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Is Trail the right Financial Model for you?

Trail commission. Is it the silver bullet that justifiably allows Financial Brokers to build value in their businesses and eventually sell the business at a healthy multiple? Or is it a somewhat opaque way for advisers to be paid, sometimes with very tenuous links between the value provided by the adviser and the payment received?

Is it the right model for your business?

 

Trail commission is not perfect

Okay, let’s get the negatives out of the way first… Trail is far from perfect; in fact one could argue that it has some potential conflicts of interest for Financial Brokers. The word potential is highlighted for a reason – trail commission doesn’t in itself cause the conflicts, but the use of trail by individual Financial Brokers could. Let’s look at a few areas of possible conflict for advisers,

1. A client gets a windfall, let’s say an inheritance. If the adviser’s income is based on the amount of assets under management, income increases if the money is invested. If the client pays off their mortgage, it doesn’t.

2. What does the client with €3 million invested through the adviser get that’s different from the client with €500,000 invested? Are bigger clients simply subsidising smaller clients?

3. Similar to the above, a wealthy client gives you €500,000 to invest. You then find out that they have €2 million invested elsewhere themselves. What additional services will they get when giving you the money to manage, that will justify your huge increase in fee? Of course if you are providing comprehensive financial planning, with future cashflow planning sitting at the heart of it, there’s part of your answer – you need visibility of all assets to provide the complete picture.

And then there are the negatives simply in terms of trail commission as a business model. You secure a senior executive in a large company as a client. But after your factfind and analysis you find that the client’s wealth is tied up in a company sponsored pension scheme, also with an AVC scheme on great terms. Unless the client has other investment assets, there’s not much earnings potential for you on a trail basis.

And what happens when markets fall sharply or indeed the client decides that its now time to de-cumulate assets? Your earnings take a drop, even though your work may not.

 

But there’s a lot to be said for it!

First of all it’s relatively easily explained. Clients understand that a small percentage of their money will be taken as charges. Trail is simply an addition here and clients “get” that.

Then of course trail is very easily collected – this is such an enormously important point! Advisers say all of the time that it’s hard to get a client to write another cheque, especially year after year. Trail makes this problem go away and the adviser / client relationship continues each year without this hurdle.

And clients see a level of alignment of interests too – if the portfolio sees strong growth, both the client and the adviser win, if the portfolio falls in value, they both lose. Is this fair for the adviser? That’s a question for another day!

 

It’s all about your proposition

To me, this is the nub of it. If an adviser is simply adding trail onto policies as a means of securing ongoing payment without giving too much thought about what they are delivering, I believe this is a very flawed model and a very risky strategy. If an adviser cannot demonstrate and communicate their value, and as a result link the trail back to what they do, they are on very unstable ground.

On the other hand, if your advice proposition is crystal clear, clients understand it and are happy to pay for it, well then trail commission is a very appropriate method of collection of your fee. And were trail commission ever to disappear as a means of collection of fees, clients would be clear about the value you are adding and the fees that still need to be paid.

 

What would I do myself?

I’m not an adviser so you could argue that it’s easy for me to be a bit sanctimonious on this issue! However I could also argue that trail is not a feature of my business model (which is based entirely on fees) – so I only get paid when I can demonstrate value. When you have to demonstrate value to get paid, trust me you work very hard on your proposition!

At the end of the day if I was an adviser, I think I would use trail commission as a method of payment. But I would link it clearly back to the value that I’m adding, and ensure the client sees the trail commission as simply a method of payment for the advice given. The quantum of trail would be decided by the services provided. I’d give clients choice; fees, retainers, trail etc. Their choice, but they need to be clear that they are paying you for the value of your advice, rather than the setting up of a product. Because it is in the provision of advice where Financial Brokers add value and change clients’ lives for the better.

Letting your communications drift

So you finally decided to start sending out a regular email newsletter or regularly updating the blog on your website. Well done to you! The first issue of your newsletter is full of promises about your new newsletter keeping clients and other contacts informed and educated. And then the newsletter delivers this in spades! Roll on to a month or two later and the next edition is due to go out. You’re busy, it’s the middle of pensions season and the markets are in turmoil. You just about manage to cobble the newsletter together, everyone moaning about not having enough time. And then that’s it, the next edition never see the light of day…

Unfortunately this happens a little too frequently among financial advice firms. So apart from a bit of a gnawing sense of failure within your own firm, what messages does letting your communications drift say to your audience?

You don’t have an opinion

Your clients and prospective clients want to hear your opinions about current events. Whether they are about how they should (or shouldn’t!) react in the current market turmoil, your views of any changing legislation that will impact the personal finance world or indeed developments within the life and pensions market. Your opinions may reassure investors, allow you to demonstrate your expertise and show that you have your finger on the pulse.

Of course if you’re not sending out these opinions, exactly the opposite applies. And then your clients don’t know where you stand on these topics. And of course then there is the very real risk that they will find their way on to the email database of another Financial Broker who provides them with this expert opinion all of the time. Who will they want to deal with – the person with their finger on the pulse or the person without?

You’ve run out of ideas

Of course email newsletters also offer you the opportunity to educate your clients and prospects. You can remind them of the value of getting advice from a Financial Broker, set out the benefits of having a risk appropriate investment portfolio, remind them of the importance of having the right income protection plan in place and how to ensure that their legacy on death is not a worrying tax burden for their loved ones.

But then when you stop, have you demonstrated all that you know, that you’ve shown the breadth of your knowledge? So what about the topics that are worrying your clients that you haven’t covered? You don’t want them thinking that maybe you just don’t have knowledge in that particular area…

At the end of the day, your clients can be a rich source of content ideas. Ask them for topics that they would like covered and then write about them!

You just don’t care

Of course this is the real worry… that your clients will think that you simply have lost interest and don’t really care about your marketing and your business. That you have simply slowed down a bit and are coasting…Of course this will set off alarm bells in their heads about your approach to your wider business, your clients and their personal financial affairs. Are you just punching in time there too?

At best, your clients might just see all of this as a bit unprofessional – starting a marketing initiative that you’re unable to continue. Is this how you want them to view your business?

StepChange provides content to Financial Brokers who don’t have time to write it themselves and a newsletter service to manage the whole process of sending out regular fully personalised and branded communications to your clients. And we’ll deliver these on time, every time!

Set great Performance Goals for 2015

I wrote a few months ago about the important role that goal setting plays in getting your whole team pulling in the same direction. We’re now going to dig a bit deeper and set out a few thoughts on how to develop really effective goals to help to drive your business forwards.

Align the Goals

In my previous article on this topic, I set out the importance of alignment between the goals of each individual and the actual goals of the organisations. This might seem obvious, but sometimes I come across obscure goals that really have no relevance to the objectives of the organisation – this can happen when the process is rushed or not thought through properly.

Focus on Behaviours as well as the Numbers

Again (and for the last time!), as covered in the previous article, don’t just set quantitative goals. Behaviours drive activity, which drive results. So focus goals on behaviours, as well as on the numbers.

Create effective goals

Easier said than done? Well maybe… Goal setting does take time but it is time very well spent. Effective goals will help to drive effective behaviours, giving a better chance of better results. I don’t think that you can go far wrong if you check that each of the goals you set display SMART characteristics. SMART goals are ones that are;

  • Specific – The goal must be clear to the individual and not ambiguous at all – they must clearly understand what is expected of them.
  • Measurable – The goal must be capable of being measured fairly so that the individual can clearly see the progress they are making in achieving the goal.
  • Attainable – The goal must be realistic and fair. If it is completely unachievable, the individual is unlikely to be motivated to achieve the goal.
  • Relevant – The goal must make sense in terms of the “bigger picture”. The individual should be able to clearly understand the purpose and reason behind the goal.
  • Time-bound – There should be a specific time period (often the calendar year) in which the goal should be achieved. It can’t just be left open-ended.

Involve the individuals in setting their goals

In a previous organisation that I worked in, the employees themselves developed the first draft of the goals. This was a very effective method as it created an immediate level of buy-in to the goals. That’s not to say that the manager immediately accepted them though! There was inevitably a level of negotiation involved in finalising the goals, but the initial buy-in remained.

Set the goals in time

A gripe of mine again based on prior experience… Many organisations don’t take goal setting seriously or don’t give it the priority that it deserves. This results in delays in getting the goals finalised – I’ve seen calendar year goals getting finalised in May or June, when the year is half over!

Don’t set too many goals

It’s important of course to set goals that will help the individual to deliver the behaviours that you are seeking and of course the results that your business is striving for. But don’t get over-enthusiastic and start getting lots of goals to cover every base. If someone has too many goals or too many different measures feeding into their goals, the whole process can become too daunting for the employee as they feel they are juggling too many balls in the air. A good rule of thumb is to set no more than 5 goals.

Don’t try and be too clever!

I’ve also seen situations in the past where goals are set that try to cover every base – remember Specific in SMART goals. I’ve seen single goals that have been constructed as “…achieve €x in income from y group of clients while ensuring z% retention levels in business from that group and overall profitability of xx%!” Is that 2 or 3 goals rather than a single goal? The employee in this case will probably feel that they’ve very little chance of achieving the goal, as there are so many hurdles to be negotiated.

Don’t be afraid to change them!

This can be a tricky one but sometimes a review of goals is the only sensible option. However this needs to be a two way street… If goals are set at the beginning of the year and the company subsequently changes direction, the goals may no longer make sense. So don’t be afraid to review them. You’re better off with updated goals that make sense and a newly motivated employee, than a disgruntled employee who has no hope of achieving his/her goals as a result of factors that are not of their own making.

And finally, reviewing goals together regularly throughout the year is an important part of the process. It also can be very motivational for the employee, who will see you “pulling” for them, helping them to achieve their goals. Remember if the goals are well aligned, everyone will be a winner if the goals are achieved!

How are you going to exit your business?

This is a question that continuously exercises all business owners. How are they going to leverage their business to support their desired lifestyle when they want to stop working? This article explores some of the main areas you might consider to increase your chances of achieving your end goal in relation to your business.

What are your goals?

First of all, think about what is important to you in terms of exiting your business. Do you have a particular timeframe in mind? Are you looking to “get out early” and maybe have a long, but relatively modest retirement? Or are you looking to work hard well into your 60’s (or later) and then sell your business to fund a more prosperous retirement? If so, it’s important to be working towards a definite end date. Or are you looking to build a business that will continue after you’re gone, possibly headed up by one of your children, a business that may also support you in retirement?

These are really important decisions to think about now, as they will influence what’s important in achieving your goals. Will it be all about maximising the value of the business on a certain date in the future or are you trying to build extremely deep relationships between your clients and your business that will endure after you’ve exited?

Know what your business is

Now you’ve got to be really honest with yourself. What do you have to sell? Is it actually a business or simply a consultancy service? For some Financial Brokers, they’ve built up a thriving business in which they are the conductor of the orchestra, where the value is not based purely on their own presence in the business. These businesses are obviously very attractive to potential buyers. Then there are other businesses in which the value all revolves around the business owner. Take the owner out of the equation and what is there? While these businesses may offer a nice lifestyle to the owner, they are a far more challenging proposition when it comes to trying to sell.

If you own a business that is based on you as the key asset and you have ambitions to sell it one day, you need to start thinking about how you will develop some saleable value within your business.

Where is the value in your business?

So let’s assume that there is potential value in your business, outside of your own input and that your aim is to actually sell your business. Now it’s time to try and maximise the value of all of your assets. These might include;

  • Financial Assets: An obvious one to start. The main asset that a prospective purchaser will pay for is the future income stream of your business.
  • Persistency: The next thing a buyer will look for is the persistency of your business as this will be a key influencer of the potential future income stream. This will give them a sense of the quality of the “book” of clients that they are buying.
  • Brand: if your brand is well known and seen as a trustworthy brand, there is definite value in this for a buyer.
  • Staff: If you have a team of highly qualified, revenue generating people that will remain in the business, they are a very valuable asset to the business.
  • Market Positioning: If you have a recognised presence in some attractive market segments and niche areas, these may open up new opportunities to a potential buyer.
  • Operational Excellence: If your service proposition, compliance and data management (among other) areas are very strong, these offer great opportunities for a buyer to leverage off the capabilities of your business.

Who will facilitate your exit?

This is another factor that you need to start thinking about well in advance. Who is likely to enable your exit from the business? Once you’ve identified the profile of your potential buyer, you can then work on making your business proposition as attractive as possible to them.

If your aim is that your business will continue with a new leader / owner of the business, you need to start identifying who your potential successors will be. Do you have fellow directors who will buy you out? Or do you have younger, ambitious individuals within the business who might want to take over after you’ve gone? If so, you need to identify these people and start putting in place structures and interim incentives to retain them, and to make it attractive for both you and them for a buyout to happen in the future.

If an external buyer is your preferred route, you need to start identifying particular candidates. Would your business be attractive to current competitors, either in your market segments or geographical area? How would your clients react to this? Are there firms trying to build presence in a niche where you already enjoy a strong presence?

And then, how do you alert potential buyers? Is it a quiet word or a public tender (which will alert your existing clients)? Or can you use the broker networks to gather interest?

How will they pay

Of course one of your main areas of interest will be how much you will get for your business and how the consideration will be paid! Will it be a straight cash deal or will there be some tie-ins into the future in the form of earn outs etc. And how will your firm be valued – are buyers likely to look at recurring income, profits or future cash flows? And which of these works best for you?

Lots of questions to consider! Now is the time to start thinking about them. The more thinking and preparation you do well ahead of your exit date, the more fit for purpose your sale proposition will be. And all of that is likely to result in a higher price for you.

What are the critical areas that you believe need to be considered when selling a financial advisory firm?

Segmentation, targeting & positioning – fundamentals of adviser marketing

Going back through the eons of time, I can recall a number of the key marketing principles that were ground into me time and time again; the importance of research and knowing your customer, understanding buyer behaviour and the role of the four P’s (product, price, place and promotion) among others.

However in my day-to-day work with financial advisers today, the principles that I find myself returning to more and more to address the challenges of advisers are Segmentation, Targeting & Positioning (STP). Many advisers today recognise the importance of these strategies as they attempt to make best use of their limited marketing resources, be they time or money or both.

Some definitions

So to start this 60-second marketing lesson, here is a definition of each, as set out by Philip Kotler, the grandfather of marketing education.

  • Market Segmentation: Dividing a market into distinct groups of buyers with different needs, characteristics or behaviour, who might require separate products or marketing mixes.
  • Market Targeting: The process of evaluating each market segment’s attractiveness and selecting one or more segments to enter.
  • Market Positioning: Arranging for a product (or service) to occupy a clear, distinctive and desirable place relative to competing products (or services) in the minds of target consumers.

What’s happening in the financial adviser market in Ireland?

Many financial advisers realise that a “one size fits all” proposition just doesn’t cut it any more. Either for the client who is looking for more than a generic service, or for the adviser who cannot profitably or successfully deliver the same service to all clients irrespective of their value, characteristics, needs etc.

As a result, many advisers are undertaking segmentation exercises, analysing their client bases and potential markets, most often by value. Others are also segmenting but by different dimensions – some are focussing on SME’s, others on specific professional groups.

A smaller number are then going on to specifically target sub-sections of their client bases and target markets at the expense of other groups – for example focusing all of their attention on clients of a certain value. In this case, some are even offloading their lower value clients to truly target their desired groups. Others are identifying specific occupations that they will target and also those that they won’t. And then sticking to this!

Finally, a relatively small number are taking that final step of actually positioning their business and all of their communications to appeal directly to their target market, even at the risk of alienating other potential customers.

Why STP is so important for financial advisers today

It’s this final step of having the courage to position yourself within a specific target market (or even a niche) that is a step too far for many advisers. They struggle with the thinking that while business might be quite tough today; it might actually be easier if you narrow your focus! How does this make sense?

If you offer a generic service to clients, they will recognise this. They won’t feel any particular connection with what you do, as it is not targeted at them. Instead if you have a clear target market and all of your communications are aimed with that group specifically in mind, the customers within that group will connect with your messages and are more likely to view you as a specialist who is out to serve their specific needs.

There are lots of very good financial advisers operating in the Irish market. At the end of the day, how are you going to stand apart from the crowd if you offer a very generic service?

Is a niche positioning viable in the Irish market?

My view is that it is 100% viable. Indeed you can build an extremely successful business based on a niche strategy! I’m not saying that it’s easy – you need to first of all very clearly and carefully segment your potential markets. You then need to decide the markets that you will target and have a clear strategy for building presence and scale in these markets. And finally you need to relentlessly build your positioning and re-affirm it time and time again.

I’m a believer and would argue that I practice what I preach in this area! There are 1,000’s of marketing consultants out there but not many that position their business specifically around meeting the needs of the financial adviser community. I’m really happy that I’ve pitched my tent there, attempting to meet the needs of a community that I admire and enjoy working with! Thank you all for welcoming me into your world and helping me to grow my business! I passionately believe that you can do the same within your chosen markets.

Do you have any views on this topic? Is a niche strategy viable? What are the challenges you face in running with this approach? All your comments as ever are very welcome.

Are your Advisers doing what YOU want them to do?

A challenge faced by many financial advice firms… The target market is clearly defined, the value proposition is carefully constructed and articulated and a suite of marketing supports are developed to help the team of advisers go out and attract a cohort of new clients. And then…nothing.

Well not quite nothing, but not the results that are being sought by the principals. Instead the advisers continue to work as they always did, going after business as they always did. Hitting their sales numbers (maybe) but not in the way that the firm wants it done – that is building up strong and durable relationships with clients in the chosen market segments, adding real long term value to the business.

This is quite a common occurrence, one I’ve come across in a number of firms, so why does it happen?

The goals are all wrong

This is where the problems usually start… Often the adviser goals are quite poorly constructed and actually are not aligned at all to the goals of the organisation. The principals might be clear about what they want to achieve and have Key Performance Indicators (KPIs) to help them track their progress. But unless they link the individual adviser goals to these KPIs, they really have little hope of them being delivered by the adviser. At the end of the day, the more aligned the goals of the adviser are with those of the organisation, the more likely those KPIs will be achieved.

The focus is only on the numbers

When you are trying to influence advisers to change the way they carry out their daily roles, you are actually trying to change their behaviours in their day-to-day activities of finding and targeting prospects, delivering advice and providing ongoing service to clients. But often, the behaviours receive scant attention as the year goes on; the focus tends to be always on the numbers. While the numbers are of course critical, it is the behaviours that actually impact them. It is so important to set expectations around behaviours, to monitor them and to measure them. If they are not being achieved, there needs to be interventions such as training, reinforcement of expectations, encouragement or sometimes good old fashioned pressure to deliver the required behaviours!

Rewards must be aligned with the KPIs

At the end of the day, money drives behaviours for a lot of people, and in my experience this particularly applies to salespeople! They work at the sharp end of the industry, in a role in which it’s pretty nigh impossible to hide, as results are clear for all to see. For this, they expect to be well rewarded.

But if their remuneration is based solely on their overall sales result, well that is where their focus will be. In this situation they will likely pay little attention to;

  • Those all-important behaviours
  • The quality of advice given
  • Product mix
  • Client retention

So what should goals and rewards look like?

The key is alignment between the KPIs of the organisation and the individual goals of your advisers. Obviously income generation will be a significant part of this, as this is going to be a goal of both the organisation and the individual. However, the level of “credit” that is given to advisers may be adjusted to take account of;

  • Are the new clients signed up by the adviser in the stated chosen market segments of the business?
  • The “shape” of the income – the level of upfront commission / ongoing income (i.e. trail) taken
  • An adjustment may be made to reflect the retention of business written by each adviser
  • Overall satisfaction levels of each adviser’s clients (this is surprisingly easy to measure).

One of the biggest challenges facing advice businesses is encouraging the individual advisers to work towards building up long-term value in the business. This is a big ask if their goals and rewards are based only on short terms factors. If you really want your advice team to play their part in building up value in your business, are you willing to reward them for doing so through long term incentive schemes or indeed through a route to a share of ownership in your business? Because at the end of the day, this is what it may take to really get them aligned with your objectives.

Do you use any particularly innovative methods to reward your advisers? If so, I’d be very grateful if you would leave a comment below.