Research reveals six ‘secret sauces’ of successful advice businesses

Separating out the role of practice manager, or principal, from other key management functions, tactical outsourcing, and building out robust and documented processes can deliver a substantial increase in the profitability of advice firms, new research has revealed.

The recommendation is among six key priorities outlined by consulting firm Elixir, part of its first-ever Advice Operations Research Report commissioned by Colonial First State (CFS), as a key pathway to increased profitability (based on EBIT margins) and owner and staff satisfaction with their advice businesses.

Smaller advice firms often rely on their principals to serve not only as advisers but also across multiple management functions – from day-to-day number crunching to oversight of staff. However, once a business reaches a ‘critical mass’ of employees, this becomes less sustainable and ultimately a sap on profits, the researchers found.

“We received many comments from participants that it was a significant turning point for them in the business when they got to critical mass, that they could separate out a role that had specific responsibility to manage the business and manage the people within it,” the research authors wrote.

The research found that those businesses with a dedicated management role in their business reported a four percentage point differential in EBIT and a slight bump in customer satisfaction scores – a 26% EBIT and 3.9 satisfaction score for those with a manager versus 22% EBIT and a 3.6 score for those without one.

Each practice, the report authors acknowledged, has a slightly varied definition of and different labels for principals, including ‘practice manager’, ‘operations manager’, or simply ‘CEO’.

“Simply put, the biggest impact was the fact of separating out management responsibilities more than the different type of role,” the report authors wrote.

“Sometimes it’s the principal handing off their clients to focus on running the business, other times it’s hiring or promoting another team member to manage the business while the principal focuses on clients.”

The report, which is based on a survey of 171 advice businesses, also found a direct correlation between pay and performance, with businesses that reward all employees by paying bonuses and competitive salaries recording an average EBIT margin of 27%.

By comparison, the average advice business has an EBIT margin of 23% after normalising Principal salaries to $150k + super.

As well, a healthy work culture also has a marked impact on EBIT and satisfaction scores.

Those respondents who scored their culture 5/5 achieved an average EBIT of 24.2% and a satisfaction score of 4.07 out of 5. Meanwhile, those who scored their culture between 1-3 counted an average EBIT of 19.6% and a satisfaction score of 2.8 out of 5.

Staff pay was also, unsurprisingly, tied to the “overall happiness, confidence, and perception of workplace culture” amongst staff.

Including staff in key strategic planning and business improvement initiatives also pays considerable dividends for advice firms, with a five percentage point difference in EBIT between those that include staff in strategy (at 25% EBIT) versus those that do not (at 20% EBIT).

Maintaining robust and clearly documented processes also correlates with a considerable revenue bump for advice firms. Research authors, however, expressed surprise that “so many businesses… rely upon memory or individual preferences of work habits in their team” rather than documented processes.

Those who answered that they had robust and documented business processes in place boasted an average EBIT of 24.8% and a satisfaction score of 3.8. Those who did not saw a significant drop-off in EBIT (at 19.5%) and a satisfaction score of 3.44%.

“Creating a culture that values and adheres to process is crucial for any business aiming for efficiency, consistency, and scalability,” the report read.

Sue Viskovic, founder of Elixir and head of consulting at VBP, said the results reinforced the importance of having the right technology for streamlining back-office operations, noting that 68% of respondents did not have effective systems for managing workflow.

Furthermore, one-third described their systems and processes as “out of date, not documented and not consistently followed”.

“As experienced business coaches, we know that fully tested and thoroughly documented processes are a critical step, if not an absolute must, to successfully streamlining and automating business operations,” Viskovic said.

“The trend towards greater technology adoption is accelerating, which is encouraging to see, but this also increases the importance of cyber security, particularly as systems become more connected and integrated.”

Going global reaps rewards

Building a global team will also reap rewards for advice businesses – if done right, Elixir wrote.

“In terms of business success, those who employ outsourced staff member(s) as a part of their team recorded an average 25% EBIT and an average satisfaction score of 3.8 out of 5 as opposed to those who don’t outsource at all with an average EBIT of 23% and an average satisfaction score of 3.5 out of 5,” the report read.

The highest satisfaction rating for outsourced employees was for those employed via an outsourced provider but are still considered part of the adviser firm’s team, just based in a different location.

The report advised advisers that the success of such partnerships is predicated on “clear communication, mutual respect, and shared objectives”.

“Begin by establishing clear expectations and maintaining open lines of communication to ensure that everyone is on the same page, regardless of their geographical location.”

The growing proportion of advice firms offering managed accounts (including 52% of those surveyed) is also correlating with increased business success.

“It was surprising to see that of those who use managed accounts, 85% indicated that advisers are saving between 1-15 hrs per week – that’s up to two days and for 62% of support staff indicated the same,” the report authors wrote.

“Managed accounts bring a host of advantages to firms, striking a balance between customisation and efficiency.”

Finally, the report authors urged advice firms to invest in expert support to improve their margins.

Currently, fewer than one in five businesses have a coach or consultant to assist with improving businesses.

“Those who either had – or have had a coach reported an average EBIT of 26.3% against those who had no input from a coach averaging 22% with the satisfaction score being marginally higher too.”