OpINion online: Sow or reap? That's the question for advisers

My friends at Business Health, an international consulting firm that specializes in financial advisory businesses, recently came out with a report comparing the financial “health” of Australian advisory practices today with their condition in 2007. What does the state of the Australian advisory business have to do with your firm? Quite a lot, as it turns out. Business Health, which is based in Australia, works with advisers in the U.S., Canada, the U.K., New Zealand, Hong Kong and South Africa. It notes that despite minor regulatory and cultural differences, the business of providing financial advisory services is very similar throughout the English-speaking world. In its latest report, Business Health found that while the best Australian financial advisory firms are in better shape today than they were three years ago, those not at the top have slipped. Specifically, 20% of the practices that went through Business Health’s diagnostic measure of business performance scored in the top “superfit” category, as opposed to just 4% of firms in 2007. Meanwhile, the percentage of practices rated “healthy” or better dropped to 75%, from 82%, and the number of “poor” and “average” health practices rose to 25%, from 18%. Given that an economic recovery is under way in all the nations where it serves advisers, Business Health believes that advisory firm owners — who seem to average 57 years of age whether they’re in Melbourne, Miami or Manchester — are faced with a choice: Do they extract as current income the extra profitability their firms are producing or do they invest it in the business so as to increase its financial health and its enterprise value for a future sale? There’s no one answer, of course, but a lot depends on whether the adviser views his or her practice as a book of clients or as a business that happens to have the adviser as its principal. Another question: When and how does the adviser intend to transition out of the practice? For advisers who view their business as a lifestyle choice that affords them a good living and an opportunity to do the kind of work they enjoy, then “institutionalizing” the business with the intention of selling it sometime in the near future may not be all that important. Despite the interest in succession planning and cashing out, many advisers may prefer to keep working for as long as they are physically able. For them, taking greater income out of a recovering advisory practice may make the most sense. For others, however, especially younger advisers and those who seek more than a good living, building the business makes the most sense. For them, reinvesting today’s higher profits in technology, systems and personnel is the right path. Of course, working on a practice to make it more productive and profitable is certainly time well spent — whether an adviser enjoys the fruit of that labor now or later. But I have a hunch that more advisers will opt to keep working and, as a result, not plow back money into their business. What do you think?