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3 strategies for transitioning to a service-based business model

John Baxter, CEO of Veracity ATS, highlights three main strategies advisers need to follow to ensure a profitable transition from the more transactional-shaped practice to a service-shaped practice

The fee-based service model throws up many challenges for firms and individual advisers. Fortunately a significant amount
of these challenges will be in the heads of the advisers and not their clients. I say fortunately because that’s where most of the solutions are too! Veracity has helped hundreds of advisers switch from the commission-based transactional model to the fee-based service model and we’ve come across this time and time again.

One of the more contentious issues we have come across when helping financial advice firms on this journey is the shape of the practice. In a transactional business it is very common to see a ratio of three advisers for every administrator/ paraplanner in the business. Interestingly, when we look at the successful fee-based service model firms, exactly the reverse is the case. We see at least three non-adviser personnel per adviser.

Many firms will find making this business shape change is their biggest challenge in the post RDR world, the conundrum being that advisers want to maximise their revenue but will need additional resources to deliver the ongoing proposition.

This leads to the next challenge – a change
in the remuneration model. This can see typical commission/fee splits in the transactional model of 60% to 70%+ change to 30% to 35% in the service model. However, what we have observed is that despite the lower commission/fee split, the fee-based service advisers typically earn more – and often significantly more!

Three strategies

Alongside these structural changes there are three main client focused strategies that need to be followed to ensure a profitable transition from the transactional shaped practice to the service shaped practice.

1. Deal with legacy assets. Trying to deliver a fee-based service proposition to clients with portfolios polluted with a disparate mish-mash of historically accumulated flavour of the month products will lead to bankruptcy or the lunatic asylum. It will not lead to a prosperous post RDR business model.

Reviewing these products can be hugely time consuming, and will often lead to compromised advice (due to the constraints within the product offerings and the lack of cohesion with other products in the client’s portfolio) and usually will pay little or no ongoing revenue. The key catalyst for review, however, is that many of these investments are as bad, if not worse, for your clients as they are for your business!

Undertaking a comprehensive data collation and analysis will show which of these assets should be moved in the best interests of your clients.

2. Review investment strategies. Having segmented your client bank, apply a sound due diligence and selection approach to determine which, institutional quality, investment solution(s) will be applied to the core wealth of each segment. Then apply this across the clients’ existing assets where it is tangibly and demonstrably in the individual client’s best interests to do so. This will help not only with the protection of their asset allocation, it will give you a chance to deliver your proposition effectively and consistently.

3. Increase efficiencies. To make profit in the fee-based service model you have to be savagely efficient. Delivering a client proposition that is value for money AND profitable is a constant challenge. Tidying up your legacy assets and hosting and servicing your clients investments on a suitable platform will be crucial to achieve this.

If you’re not profitable you can’t act in your clients’ best interests. So our advice is to focus on the pound coins and not the percentages. Not only do the percentages available have a ceiling, they may well also turn out to be Fool’s Gold! ●

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