Reality Check Time for Advisers: First Rule of Business Is Be Profitable

The first rule of business is “be profitable”, and that is a concept which appears to be causing financial advisers especially some real issues.

In any number of countries, there is debate driven from government, consumer advocates, regulators and those with a vested interest in improving their own profitability to drive down costs in financial services.

“Costs” is generally considered to be the cost of the adviser in all of these arguments it seems, to the exclusion of almost all other costs of manufacturing product or services.

Traditionally a financial institution generally set its product price by taking into account:

Operational costs (the ivory towers, salaries of staff, corporate golf days, strategy retreats, coffee budgets and everything else that goes with running a funds management, lending or insurance company)

Distribution costs (what is paid to get the attention of potential salespeople or brand influencers, together with what is paid directly to them if they succeed in moving any of the institutions product into the marketplace)

Reserves for liabilities (money which must be kept aside to fund anticipated insurance claims in the future, or meet solvency requirements, etc)

Investment Returns (the amount of money that can be made from the money being kept as reserves, which should serve to reduce the cost of product today)

Interestingly there appears to be very little focus or discussion on why operational costs for institutions are what they are, and whether or not there is a negative impact upon consumers from the decisions made by institutions.

Equally, there seems to be very little discussion about the lack of favourable impact on pricing that prudent investment should have.

Instead, what appears to be the norm is that investment returns by institutions are captured as “profit” for the institution. That is, instead of being a positive factor in anticipating future pricing or requirements for reserves for consumers, it has become a number which gets reflected in the annual report of the institution as money made for the shareholders in the financial reporting period.

Instead, what appears to be the norm is that investment returns by institutions are captured as “profit” for the institution. That is, instead of being a positive factor in anticipating future pricing or requirements for reserves for consumers, it has become a number which gets reflected in the annual report of the institution as money made for the shareholders in the financial reporting period.

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It seems to me that the net effect is that financial institutions are able to keep the all upside for shareholders and pass on pretty much all the downside to consumers or distribution. Of course, consumers can’t be blamed for the spiralling costs of the institutions or the pressure from their shareholders to announce a new record profit each year, so it must be distributions fault, right?

The attention then focuses upon the cost of distribution to the exclusion of all other costs or financial wizardry in the annual accounts of the institutions….and financial advisers become scared of being seen as profitable in their own right. After all, we are almost solely to blame for rising insurance premiums (or whatever), aren’t we?

Reality check time for advisers: the first rule of business is “be profitable”

It is absolutely okay to make sure your firm is making enough money to create jobs for others, and buy services and products to run your firm, and contribute positively to the economy. It is absolutely okay to make enough money that you can pay yourself a decent amount. It is also absolutely okay to be profitable enough that you can afford to spend the time doing some pro bono work each year to bring your expertise to those who could otherwise not afford any professional help.

It is not okay to spend your time and firms resources trying to provide advice or move products because a regulator or institution would like us to – but would also like for us to do so at our cost rather than theirs.

Recently I was being questioned about why so many advisers in this country in the last couple of years had gone from providing holistic or wide-ranging advice to a narrow field of specialisation, often working with products or advice areas that had high commissions. Surely that was a sign that “ advisers were motivated by greed and not considering the needs of society as a whole? ”

My response was twofold – and quite possibly what made the conversation a bit tense:

It is a politicians job to consider the needs of society as a whole – that is what we elect them for. So if you aren’t happy that society as a whole is not being adequately cared for take it up with your local member of parliament. It is not the financial advisers role to fix society as a whole.

The first rule of business is “be profitable”, so here is how any half-smart adviser is going to look at the various needs of society:

To be blunt, there are only so many people that any individual adviser can help. There are only so many hours of daylight and only so many years of life for most of us. There are limits to what we can do, or are willing to do.

However, for those who the advisers do take on as staff or suppliers, or those who become clients, there is an obligation to try and deliver the best value and as much certainty as possible. So before any adviser can focus upon doing greater good for the wider society they need a profitable business base to work from in order to meet their obligations to those who have already placed their trust in the adviser.

It is perfectly reasonable – in fact it is smart – for advisers to disregard products or advice lines where they simply cannot deliver them profitably.

The key to ignoring some areas of advice ethically is to do so with complete transparency.

In the last couple of years (in this country at least) more and more advisers are recognising that being profitable largely consists of figuring out which areas make money, and then just staying the hell away from those where there is no money to be made. Regardless of what institutions, regulators or consumer advocacy groups would like this is the smart play.

Just be open about it, and don’t hold yourself out as a holistic adviser if you are only offering limited advice. Don’t hold yourself out as an independent if you are actually working predominantly for one provider. Be honest…..but be profitable too.