Expand or cut: A question of survival

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In the current environment of increased regulatory costs, advice firms are confronted with the dilemma of whether to invest for growth or cut costs to maintain profits.

However, this places some smaller firms between a rock and a hard place. Investing in growth will of course be easier for large companies with access to more capital and more man power, and there are only so many areas that a business can cut costs in.

Kim Hutchinson, national chairman, RSM Bird Cameron says that for some firms, “cutting costs is often not an option”.

“If you have to put more people on to do compliance, what other areas are there – in a very people-oriented business – that you can cut? You can only cut so much entertainment and electricity.”

The other problem with cutting costs is that businesses almost guarantee that they will stifle growth if they begin to cut training, marketing and staffing costs, says Hutchinson.

He believes that growth in the financial planning sector will come by means of mergers and acquisitions. However, Hutchinson warns that if planning firms aren’t seeing a payback within two or three years, then they’ve “backed the wrong horse”.

“Given their level of profit that we’re now talking about with these compliance costs, you could find that the payback can be well in excess of 10 years,” says Hutchinson. “Inevitably the price must come down because people won’t invest in something that’s going to take 10 years to get their money back.”

Aside from M&As, Hutchinson says the best way planning firms can grow and combat compliance costs is by recruiting and training the best people.

 “If you’ve got the best people, if you’ve got the best marketing and it’s all about getting the best market share…if you’re competitively better, you’re going to end up with the better clients with the better business.

“The most successful businesses will be those that recognise growth opportunities in a tighter market, ensure due diligence and financing is appropriate and engage their workforce to drive productivity.”

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