How to boost your profits by 50%

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Financial planning firms are not making enough profit to survive in a new world environment, thanks to advice fees that are too small.

According to succession experts at Peloton Partners, wealth management firms are missing out on a possible extra 50% in Earnings before interest and taxes (EBIT).

Peloton Partners was established by Rob Jones, Michael Harrison, and David Murray, who between them have more than five decades of direct experience working with institutions and financial planning businesses.

They have reviewed and advised businesses with a combined total of $1.42 billion FUM, total revenues of $16.87 million, and close to 6,000 clients. The partners say that the total ‘un-extracted’ or ‘latent’ bottom line value assessed within these businesses was $2.7 million in EBIT uplift, which equates to nearly 50% of the total aggregated EBIT these firms are currently producing.

Principal Rob Jones says that the majority of this comes from advisers charging the correct advice fee that is competitive and makes an appropriate level of profit.

The partners say that advisers are charging an average of .6% per client, and Jones says that is “not acceptable”.

“If you assume that they’re not going to earn anything else from the whole relationship and they’re not going to be taking product rebates and so forth, they’re actually quite low,” says Jones. “That’s just a fact and we’re aiming to fix that up because it means that they’re not making much profit. And in fact most, or all, businesses we’ve seen are generally suffering from a lack of profit and a lack of growth.”

Talking to clients about increasing their advice fee is a multi-layered discussion, says Jones.

“There are ways of going there, there are ways of insuring you still retain the client and we’ve done all this before so we’ve seen it work – and it does work,” says Jones.

There are also other ways around it that could result in a lower overall cost to clients. For instance if a client is in a high platform structure with a lot of active funds, there are ways to offset the fee increase, he says.

Advisers need to revisit exactly what clients are receiving, how it compares to what others are offering, and whether they’re being charged appropriately. Jones says it is about engaging the client, and though it may result in some client depletion, advisers need to think about whether those clients are worth having.

Jones says he saw one client recently that was a significant client in terms of wealth and the services provided, but was only being charge .15%.

“It was simply that effectively, at the start of the relationship, which was some years ago, the client was in a good position and maybe bartered a good deal with the adviser and got one, and then they put more money in and the fee structure hasn’t merged.”

“What we found when I went back to visit some of those clients – existing clients – is that they will have a range of additional services that they were willing to pay for. In some cases the relationship wasn’t as good as it could’ve been and it was reigniting and it was on a stronger footing.”