practices returned a loss for the year and a further 28% reported profits of less than 20%. The conclusion must be that more than half of us are not in it for the money or we have practices that are hardly likely to be deemed saleable. Given that there are easier ways not to make money, many of us need to go back to the drawing board if we want to grow our practices as the biggest asset we possess.

How do you rate yourself?

Some pertinent business issues have been highlighted in this article. Use these findings to stimulate your thought process. Maybe you should consider entering the Best Practice competition this year. It costs nothing, other than a little time and effort on your part, and the experience could change your practice forever. FAnews will again be teaming up with Celestis and Business Health to facilitate the 2008 SA Best Practice of the Year Award, so watch out for an announcement in the near future.

Final thoughts

A sample size of 73 practices is only a small percentage of the total number of financial advisory practices operating in South Africa. Is it reasonable to assume that their responses are representative of the industry? Firstly, Business Health assures us that the nature of the responses suggests that we are dealing with a number of the top practices in the country and, therefore, the data is credible. Secondly, Celestis currently delivers practice management to nearly 2 000 practices through Masthead and its own resources. The experiences of the practice consultants operating in the field corroborate much of the information obtained from the Business Health report.

Our industry is not in trouble but there are ways in which we can improve efficiencies and profitability. In the long run, this is in our interests and those of our clients. A healthy financial advisory practice will translate into better services for its clients.