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Ride a hobby horse to work

Most IFA owner-managers have accepted that they must be prepared to

operate in a highly regulated, very competitive and rapidly changing


Parallels can be drawn with other industries which operate in similar

conditions such as telecommunications, leisure/entertainment or food.

However, a major difference between businesses in these sectors and the

IFA sector is the lack of confusion about why they exist.

Most IFA owner-managers say their purpose is to “serve” or “look after”

clients. Very few say they are in business to make a profit. There are

three simple ways to increase profits:

Maintain revenue but cut costs.

Maintain costs but increase revenue.

Cut costs and increase revenue.

Achieving either a cut in costs or an increase in revenue, or both, is the

art and science of management. The owner-manager is both executive and

shareholder. He or she is responsible for investing capital and for

generating a return on that capital in the form of profit.

The return on investment is taken largely by way of earned income and

possibly dividends. In relatively few cases, there may also be a capital

gain upon disposal of the business. What, then, can an IFA owner-manager do

to improve profits and the return on capital?

All IFA owner-managers are capable of selecting products or investment

funds for their clients. As part of the selection process, they make value

judgements about the effectiveness of management teams, efficiency, costs,

historical performance and prospects for future performance. In short, they

analyse product providers&#39 business performance.

Many an IFA will offer a view on what person or strategy is likely to turn

round the performance of an ailing listed company. Many others can offer

pocketbook views on shares that did or did not perform. In each case, they

have evaluated key considerations relating to business performance.

However, when asked about their own business, they cannot provide the same

insight, analysis or evaluation.

Many people who follow a hobby can give quite precise details about where,

when and with whom things were done, seen or collected. This often involves

names, dates, numbers, amounts or costs.

They can do this because they are interested in the subject or need to

know such things to carry on their hobby. How many IFA owner-managers can

say the same about their business? From experience, the answer is

relatively few.

So does this mean we need to become business anoraks?

No, not at all. It simply means knowing what are the key performance

criteria, where we want them to be, where they currently are and how we get

from there to the desired level.

To do this, we shall need to measure, monitor and evaluate these key

criteria on a frequent and regular basis – frequent because a week or

month is a long time in business, regular because we wish to establish


Now, I can imagine some of you are thinking: “Doesn&#39t this bloke know we

already have to monitor finances, activity, types of business written,

complaints and what seems like 101 other things as part of our compliance


Indeed, I do. It is precisely this requirement that should give IFAs a

head start in putting in place other complementary measurement and

monitoring procedures to give a rounded, informed view of business

performance. It should open the way to a “compliance dividend”.

Financial regulators, particularly the PIA, have set performance criteria

for IFA firms. However, these, generally referred to as “compliance

requirements”, are written and set from an investor protection perspective.

They include complaints handling, conduct of business rules, financial

monitoring, training and competence requirements, compliance monitoring and

so on. However, with a modest expansion of such activity, greater knowledge

and control of the business can be achieved.

So what are the key criteria? Well, they are several and varied but can be

grouped as follows:


This includes setting aims, objectives, targets and timescales and

documenting all these to produce a budget and a business plan which can be


Operational efficiency

This will include reviewing activity, revenue production, use of time,

obtaining and using adequate resources and quality control – key things to

be measured and monitored against the budget.


This is the heart of the matter and measures costs and revenue produced,

monitors gross and net margin and enables profitability to be judged.

It is vital that all IFA firms have standardised systems and procedures to

facilitate the delivery of the performance standards required. This

requires the IFA owner-manager to understand how the business works and set

objec tives from the top down.

It also requires performance standards to be quantified and set. Once the

top-down performance requirement has been established, the procedures can

be used to help delivery.

Clear processes and standardised procedures will ensure that the wheel is

not reinvented each day. They will also ensure that measurable activity and

results are achieved.

The top-down objectives to be set should include the required turnover,

gross margin and net margin. The net margin is especially important as it

will determine the total expenses and profits targets. Other targets to be

established relate to working capital and cash flow as this will determine

funds available to run the business and finance activity.

These high-level targets can then be broken down into operating budgets or

targets by function, team or activity as required. Again, data must be

gathered to measure performance as it happens.

Having set top-down budgets or targets and having established measurement

and data-gathering systems, it is important to monitor and evaluate the

results. Such data, if not monitored, is a waste of time and energy.

However, if it is monitored, it will provide important and up-to-date

information about the business, its activity and the financial outcome. But

monitoring alone is not enough. The results must be evaluated and

performance or performance targets reviewed. Questions should be asked

relating to the level of performance achieved compared with the budget or


For example, are targets too high or too low or are expenses above or

below budget? If so, why and what can be done to get back on target?

Targets or budgets can be adjusted if they are incorrectly set. The

objective is to ensure that management is in control of the business and

can predict the trading outcome with some degree of accuracy.

Good monitoring and performance management will allow the IFA

owner-manager to control the business rather than being controlled by it.

Where does your business stand in relation to this question? Are you in

control of your business? Are you planning for change by analysing what you

need to do in terms of performance or are you reacting to events and unsure

of profits from one year to the next?

If you fall into the latter category, consider whether dealing with

clients is a well-paid hobby or whether you are running a business for



Establish control

Learn and use key performance criteria

Standardise systems to avoid duplication

Ensure processes are clear

Establish itemised targets

Review and evaluate performance


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