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IFA owners, look up!

Financial planning firms are great businesses to own. Recurring incomes and predictable costs with scalable tech make for a great sector to be in. Recent investments from private equity firms and the like continue to show this!

But are they really so robust? The premise of this argument is that their client assets are diversified and therefore insulated from sector specific volatility. Recent times seem to be challenging some of that thesis – most asset classes are down, meaningfully, and diversification doesn’t seem to be able to absorb the blow quite as well this time. Furthermore, operating costs are rising, creating a double-sided squeeze on margins for firms.

So, are owners doing anything to respond to the current environment?

Well, here is where it gets interesting. Responses differ, and times like these can define which firms thrive and which fail.

Some principals have their heads up, taking note of increasing costs, falling Funds Under Advice, increasing interest rates, and reducing margins. These firms are responding to circumstances with considered, responsible steps to secure the future of their businesses. Others, not so much. Some firms are doing what they tell their clients to do – stay invested, keep calm, and carry on. For clients, this is good advice, but if you are the owner of a planning firm, this is absolutely the wrong thing to do. These are difficult times, and the ground is moving under your feet. The ostrich strategy will not help you at all and leaves your future up to chance. Intentional leadership, and prudent planning, are vital and will be rewarded.

So, ‘what to do?’ you may ask.

Well, look no further than the Venture Capital markets to see some clues on how to think about things. For those raising VC funding in this market, things have shifted, fast! Venture Capital funding for the first quarter of 2022 was down 38% YTD. Previous focus on growth at the (often endless) expense of cashflow profitability has come to a screeching halt. Business owners must now demonstrate a clear path to profitability – prudent cost management and realistic revenue forecasts.

For many, prudent cost management is a step too far, brought on by years of easy capital. These companies will struggle to raise capital and many will fail. However, for companies who can control their cash burn rate, reduce speculative marketing spend, mothball pet-projects and focus on their core customer proposition, there is a huge opportunity that awaits. They will survive and be stronger in a market where others will be forced to exit.

If you are at the helm of a financial planning business, the similarities to the VC market are numerous. Years of easy growth for firms has turned many of them into lifestyle businesses for the founder, who are lax with spending and distract themselves with (expensive) pet-projects.

It is owners who look up to their current reality that will be in much better shape than their competition.  A good start would be to look at your five-year forecasts, with a particular focus on your operational spending (including annual dividends).

Take bold decisions where appropriate, remember your ‘why’, shore up some capital (beyond what the regulator says you need), and be cautious in taking all surplus cash out of the business for a while. Look honestly at your new business targets to be confident that you are on a stable footing and can absorb a sustained downturn and focus your efforts on supporting your existing clients.

There are numerous stakeholders depending on you and the opportunities abound on the other side, for those who look up and take action when the going gets tough.