The Strategic Evolution Of Advice Firms
Practice Management & Professional Services & Strategic Issues

The Strategic Evolution Of Advice Firms

May 13, 2022

by Tony Vidler  CFP logo   CLU logo  ChFC logo

The evolution of advice firms into different service and revenue models is happening already of course, but the majority of financial advisory firms appear to still be trying to figure out what the next evolutionary step might be. There’s a classic cartoon that shows the way forward for those advice firms when it comes to how they must evolve.  It is called “The evolution of an entrepreneur” and even though it is aimed at those starting out in business, it captures where the advice industry has come from and where it currently sits for many.

 

For many advice firms almost their entire focus is on generating revenue, and that has been especially true for the last couple of years.  Revenue is not the same thing as profit though, which of course we would expect financial advisers to grasp.  More and more have in recent years of course and are focussed upon being profitable businesses in their own right.  Where we pretty much all came from in years gone by though was being focussed upon volume – a pure sales focus that was all about moving product putting policies and investment plans in place.  Basically we bought in to what the product manufacturers wanted and thought that was important to us.

 

Our business requirements align with theirs in some areas of course, but our primary busines requirement is not the same as theirs.

financial-advice

I thnk most advice businesses have learned the hard way in recent years that sales volume is not as important as revenue generation, and many have grasped that profit matters more than gross revenue.  The smartest are already understanding that  the future is to start thinking seriously about how to build reliable and growing cashflows.

 

Profit does after all come and go to a certain degree, depending on a multitude of uncontrollable and controllable variables from changes in taxation policy or regulatory intervention through to individual decisions on investment in a firms infrastructure which presents a future benefit, but at an immediate loss.

 

Profit matters and focussing upon it is a significant step forward in management thinking for an advice firm.  It isn’t the end of the management thinking or firms evolution though, as Warren Buffet might point out.  After all, he has built a stellar record as an astute business manager by focussing upon cashflows of underlying businesses, right?

 

Sustainable cashflows for an advice firm are created when selling is separated from delivering client value.

 

Selling things, whether it is products or units of time, must involve delivering something of value of course.  That results in a transaction and revenue generation, which contributes to profitability.  Excellent!

 

But long term value comes from repeated revenue which does not require the expenditure of the same time and effort which is involved in continually re-commencing engagements with customers.  That generates positive cashflow for a business (or it should if enough of it is done).

 

So what needs to change in order to make this shift in business paradigm?

 

Up-front or initial commissions shifting to renewal or servicing commissions is an obvious answer.  Packaging valuable advice into ongoing subscriptions is another.  Becoming re-sellers of associated solutions such as accounting software or financial apps is an option.  Creating a valuable information source (or any other service) into a research function works.  When we begin to think about it there are quite a few areas where we could introduce services or functions or products that are delivered regularly and with a positive cashflow implication for the practice.

 

The key is shifting the paradigm: changing the thinking so that the focus moves beyond what is immediate revenue, or even what is profitable in the short-medium term, and onto

“what will generate reliable and increasing cashflows for the firm?”

 

I suspect that is the way forward for advice firms looking 5-10 years out.  After all, it seems to have worked well enough for Buffet so it can’t be a totally ridiculous suggestion.

You might also be interested in this related article:
Most Advisers Are Frogs Being Boiled Alive When It Comes To Fees
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