Financial Planning - December 2012

profitable practice

cial advisors will leave the profession by the end of the year. A representative of the authority told me that the average advisor in the U.K. is in his 50s and has been working in the industry for nearly 30 years (sound familiar?); many advisors will choose not to reinvent their practices to focus on advice rather than products.

It’s important to note that the U.K. is not the only country developing such regulations for financial services practitioners. Australia, for example, rolled out a ban this year on “conflicted remuneration,” saying that advisors providing financial product advice to clients can only receive remuneration from their clients. (We’d call that fee only.) The Netherlands, Hong Kong and India are all following suit.

HYPOTHE TICAL CHANGES

Here’s an exercise: Imagine how your current practice would need to change in the face of new regulations similar to the U.K.’s: demanding fee and service transparency, banning commissions on investment products and raising the level of professionalism of investment advisors.

Because of the new fee arrangement, you
would probably need to prune your client
base for unprofitable relationships.

You’d need to consider several aspects of your business.

Charging for advice: If you are not already charging for advice, you would need to. That means separating your advice from execution and being able to demonstrate your value to clients clearly. It also means having a dedicated pricing structure that takes into account the costs to deliver your services, while factoring in your expected profit margin.

You’d then need to strategize on how you get your clients, how they find value in what you do and whether they will happily pay for your services. You would want to segment your current client base, specifically identifying your relationships by complexity of advice and profitability. You would likely need to develop a new service mix, creating levels of services and activities that you will perform for different segments of your clients.

Because of the new fee arrangement, you will probably need to prune your current client base for unprofitable relationships. You’ll look toward wealthier clients or develop a system for managing multiple small accounts in order to keep up your income levels.

Further, you’ll need to get smarter about using technology and integrating many of your back-office activities as profitability takes center stage. Standardized processes could help you streamline both service and support.

you have access to all investment solutions that would fit your client base. That means you will probably want to develop an optimum client description and focus your marketing efforts on those prospects.

You would also need a platform that would allow you access to all the products you’d need. For certification, you would need to prove to an organizational body that you truly give independent advice.

Don’t have a college degree? That could be a problem. Also, 35 hours of continuing education is a high bar: Even if you are already a certified financial planner, that’s more than double your current requirement.

REALIT Y CHECK

Now think about this: The United States has been a leader in the development of financial planning and investment advisory services, but it isn’t any longer. Given the global nature of the financial services industry, I don’t believe we can sustain our current advisory services system into the future.

I believe that change is coming and we’d be wise to take an active role in helping to design our changes, rather than having them developed by people who don’t know our business models or our clients.

Look back now at the picture I’ve painted for the future. Most of these changes would actually be good business practices for today, independent of the way you get paid. These strategic decisions will help you create value for your clients, demonstrate your professionalism and improve your bottom line.

I believe that professionalism is paramount; we’re no longer sales-driven but solution-driven. We’re advisors, counselors and planners who develop sound financial futures for our clients. Aren’t we? FP

Deena Katz, CFP, is a Financial Planning columnist and an associate professor of personal financial planning at Texas Tech University. She is also chairwoman of Evensky & Katz, an advisory firm in Coral Gables, Fla.