Target Operating Model in Financial Advice — The Next Frontier of Value Creation (Part 2)

We believe that significant value creation opportunity still exists for advice firms and their investors, but realising true cost efficiency will take commercial and management sophistication. In defence of large firms, many realise the cost-out opportunities but face a market that continues to be weighed down by its own legacy.??

Common problems we have heard from chief executive officers and chief operating officers (COOs):?

• “Advisers are set in their own ways, and they are difficult (though, admittedly, not impossible) to change”?
• “Advisers like the paraplanners and admin they have worked with, and disturbing this arrangement will ruffle feathers”?
• “Cost has been taken out in things like properties and PI insurance, so we can stop there without having to rock the boat too much”?
• And less spoken, but probably fairest — “The focus is on M&A; we will figure out the integration and operating models later”?

However, underlying these statements are structural issues that advice firms have yet to tackle:?

• The mistaken assumption that size = scale = operating leverage, when the evidence suggests that this is not automatic?
• Not harnessing the potential of workflow simplification from vertical integration??
• Using too many platforms …?
• … and too many tech systems, which ultimately take time and effort to stay atop of (e.g. dual keying problems)?
• Technology adoption without corresponding operating model changes?
• Lack of follow-through that enforces the target operating model in the firm from top to bottom of the organisation?

Additionally, many organisations have leaders who are products of the industry and do not necessarily have the tools to instigate the root-and-branch changes that are required to drive target operating model changes and, ultimately, improvement in cost to income ratio.?

But this need not be the case. We will explore the principles of good target operating model design, and the lessons that can be learnt for COOs and chief technical officers in advice firms.?

Unfinished business in value creation?

At its core, we believe that most advice firms have yet to face up to the distinctions between a) genuine, client-facing unique selling proposition and b) ‘behind the scenes’ functions that are essential. Henry Ford is often credited with popularising the first automobile. However, his true innovation was the development of a groundbreaking assembly line, enabling the mass production of a complex but highly reliable product. Financial planning, in many respects, requires similar genius.??

In our experience, successful operating models follow a few simple ‘design principles’:?

• Operating model = cost to serve, and should be different for different client segments. Good operating model design should therefore start with client segmentation.?
• As an example there could be three operating models within a business:?- One for telephony/remote clients?- One for standard face-to-face advice clients?- One for higher value clients who might require more bespoke advice services?
• Build for the future, not for today. Make sure the operating model is fit for the purpose of your growth ambition.?
• Encourage a process of ‘keep, reallocate, automate’, where each function keeps the tasks they have to do, reallocates ones they don’t have to do (to cheaper areas) and looks to automate as much as possible when the reallocation is done — e.g. an expensive planner should not be sourcing insurance quotes; that should go to admin teams (see below).?

• Start with the front office, as they often set the tone for the rest of the organisation.??
• Paraplanner and admin staff should increasingly be thought of as ‘shared services’ rather than adviser cost …?
• … with further division of labour where senior paraplanner and admin groups are thought of as centres of excellence.?

• Have an honest conversation about technology and third-party systems; e.g. do advisers really need to use three different cashflow modelling tools??
• Adopt a flexible cost structure with rotation between fixed and variable cost; e.g. insource/outsource to capacity and demand.?
• Consider generative artificial intelligence and process automation as enablement.?
• Actively monitor and track efficiency/capacity utilisation vs client satisfaction — as ‘teaching materials’ for why a better operating model can actually improve client satisfaction.?
• Align organisational incentives with delivery of the new operating model, so that even the advisers have ‘skin in the game’.?

Operating efficiency as the next frontier of focus for boards and investors?

We believe that there is an urgency in taking actions. We note that investors are beginning to avoid or down-value businesses that are perceived to be poorly integrated. Consumer duty will also place increasing onus on advisers to justify their cost-to-serve to both their clients and the Financial Conduct Authority, which is bound to shine a light on inefficient cost structures. Many of our clients are beginning to include operating model improvement as part of their action plan for the next five years.?

In the longer term, changing the operating model and advice process can materially increase the servicing capacity (in number of clients per adviser) within the industry’s c.27k financial advisers. If they complement this with the right initiatives to improve commercial effectiveness, advice firms can meaningfully transform their organic growth profile as well. We see optimising operating models as a win-win for advice firms.??