Financial Planning vs Financial Planning

We're not financial planners. We're financial planners.

One of my favourite acquisition shortcuts, is to see a few client files as early in discussions as possible. And yes, ‘client files’ dates me horribly, but I’m 50 now and I’m trying to own it okay? And when I say early, I’m talking ideally prior to heads of terms being signed. What I hope to find is what type of ‘financial planning’ the firm in question is practicing. There are other indicators (clients per adviser, headcount in particular roles, time to deliver initial and ongoing proposition etc), but seeing the final deliverable for the client is definitive.

I need to explore because a buyer might be thinking about synergies. If the two firms have very different looking teams, this can lead the buyer to thoughts of redundancies post-acquisition. If that becomes the case, who will do the work? Are there real efficiencies to be gained, or are these people essential to the continued success of the firm? The answers often determine the success/failure of a deal, so it’s critical to get this right. The issue is one of identity.

The definition of ‘financial planning’ is particular tricky to pin down these days. I’ve had business owners insist that they do holistic financial planning, only to find out that while this is technically possible, it relies on the client asking all the right questions over several years. “Been a client for 5 years, we’ve probably covered everything then”. If you looked at that file, you’d find a series of transactions and suitability letters, but no plan. Is that financial planning? They think so. I’m not convinced.

So, how has this issue come about? Well, it’s genesis was likely RDR and specifically CP121. This was a regulatory consultation paper that suggested financial planners were defined separately from financial advisers. The distinction had its roots in the fiduciary duty. In other words, whose side are you on? The incumbent powerbase at the time lobbied like crazy and the idea died. Then the PFS were awarded the designation ‘chartered financial planner’ by the Privy Council. This provided a strong indication to the market, that ‘financial planning’ meant passing exams (the PFS being so heavily entwined with the CII and they’re product being exams). If we’re trying to make financial planning a profession, it’s hard to argue that exams are a bad idea.

Now, let’s head over to Celtic Manor and see how IFP members liked that call – ‘collective groan’. And the IFP never really recovered. Membership numbers never doubled each year as was hoped and they were swallowed up by CISI. That’s The Chartered Institute for Securities and Investment. Doesn’t sound like a great home for financial planning does it. They’ve tried and done some great work, but their roots are firmly in wealth management.

So we have the PFS representing financial planning. The net result has been an army of very well qualified financial advisers. I say this with the greatest respect. Many clients need a good financial adviser, but some need a financial planner and to me, there’s a world of difference. That difference is straightforward in my mind. A financial adviser is ready, willing, and able to provide a solution to an isolated issue for a client. A financial planner sees a particular issue as connected to every other aspect of the client’s life and is unwilling to treat symptoms, before exploring causes. They work together to identify long, medium and short term goals, to reach a shared understanding of the clients’ current situation and to formulate a strategy and tactics to move the client towards their goals. Solutions are rarely limited to the provision of financial products.

Sharon Sutton did a huge amount to address this issue, while serving as president of the PFS. This blog post is a great summary – She put the spotlight firmly on what financial planning actually is and raised awareness from a position of power. For many small, nimble firms, she helped them see what was possible and triggered some much-needed innovation. Larger firms may have been interested, but they need to see the financial argument for change and this is where things get tricky.

Do clients of real financial planning firms pay more for the service? Answer is no. Do real financial planning firms have higher expense ratios than financial advice firms? Answer is yes. So real financial planning firms have broadly the same revenue signature as their financial advice cousins and greater expenses. Er, so less profit then? Answer is no. Now. Answer was yes historically. The hook for business owners transitioning to real financial planning was never more money. It was just the right thing to do. ‘Give your clients what they really need and they’ll stay with you long term’.  Guess what, give them financial advice and an annual review and they’ll stay with you long term too.

So what’s changed then? Well, if revenue is broadly AUM x annual fee rate, and the annual fee rate hasn’t changed, then the answer is er, AUM. Many of the firms I’ve worked with long term, have moved from an average AUM per client of c. £500k to c. £1m. Clients with greater complexity value real financial planning. These clients are traditionally served by DFMs and private banks, but the tide appears to have turned. You can see it in the financial performance of many of these financial planning firms. Strong revenue growth is common here, driven by the acquisition of ever-wealthier clients and the addition of more junior advisers to re-allocate long term clients to. Professionals are largely on salary plus incentive reward instead of revenue sharing and there’s a strong brand, a carefully curated proposition and the right mix of humans and technology supported by strong processes.

Why is all this interesting you ask. Well, acquirers rarely see the distinction. Many large firms are firmly embedded in the PFS side of this equation and view real financial planning firms as over-resourced. If you sell to them, they’re likely to hack away at headcount, while they introduce your clients to their proposition. This is a different risk to that of vertical integration, but it will create the same result, turbulence for your clients. As deferred consideration remains both a significant portion of the overall value in a deal, and largely predicated on the maintenance of recurring income, as an owner you are going to want to be absolutely sure that there’s a shared understanding of what’s meant by ‘financial planning’. This is the foundation of what is known in M&A circles as ‘fit’.

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