Best business practices in the South African independent financial advisor's practice: an exploratory study.

Author:Louw, Lynette
Position:Report
 
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ABSTRACT

Determining the value of the independent financial advisor's (IFA) practice is subject to a range of uncertainties. The success of the most profitable international financial advisory practices has been ascribed to the implementation of best business practices (BBP). The contribution BBP render to enhancing the value of the practice can, therefore, not be negated.

BBP assist the IFA with key functions related to Finance and Reporting, Potential Clients, Client Relationship Management, Staff Management, Operational Efficiency, External Environment, Business Continuity and Business Entity and Client Access. Based on the findings of this research, the following two conclusions have been reached. The implementation of BBP contributes toward enhancing client experience, increasing profitability, improving the value of the IFA's practice and ensuring the continuity thereof. The extent to which BBP were implemented by IFAs; however, is low. This finding, combined with a demonstrated correlation between the implementation of BBP and the annual income and longevity of the IFA in an uncertain environment, confirmed the need for the implementation of BBP in the South African IFA's practice.

INTRODUCTION

It is estimated that 50 per cent of financial advisors consider their practices worth much more than their actual value, whilst the other half neglect to attach a value to their practices (Grau, 2003: 1). In either scenario, failing to determine a realistic value may preclude the financial advisor from eventually capitalising on the full value of the practice (Grau, 2003: 1). The difficulty of accurately determining the value of the practice leaves the financial advisor with the option of employing any means available to improve the practice, thereby increasing the potential value thereof. Best business practices have been proven to enhance the value of the financial advisor's practice. This is based on research conducted in financial advisors' practices in America, the United Kingdom, Europe and Australia (Clark, Grable, Grau & Piacente, 2004: 19).

The implementation of qualitative value drivers affords financial advisors the opportunity to enhance the value of their practices (McCarthy, 1996: 52-56; Opiela, 2002: 1-5). It has been found (Clarke, n.d.: 1) that the success of the most profitable financial advisory practices may be ascribed to the implementation of those value drivers that, collectively, are known as best business practices, also referred to as qualitative value drivers. According to Peters (2005: 1), "best practice is a generally accepted best way of doing a thing" and is "formulated after the study of specific business or organizational case studies to determine the most broadly effective and efficient means of organizing a system or performing a function". The concept of best business practices is, therefore, based on finding the ideal manner in which to perform typical business practices.

Best business practices contain principles and suggested actions, specific to financial advisors and their practices, in terms of Finance and Reporting, Potential Clients, Client Relationship Management, Staff Management, Operational Efficiency, External Environment, Business Continuity, and Business Entity and Client Access. Briefly, in complying with best business practices the advisor should:

* Analyse income and expenditure to determine productivity and profitability (Finance and Reporting).

* Develop a marketing plan and implement actions toward gaining new clients (Potential Clients).

* Segment the client base to deliver services appropriately according to the various client categories and to implement various client initiatives (Client Relationship Management).

* View staff as an investment upon which a return should be earned (Staff Management).

* Recognise the benefits of technology and the importance of standardised processes, record keeping and time management (Operational Efficiency).

* Anticipate and manage risks to the practice, develop the brand thereof and deliver a comprehensive service portfolio to clients (External Environment).

* Develop a business plan and provide for both planned and/or unplanned departure from the practice (Business Continuity).

* Consider the impact of the various legal business entities, as well as the location, premises and accessibility of the practice (Business Entity and Client Access).

The objective of this paper is to report on the case for best business practices, which includes the economic, market and legislative challenges faced by South African independent financial advisors; provide an overview of best business practices; and to present the empirical findings pertaining to the implementation of best business practices (specifically those related to Finance and Reporting, Potential Clients, Client Relationship Management, Staff Management, Operational Efficiency, External Environment, Business Continuity, and Business Entity and Client Access) in the South African independent financial advisor's practice. These reported findings form part of a comprehensive study on the implementation of best business practices as a means toward both increasing the value of a financial planning practice and managing the environment within which the financial advisor operates; those best business practices that may assist in increasing the value of a financial planning practice; and the degree to which South African independent financial advisors currently make use of best business practices.

Implementing best business practices is a relatively new concept to the South African financial advisor. The library of the Nelson Mandela Metropolitan University was used to conduct an international and national data search, via online databases, to establish the existence of any similar studies, as well as dissertations or theses on the extent to which South African financial advisors currently make use of best business practices. The online databases used included EBSCOhost, Emerald, INFOTRAC, MetaFind, NEXUS, OCLC, SABINET, various electronic journals and the Internet. Results obtained were limited to what constitutes best business practices in a number of fields other than that of financial planning services, such as information technology (Anderson, 2003; Robertson & Sribar, 2002; Starinsky, 2003; Wagner & Newell, 2005), education (Falkena, Fourie & Kok, 1996; Parisse & Richman, 2006; Sosnowski, 1971), manufacturing (Cunill, 2006; Kock, Roodt & Veldsman, 2002; Oosthuizen, 2005; Schuman, 2005), product development (Boyson, 1999; Cooper, 1998; McBride, 2002; Nelson, Moody & Stegner, 2001) and so on. The data search indicated that no similar research, specific to the South African independent financial advisor, exists. Given that best business practices have enhanced the value of financial advisor's practices in other countries, the contribution of this study is expected to be significant in the South African context.

THE CASE FOR BEST BUSINESS PRACTICES

Best business practices have been proven not only to increase the capital value of the financial advisor's practice, but also to improve the working experience of the advisor. A point in case is the advisor who embarked on a process of implementing best business practices and who, two and a half years later, had reduced his number of clients from 1 243 to an easily managed number of 91, reduced his number of employees from 11 to four and increased his annual recurring income from $388,382 to $1.6 million (Bachrach, 2005: 1). The environment within which the South African independent financial advisor operates, and the various factors impinging thereon, further increases the need for best business practices.

The South African insurance industry is a major employer, a considerable source of income and a significant contributor to the South African economy (INSETA, 2005: 3). Services offered by this industry range from insurance products (commercial, life, car and household) to products catering exclusively for pensions and savings needs, thereby providing support to numerous industries and individuals. Statistics (INSETA, 2005: 3) indicate that the South African insurance industry accounted for 93 per cent of all premiums collected on the African continent in 2003, thereby earning it a place as the largest insurance industry in Africa. Furthermore, the domestic industry has the highest penetration figure globally. Penetration is calculated at premiums as a percentage of Gross Domestic Product (GDP) and, at 18.8 per cent, this demonstrates the South African consumer's partiality toward insurance as a savings vehicle. Information obtained from the South African National Treasury department reveals that the insurance industry accounted for 2.8 per cent of national GDP in 2003 (INSETA, 2005: 4). The contribution of the industry as an employer, as well as the drivers of change impacting on the industry, such as economic factors, market forces and legislative requirements is discussed next.

Information released by the Department of Labour reveals that 4 870 active insurance sector employers were registered with the South African Revenue Services (SARS) for the period May 2003 to January 2004. These employers collectively employed 108 000 employees. Parent companies accounted for 98.5 per cent of this total number of active insurance sector employers (INSETA, 2005: 4-7). SARS acknowledges that a significant number of small and informal owner-managed or intermediary insurance practices are not formally recorded on its database (INSETA, 2005: 4-7). This indicates that the number of employers in the insurance sector exceeds that of 4 870 employers. The majority of active employers originate from the insurance and pension funding, short-term insurance and life insurance sectors. It should be noted that various employers may offer a portfolio of product services; however, such employers are only classified in the sector where the...

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