Many elements are needed to build a thriving financial planning business. A strong value proposition, the right technology platforms and succession plans to ensure business continuity are all important. But the most critical component is a secure and growing client base.
Financial planners who wish to maximise the value of their business need to be constantly building for the future, while maintaining service levels to existing clients, Forte Asset Solutions business valuation expert, founder and owner Steve Prendeville says.
“If the business stagnates, it means it is in decline. Financial planners have to be constantly re-energising their business by bringing new clients on,” Prendeville explains.
Many financial planning practices have an aging client base. Business Health’s client survey tool, CATScan, shows 49 per cent of clients are aged over 60, while 40 per cent are already retired.
Having too many older clients on the books can drag down practice valuations, Prendeville says.
“If we see more than 30 per cent of the client base aged over 70, there’s a mortality risk and we will apply a discount factor to that business,” he explains.
The industry average for practice valuations is about 2.5 times recurring revenue. Prendeville cautions risks to recurring revenue – such as a large number of older clients – could reduce this by as much as 20 per cent.
But there are ways to future-proof the business and offset that discount factor.
One strategy Prendeville suggests to businesses at risk of lower valuation due to the age of clients is to expand the range of services offered to these clients. Providing value-add services covering issues such as aged care, estate planning, or equity release and reverse mortgage products can not only generate additional income from older clients, but also act as an opening to involve younger family members in the advice process.
For example, estate planning attracts the interest of younger family members as it may directly affect their own finances, as does advice involving the family home.
Bringing multiple generations of a family into the business reduces risk to the practice’s funds under management as wealth transferred between family members is more likely to stay under the financial planner’s advice, according to Prendeville.
“Practice valuation comes back up to 2.25 per cent if you have a diversity of age in the client base,” he says.
Advisers commonly target younger clients by asking established clients for referrals to family members and using referral relationships with service providers such as mortgage brokers and accountants.
But research shows recommendations alone are rarely enough to compel people to choose one adviser over another. Only 19 per cent of people who had recently received financial advice said they selected their financial planner based mainly on a recommendation, the Australian Securities and Investments Commission’s (ASIC) report, “Financial advice: What consumers really think”, found. Of people who had recently considered financial advice, just 30 per cent said a recommendation was important.
From these statistics we can conclude financial planners need a more sophisticated approach to winning new clients.
The ASIC study found the top three reasons why clients selected a particular adviser were level of experience, reputation and communication skills. The last criterion involves taking time to understand the client’s goals and the ability to clearly explain concepts and recommendations.
Financial planners who involve their clients’ families in the advice and decision-making process have an opportunity to demonstrate these attributes to family members, which may encourage them to ask for advice on their own situations.
“If I’m putting mum into an aged care home, that’s highly emotional. Good advice and help on that process wins hearts and minds. They are emotionally invested because it’s family and if someone can show them through, that’s how trust is born,” Prendeville notes.
Advisers may talk directly to retiree clients about issues concerning their adult children, such as housing affordability. It can be difficult for advisers to talk about residential property and remain compliant, but they can discuss ways to help adult children to enter the property market. This may be through gifts or loans. But it can also involve financial solutions that would allow the parents to co-invest in property with their children, such as DomaCom’s rent-to-own product or property syndicates.
Shartru Wealth chief executive and representative Robert Coyte feels involving family members is an essential part of any advice process and can help advisers to manage business risk.
“If you are doing the job for a client, taking in all the situations and all the things that are going to impact on that client over time, it’s impossible not to include members of their family, whether that’s people who are older than them – their parents – or their children whom they might have obligations towards,” Coyte says.
“Part of giving advice properly and extensively is that you need to have a gauge of all those things.”
The financial planner’s obligation is always firstly towards their client, but there may be opportunities to expand the client base if family relationships are managed well. In the early stages, this can mean focusing on strategy rather than products.
“I always talk conceptually. For example: ‘Let’s say we could access the equity in your home, but you can still live there and have tenure.’ Once we have got the clients on board with the strategy, the product is the last thing we discuss,” Coyte reveals.
“Products are just tools. Craftsmen never talk about their tools: they talk about the end product. We focus on what the strategy is going to achieve and what are the risks or downsides.”
Only when the client is comfortable with the recommendations does Coyte bring in family members to explain the proposals.
In cases where a family member disagrees, he recommends they seek separate financial advice to have somebody represent their interests so any issues can be resolved upfront.
“You don’t want to get wills challenged or families to get in a mess,” he warns.
Family members who can see the benefits of the recommendations and understand the value of the advice will appreciate the adviser’s knowledge and skill. This respect and trust can form the foundations of successful new client relationships with other members of the family.