Advice firms hoping to succeed will have a much higher chance of achieving organic growth if they specialise, as opposed to generalist practices, according to AZ NGA chief executive Paul Barrett.
Speaking on a WealthO2 webinar, Barrett said advice firms need to structure their business with the end in mind, adding that those with a long-term view will have a greater chance of successful growth.
"Be clear about the strategy and be clear about the structure. People often structure their affairs to get tax efficiency, but firms who take a longer-term view of their structure and shareholder arrangements have a much more attractive business when it comes to bringing in a party to buy in later on," Barrett said.
"It's never too late to pause and reflect on your structure and strategy and start again."
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Barrett said it is often very clear in the first meeting with an advice business whether or not they know what they are doing, and what they are working towards.
"The way we started our business was very simple. We asked a series of questions; what are we good at, who do we know, what problems to the people we know have that they are trying to solve," he said.
"It's okay to not be 100% sure, but you have to be generally sure where you are going with your strategy."
Barrett said one of the first indicators of a good advice business is the clientele. He said businesses with a more specialised clientele are more appealing.
He warned against generalist financial planning firms, that describe themselves as "retail financial planning firms", where there are multiple advisers offering general advice to mums and dads.
"That model has worked quite well in the past and there are still people today who are successfully deploying that model and they rely heavily on really good people," Barrett said.
"Those firms have got some of the best people, and they have to because when you're delivering a generalist proposition that is a very difficult thing to do, so you need very good people and often good leadership."
However, Barrett said most of those general practices are struggling in today's advice space.
"When you look at their financial performance and you track it over the last three years, you can see a downward trend," he said.
"That's because it is really hard to stand out and justify your fees to consumers when you're not truly mastering something."
Barrett said, from the point of view of the consumer, it becomes obvious when someone is not an expert in their field.
"When you're in front of someone who clearly is a deep subject matter expert in what they're doing, the level of confidence you have as a consumer is very high and your willingness to pay a fee is also much higher," Barrett explained.
"If you think about those general practices, the people delivering the advice, often when you get them one on one for a real truth telling session, they struggle with the value of advice. They struggle with truly backing their value proposition. That is because they are generalists."
Barrett added that those who are generalists can have good businesses, but said there are extra things they would need to achieve in order to survive.
"It's going to get harder. In the long run, organic growth is a really good sign and a telltale sign of the quality of a business. If there is good organic growth you know you've got a good business," he said.
"It's much easier to get organic growth if you have a deep and narrow capability because you're proud to talk about it and often very passionate about it and in the market at the forefront leading that story."