THE average wealth manager and adviser have a lot to contend with. Regulation, compliance and shrinking profitability leave little time to concentrate on how businesses really work. Few managers know which clients are profitable, most have no succession plans and "client value" is only the vaguest of notions. Product providers are finally offering help to those who want a way out of the black hole.

By the end of last year, the top ten investment managers had over £10bn locked away in multi-manager products. Advisers have supported these products too, aiming to reduce costs and boost client returns. Many are disappointed that shifting to wraps or platforms fails to set profits soaring.

Peter Smith, managing director of Pivotal Consulting, says: "It is a definite misperception in the UK, some advisers think a fund platform is a panacea. It helps, but it does not impact on the front office where most of the issues exist."

Smith heads up Pivotal Consulting, created in 2003 by MLC, the world's third largest manager of manager, with £1.2 billion under management in the UK.

When MLC/Pivotal opened up to UK intermediaries it also bought 21 years of experience in the Australian market, which faced similar upheavals less than a decade ago. Packaging that knowledge for advisers is now a key part of his business strategy.

Smith says that outsourcing often leaves advisers feeling 'naked', that they are not working hard enough for the fees that clients pay.

He adds: "It is important that there is not the perception that the adviser is putting all their money with one company. We peel back the wrapper around their investments to show the underlying diversification – the asset classes, fund mangers, the process and any rebalancing."

But unwrapping investments is not the only issue, he warns. In too many cases, clients do not value what they are paying for, and advisers have no idea which clients are profitable or why.

He says: "These fundamental issues are totally overlooked in 90% of the firms that we look at."

Research from Cerulli Associates back up Smith's claims. Its study shows an almost inverse relationship between the time advisers spend on elements of the financial planning process and how much clients actually appreciate it.

While elements such as data gathering are crucial, the effort involved leaves little time and resource to manage the relationship in the future.

Heavy workloads also mean that senior personnel have little or no time to grow their businesses and develop imbedded value.

The answer, says Smith, is a complete overhaul of the business. Pivotal has six professional change managers who work on site, analysing every part of a practice. It can be painful, it is not quick and is a challenge for advisers to come under such close scrutiny.

He says: "There is no point just taking some broker consultant, sending him on a two week change management course and then write 'change consultant' on his business card. It just does not work and people are not that stupid."

A complete project, from identifying issues to implementing new business practices, can take up to a year.

The first step is to dig out information to provide a snapshot of where the business is today. A lack of useful data complicates the process, but the step cannot be avoided, says Smith.

"The diagnostic process is important. Management information is pretty bad. Most of the companies are set up by people who are good salespeople. But being good at sales and at running a business are usually mutually exclusive."

At this point, a Pivotal consultant may end up sitting on the company's board, recommending IT expenditure or even the installation of a new CEO to guide future development.

While Smith admits these can dent profitability as they are not business generators, they can lead to better long term planning and higher profitability.

Key recommendations always include outsourcing investments, but could envisage stripping out human resources and even events management for those wealth managers who run seminars and workshops.

Smith defines the entire financial planning process through six key steps. They are: prospecting; first meeting; recommendations; planning preparation; implementation; and finally review and ongoing service. Outsourcing helps with implementation and recommendations but not with the other elements, say Smith.

He adds: "The aim is to get them to the same level as accountants and stockbrokers. It is about charging for advice, strategy and ongoing coaching, not about paying for placement of a product."

Consultants will also look at the entire financial planning process to establish clear models and templates, from letters, to follow-up calls and how much time the adviser spends talking to each client about the firm.

Discussions invariably turn to the question of fees or commission. Smith is unfazed.

"The way you recover the fee is irrelevant. If someone pays £500 for advice but then sees the adviser sending a cheque to Skandia or whoever, but they pay £20,000 for that, they are not going to see value."

Smith tells advisers to charge more for the advice, and an ongoing fee of generally 2% per annum of funds under management, either as a fee or taken directly from funds.

Of the 70 firms that have worked with Pivotal, most are single site, regional wealth managers or IFAs who already have high levels of funds under management. Many have come from links to the Institute of Financial Planning.

Jeremy Hackett of PruConsulting agrees that fees and charges are an important motivator for adviser businesses, but not the only issue.

He says "There was a lot of noise at the time of depolarisation but the move started long before then. More and more advisers want to wean themselves off transactional relationships to create businesses of real value."

He believes that younger advisers have different attitudes, adding: "They realise that initial commission is not the way to go but often have unrealistic expectations about the true value of their businesses. Many businesses are really just a filing cabinet with a lot of papers in it."

Prudential set up its consulting arm earlier this year, with six consultants who do not charge for their service. Strict lines are drawn between consultants and others within the Pru who have dealings with individual IFAs and private client managers.

Typically, says Hackett, each consultant will spend around three months with an adviser company and make recommendations on how the business can be altered.

PruConsulting offers a 'profitability calculator' to define an adviser's income streams and highlight any over-reliance on any single product or sector.

It also uses a Sage Accountancy programme to identify costs. The answer to increasing profitability is simply to increase revenue or cut cost, or a combination of the two, says Hackett.

"Surprisingly, it is a big revelation to a lot of the businesses we see. But we are not rocket scientists or magicians, it is just they are very busy, they are swamped."

Since January, PruConsulting has had initial contact with around 100 firms, of which 60 are receiving undergoing further assistance. wealth

The biggest issues facing IFA practices

Client base:

Little or no segmentation, meaning advisers do not know how profitable each client is or what time and resources are allocated to each.

Dependency:

Client relationships depend on the individual, not any value added by the firm or its processes and practices. If one key member leaves, clients will follow.

Client perception:

Do they come for you for advice and strategy, including cash and debt management and other important non-commission items – or do they just see the product recommendations? If the product does not live up to expectation, then your reputation falls. But good advice will last the course.

Inferiority complex:

Advisers worry that outsourcing key investment decisions to third parties will leave them with little to say and few justifications for their fees. In fact, says Pivotal, switchers tend to increase fees and do more – just not the fund recommendation part.

Case study – Frank Cochrane – FSC Investment Services

IFA Frank Cochrane somewhat of a local celebrity in Wolverhampton thanks to his regular column in the Express, and Star, and appearances on the BBC's Working Lunch.

He has been an adviser since 1979 and his business, FSC Investment Services, is typical of many advisory firms facing a challenging future.

Cochrane and two other registered individuals handle client work and a further six staff run the office and administrative functions. Burgeoning regulatory requirements and the stock market crash made him re-evaluate the way the company operated.

He says: "The catalyst really followed on from what happened in the stock market in 2000 to 2002. We knew we needed a better way to risk profile clients and that the old "one-to-five" system was just not good enough."

"Looking at the Sandler report and the FSA view on advice and the push towards fees, it was plain to see that the old way was not really working. Dinosaurs end up dying."

Rather than face extinction, Cochrane decided to reinvent FSC Investments Services. Outsourcing investment decisions was an obvious choice but he wanted help making the jump and turned to manager-of-manager MLC.

In October 2004, Steve Champion from MLC's Pivotal Consulting conducted a thorough review of the business. The results were quite revealing.

Cochrane says "It was surprising to find out how much work we did without getting paid for it. We were offering a Rolls Royce service for Mini Metro prices, spending 80% of our time on the 80% of people who don't make us money."

Over a period of 18 months, Champion helped turn the situation around, to the point where FCS Investments Services now spends 80% of its time looking after the fifth of customers who are profitable.

Old ways were ripped up, the customer base segmented and new fee structures bought in.

Cochrane admits that explaining the new model to clients slowed up the transition but they were all happy with the results. There was some resistance from within the company however.

He says: "To be honest, it was actually some of the younger members of staff who found it more difficult. For me, it was quite obvious this was a chance to increase the value of the company and provide a better service."

Clients are now split into different groups. Those with over £150,000 to invest receive a bespoke service, those with £50,000 upwards an intermediate one and those below are offered transaction only. Cochrane reckons that his top 100 to 150 clients are enough to keep company profits growing.

"We now charge 1% on funds under management and most of those clients were surprised we had not done it before. On the execution-only side, we have 100% take up of the new offer, a good indication it works."

Funds under management have increased by over 10% since October 2004 to £60 million, without having introduced any significant new clients. Cochrane believes his target of £100 million within three years will be easily achieved from within his existing client base.

The new service was introduced in January 2005. Pivotal's presence within the firm has decreased since then but Steve Champion still visits twice per month to fine tune operations.