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David Shelton: Keeping costs under control

Over the past few days, many of the networks and larger businesses have been posting their results. Profit performance has been a mixed bag with firms heading in all directions and clearly at different stages in their life cycle.

Some cite “RDR compliance” as a major cost contributing to loss; others cite “good housekeeping” for a return to profitability. Are there any conclusions to be drawn for the thousands of smaller firms that make up the advice market?

Clearly, those reporting all start from different points. This makes comparison difficult and necessitates looking for common themes. First of all, effective and rigorous cost management stands out – either because it has been applied or because it has not. There is no doubt that forward looking firms recognise that margins might fall next year until the market settles following the introduction of adviser charging. This is good risk management and all firms should look carefully at their costs ahead of this major change.

There is a view that costs should be cut by 10 per cent every three years to keep firms lean by continuously asking the question: “can we do this differently or more efficiently?”

The second theme is about concentrating on profitable clients. Networks that lose members and increase profitability at the same time have the right formula – this is a value game, not a numbers game. Much has been written about segmenting clients by value and profit – now is the time to do it.

The final theme is around prudence. We know that this is a high-risk business with the potential for financial loss through no fault of our own. We cannot change the way reviews and compensation schemes work but we can manage our own risks with care. In the advice market, “keeping the business safe” is a critical management responsibility and there are plenty of examples of what happens when this is not prioritised.

As always, examples of good and poor practice can help run our own firms and adherence to costs, client profitability and safety seem to be a sound starting point in preparation for the 2013.

David Shelton is the author of “The Business of Advice” book and website


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