Five key drivers of practice profitability

19 June 2017

Wayne Wilson looks at the top factors that drive and improve financial advice practice profitability.

A challenge for all principals of financial planning practices is quantifying what elements of their business deliver the best return.

The most recent Future Ready VII report into the health of the Australian financial advice industry noted that most practices had experienced an uplift in revenue and profitability over the past two years, as well as an overall increase in the number of new clients.

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While these are positive top-level figures, it is useful to delve deeper to understand exactly what is driving profitability, and what measures financial planning practices could be putting in place to further improve profit.

Indeed, it is particularly valuable for practices to understand their profitability drivers when their expectations for future growth and revenue are considered.

For example, the vast majority – 94 per cent – of principals expect to increase their practice revenue over the next 12 months.  Meanwhile, 89 per cent expect to increase the revenue generated by fees, and 80 per cent expect to increase the number of clients they service, according to Future Ready VII.

But dig a bit deeper and exactly how planners expect to achieve these results is less clear.  Only 38 per cent have some kind of business plan for the next 12 months, and just 35 per cent have a longer term strategic plan.

So, which are the elements that help drive profitability?  And what are the most profitable practices doing that others aren’t?

Use of technology

The most profitable practices have implemented a fully integrated customer relationship management (CRM) approach that includes:

  • Using an automated CRM system;
  • Updating client data within 24 hours of a meeting;
  • Storing information about potential clients on their CRM system; and
  • Having 20 or more data fields for storing client information.

Those practices that do all these things are, on average are 265 per cent more profitable than those practices that do none of them, as shown in the table below.


Interestingly, however, only four per cent of practices do all of them.

Clearly, making use of technology can make a significant difference to the business of running a financial planning practice.  It is therefore surprising that more practices aren’t taking advantage of some of the excellent technology available to them.

For instance, only 69 per cent of practices surveyed in Future Ready VII stated that they can set up and track workflows, such as making appointments, plan preparation, document signing and business lodgement, using an automated workflow management system – a percentage that has remained unchanged in four years.  

And just 32 per cent have a fully integrated workflow management system so that modelling, ongoing management and review process all “talk” to each other – this is also virtually unchanged since 2012.

Client segmentation

Practices that have an effective client segmentation model – with differentiated service offerings and a process that is reviewed annually with others from the business – are, on average, 148 per cent more profitable.  But just one-in-three practices effectively implement such an approach.

It is interesting that just over three quarters of practices – 77 per cent – have some form of segmentation or categorisation approach, but 13 per cent of these do not offer a differential level of service to each category.  

Given that the major objective of client segmentation is to match services to clients’ needs, this seems counter-intuitive. If a client segmentation model is to deliver real business value, it can’t be simply an academic exercise.

Client reviews

According to research by Business Health, clients continue to rate the review service delivered by their advisers as by far the worst reporting area.

So it is hardly surprising that those practices that do effectively implement a well-structured client review process experience a massive 557 per cent increase in profit compared to those who have no documented regular review process, as shown in the table below.


A well-structured process includes having documented procedures, involving more than just the adviser (for instance, also including a paraplanner or client service representative), reviewing “A” class clients at least quarterly, and having reviews that last for at least 90 minutes and cover more than 15 items.

For instance, reviews usually cover:

  • Financial goals and if clients are on track to achieve them;
  • How clients have found the past 12 months;
  • Risk profile;
  • The economic background and performance of investments generally;
  • Ownership structures;
  • Taxation issues;
  • Any changes to clients’ personal health;
  • Personal insurances;
  • Career issues;
  • Any other services that could be offered; and
  • Any changes in personal circumstances.


Staff management

p22_KnowIt Wayne Wilson headshot300For most practices, their biggest expense is the salaries/wages bill.  On average, financial planning practices have 5.6 staff (including principals), meaning the average practice is investing around $480,000 per annum in salaries, which accounts for 45 cents of every dollar of revenue generated by the firm.

It is therefore surprising that more is not being done to maximise the return on this investment.  For instance, a third of practices do not have position descriptions for the majority of their staff, and almost half do not have agreed and documented performance objectives for the majority of staff.  

A similar proportion have not recently conducted performance reviews or appraisals with their staff.

And yet, consider the following:

  • Practices that have documented job descriptions for more than three quarters of their staff see a 130 per cent increase in profit;
  • Practices that have performed performance reviews/appraisals in the past 12 months experience a 154 per cent increase in profit; and
  • Practices that had a salary/remuneration review in the past 12 months see a 141 per cent increase in profit.

Those businesses that have invested time and effort to implement an effective performance management system are delivering considerably more profit to the business owners than those who are not yet leveraging the full potential of their team.

Location, location, location

Future Ready VII showed an increasing number of financial planning practices are conducting their client appointments in their own offices.  This trend has a clear impact on practice profitability and it is worth advisers asking themselves “is always travelling to meet clients the best use of my time?”.

At the same time, the benefit of onsite meetings can only be fully realised if the office environment is up to scratch.  With clients rating the ‘professionalism’ of their advisers’ premises as very important, features such as furnishings, equipment and location should be carefully considered.

In addition, in light of the ageing client base, considerations such as stairs or access for disabled clients will become more important.

It is clear that there are a number of factors that impact practice profitability, and that those practices that monitor and respond to the elements that help drive profitability will improve practice profit.    

Wayne Wilson is chief executive of knowITgroup.

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