Adviser: all part of the package

Smaller independent practices have been slow to grasp the nettle of financial services. Although the number of registered firms has grown, this has largely been due to clients demanding financial services and products as part of their overall wealth management and tax mitigation strategy.

It is, therefore, particularly important for firms with a strong tax department to include financial services as part of the package, or risk losing clients to rivals who have more to offer.

For those looking to create a point of difference between themselves and other practitioners, financial services is an excellent route to take. As well as offering the potential to become an extremely profitable niche service, it has the added advantage of being one of the few areas where the financial benefits to the client are clearly visible.

Of course, going down the financial services route is not without its challenges. The spectre of the regulatory regime and the fact that many firms have little idea about how to set up and run a financial services department, have played their part in deterring many practices. Many firms successfully outsource this work, but if you do it properly, having your own department is also an opportunity to create a business of real value that will be an asset to the practice.

When setting up a financial services department, it is vital to find the right independent financial advisers. They will interface with your clients and must have the partners’ support and confidence.

The back-office function can be outsourced to a third party, or housed in a separate entity under the firm’s umbrella. It is interesting to note that those firms with the most successful financial services operations are the ones that are prepared to invest in the creation of their own, wholly-owned operation.

Not only do they have an extremely lucrative revenue stream, but they have created a business that can, if necessary, be sold off in a merger or acquisition situation, or used to raise capital for other reason.

Benchmarking is an essential tool for evaluating performance, but when it comes to financial services, many practices are out of their depth.

As a general rule, IFAs should be expected to generate three and a half to four times their salary in commission income. So on a salary of £40k, they would be expected to generate £140k. Salaries should be pitched at a realistic level and supplemented by a progressive sales bonus.

If the IFA falls short of target in any quarter, then the shortfall should be added to the target for the next quarter and the full amount must be achieved before any bonus is paid. You should also allow one paraplanner for every two IFAs at a base cost of £20k.

Building up renewal income will add value to your business – IFA business is primarily valued as a multiple of renewals so the value of a financial services department should grow exponentially.

Phil Shohet and Andrew Jenner are directors of Kato Consultancy.