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.
