Mix It Up

In the world of investment, diversification is often held up as the key to success, enabling investors to spread their risk and minimise losses in a market downturn.

In the business world, diversification is just as important. Financial planners face a raft of potential changes over the coming years that could fundamentally change the way they operate, and the sources from which their revenue is drawn.

In light of this uncertainty, particularly given a change of government could render those changes that are currently proposed redundant; it is prudent for practices to ensure their business is not dependent on any one income source.

CoreData’s Licensee Research 2010 indicates that those planners who have a diversified business model – in other words, those who offer debt management and insurance as well as at least two of the ‘core’ services of managed funds, retirement planning and superannuation – were more likely to be profitable in the past 12 months than those who don’t.

Almost three quarters of planners with diversified business models (71.5%) experienced profit growth, compared to only 64.7% of planners with undiversified business models.

Profitability across the industry has nearly doubled year-on-year after a GFC-induced slump in 2009 which saw almost two thirds of planners experience a plateau or decline in profits.

In 2010, this trend has reversed with more than two thirds of planners (67.5%) experiencing profit growth in the last 12 months.

The jump in profitability is a remarkable turnaround given the impact the crisis had on the revenues of most planning businesses, and advisers point to hard work as well as improved market conditions as the main drivers.

The idea that diversification aids practice profitability is also supported when profitability is assessed at the level of services offered.

Some 70.8% of advisers offering debt management experienced profit growth in the last 12 months, compared to only 65.0% of those who do not offer debt management.

Profitability was also higher for those offering direct equities (75.3% versus 60.8%), insurance and risk protection (68.2% versus 60.0%) and tax advice (73.0% versus 65.9%).

*Data taken from CoreData’s Licensee Research 2010