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' 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
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't 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
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
GUIDE TO IMPROVEMENT
Learn and use key performance criteria
Standardise systems to avoid duplication
Ensure processes are clear
Establish itemised targets
Review and evaluate performance