Why? Because in principle, larger firms ought to be able to use their size to invest in better propositions and utilise their scale to drive down costs, delivering better value for customers and ultimately better returns for their owners.
Private owners, private equity and public markets increasingly see that well-run advice businesses, often with their own in-house investment solutions, have high levels of recurring income, retain their clients and help to grow their clients’ assets over the long term.
All of these factors should lead to growing returns as businesses scale.
So why is it that in practice advice firm margins generally do not increase as firms grow?
According to the FCA’s 2019 analysis margins are actually greatest amongst firms with a single adviser, and they consistently decline as firm size rises. On average, firms with 50 or more advisers made a loss.
I would argue that a significant reason is that compliance overhead grows disproportionately quickly as firms scale. When a firm is small the principal’s values and livelihood ensure quality and compliance.
As the firm grows beyond the founder, systems and controls are typically used to try and maintain quality. The problem is that very often the design of these systems and controls are often decades old – at least in their thinking.
My observation is that many come from the production line mindset of the old ‘Industrial’ or ‘Ordinary’ branch salesforces, where quality control was ensured by reviewing weekly activity sheets submitted by salesmen.
I have heard those who operated in the industry in the 1980s refer to these as ‘Lie sheets’ on more than one occasion.
Like Ford, GM and Vauxhall production lines in the 1980s, these industrial processes rely too much on workflow and checking gates at the end of the process and not enough on building quality into the process so that the product is right first time.
In a vertically integrated firm, or where the ‘product’ is not just the advice but the actual portfolio itself, the financial driver to focus on the ends and rationalise the means at the end of the process will also be present, to a greater or lesser degree.
It is also true to say that technology has not always helped here. Often it has grown out of the ‘salesforce’ mentality with rigid workflow which is created by management, painful to follow and therefore easier to circumvent and fill in after the fact with post-hoc justifications (historically I have been involved with one or two of these systems).
Alternatively, vendors have sought to automate the adviser out of the process, with the latest ‘robo’ processes which while good at recommending specific portfolios, can not handle the complexity and messiness of human circumstances and the challenges of principles-based regulation.
So, what can the advice industry learn from another industry where getting quality right at scale was critical?
If you look at the JD Power Vehicle Dependability Study over the years, it is dominated by Asian manufacturers: Toyota, Kia and Hyundai have consistently topped the rankings. What can we take from their success?
In the late 1980s / early 1990s, the US car manufacturing industry was trounced by Japanese car makers who built quality into their products with a mantra of ‘lean production’, ‘right first time’ and ‘Kaizen’ continuous improvement.
Toyota’s workers for example were empowered to make changes and improve the system as problems arose – a Japanese factory worker was expected to stop the entire production process if a mistake was spotted so it could be corrected before it was too far into the build.
By contrast, on a Ford mass-production line the process was never stopped and quality problems were often only discovered at the end of the assembly line, requiring large amounts of rework by which time plenty of other flaws had slipped through too.
I was a post-grad student in the US mid-west at the time and had the opportunity to study this transition. This new wave of competition was devastating to the domestic manufacturers, their businesses and the livelihoods that depended on them.
Three strategies were and remain core to the winners’ approach:
So the key to getting advice ‘right first time’ is a customer first mindset, investment in technology which complements adviser ‘wisdom and ingenuity’ rather than restricts it, supported by strong measurement and communication between teams. That is good for the client, more enjoyable for the adviser and advice team, and good for the firm and its owners too, whatever their size.
Ben Goss is chief executive of Dynamic Planner