The first rule of business is “be profitable”, and that is a concept which appears to cause industry stakeholders some issues when it comes to judging financial advisory firms.
That pisses me off to be honest.
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 distribution. The “Costs” that need saving is generally accepted by these industry stakeholders as being just 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.
It ignores the obscene profits of large institutions, and the gross salaries they pay their most senior people. It ignores the multi-layered management tiers consisting of people spending their lives meeting other people from within the management tiers. It ignores the incredible inefficiences of so many sectors of the industry that merrily blow shareholder and policyholder and client funds on poorly thought out projects and purchases.
Yes. To make things better for the consumer we merely have to reduce costs amongst those self-employed small business distributors.
It pisses me off because most distribution businesses ARE actually small businesses…where the owners earnings fluctuate wildly from year to year in many cases, and where there is very very limited ability to pass on dramatically increasing operational costs to consumers swiftly – and frankly most distribution businesses try pretty damned hard NOT to pass on costs to their clients. They try to improve services within the same cost structure; provide plenty of jobs and are usually far more caring and amenable employers to their staff; and most importantly they are generally the ones leading in innovation with the uses of technology and service standards.
They sure are a problem aren’t they? The idea that the owners might make a profit from their risk-taking and long hours (far longer than the staff they employ) is anathema it seems. So in the interests of perhaps helping some in society understand who makes money and how here’s what happens with the firms that make millions if not billions each year (and that is not distribution businesses).
Traditionally a financial institution of any sort 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. Even at the shareholders annual general meetings there is little questioning of any depth on some of the costs. 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.
It seems to me that the net effect is that financial institutions are able to keep the upside for shareholders and pass on pretty much all the downside to consumers or distribution to wear. 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 we are back to “it must be the distribution costs”, 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?
I call Bullshit.
Reality check time for advisers: the first rule of business is “be profitable”, and that is a rule that everyone else in the industry is comfortable with so it is time for distribution businesses to get comfortable with it too.
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 which keps other small businesses in business, and contribute positively to the economy. It is absolutely okay to make enough money that you can pay yourself a decent amount (especially when most small business owners such as financial advisers are usually working 1.5-2 x any other full time employees hours).
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.
What has fired me up about this is that 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. It was suggested that surely that was a sign that “advisers were motivated by greed and not considering the needs of society as a whole?“
My response was threefolld, but I shouldn’t put in print my first reaction. What can be published is the next 2 points:
- It is a politicians job to consider the needs of society as a whole – that is what we elect them for. That is not an advisers job, and nor is it within their power. 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 business owner 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; we are not social workers. Having said that; most good advisers do actually have a strong social ethos and a part of why they do what they do is because they want to make a difference in peoples lives. The desire for social justice and elevating others is a strong feature of most good practitioners.
But 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. It is just as smart and just as reasonable for distribution to accept and acknowledge that it cannot help all consumers equally. Some need to be served by different advice models, such as those offered by the billion-dollar-a-year-profit-making institutions, or they need to have their requirements served by our social welfare systems that the self-employed fund through our multitude of taxes.
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. The same goes for which segments of society we can help: stakeholder groups we must understand and accept that in the main financial advisers can only help some consumers. If we do that well and profitably THEN we have the wherewithall to deliver some pro-bono services and time to those who cannot afford high quality advice but who will benefit from it.
Regardless of what institutions, regulators or consumer advocacy groups would like this is the smart play, otherwise we too will become bankruptcy or unemployment statistics. The rest of society who we cannot afford to help should be served by the obscene profit makers within the industry and the other tax-payers.
We pay more than our share and do more than our bit already.