Size doesn’t matter, but bumbling does

By Pixel Fish

At 83 kilograms and 5.6 feet, Aaron Smith is one of the smallest All Blacks.

He’s also the most-capped scrum-half to ever play for New Zealand.

While Smith is dwarfed by teammates like Sam Whitelock (6.6f, 117kgs), Brodie Retallick (6.7f, 123kgs) and Karl Tu’inukuafe (6f, 135kgs), in his position, he uses his compact stature and agility to his advantage.

But Smith’s prowess has little to do with his size. Although scrum halves tend to be the smallest players on the field, there can be a material difference in the height and weight of opposing numbers.

Smith’s success is attributable to his sporting ability, work ethic and ability to leverage the skills of those around him to execute his game plan.

Similarly, accounting and advisory businesses of any size can be successful if they have clear strategy and can efficiently execute that strategy.

Yet recent debate about the importance of scale and the emergence of super firms has made some smaller players defensive.

They see commentary about the advantages of size, as an attack on their business model, which it is not.

You only need to look at the smallest firm in the AZ NGA community, based on revenue, to realise that smaller advice businesses can be extremely attractive.

For calendar year 2021, this business is on track to bring in $1.7 million in revenue with an Earnings before Interest and Tax (EBIT) ratio of circa 25 per cent. It has no debt.

This business employs one full time adviser with one support staff and outsourced paraplanning. The principal is paid a salary of around $220,000 per annum, plus a dividend, and has a fantastic lifestyle.

Any day of the week, this is a great business to own, invest in, and be a client of.

Bumbler vaccine

While successful businesses come in all shapes and sizes, they tend to share common factors.

In addition to a clear strategy, they’re usually led by ambitious, highly engaged people.

They also monitor performance and implement structures to keep them accountable.

Accountability is the key to identifying and correcting drift, which is the tendency for management and staff to bumble along as a business matures, leading to stagnation and decline. Often drift is so insidious it goes undetected for years.

Establishing a formal board and holding regular board meetings to review a business’ strategic objectives, identify potential risks and issues, and measure performance acts like a bumbler vaccine. It provides clarity, promotes truth-telling and keeps a business on track to achieve their goals.

All other things being equal, size is irrelevant to success.

Shooting the lights out

As a sector, financial advice is pretty good place to be.

The job is interesting and rewarding, both personally and financially. There are low barriers to entry, mandated growth and demographic tailwinds.

Notwithstanding higher compliance costs and the loss of subsidies and rebates, profit margins are still attractive.

Advisers pining for the good ol days need look no further than their clientbase for a dose of perspective.

Consider my friends, we’ll call them John and Beverley.

John and Beverley own and operate a magazine import and export business. They import and distribute magazines around Australia, and export and distribute local titles around the world. Airports are their main distribution partners.

Their business is relatively complex. It involves stock, logistics, freight, warehousing, inventory, distribution agreements, and currency exchange.

Since the onset of COVID-19, John and Beverley’s business has not generated enough revenue to pay them a wage.

When they describe “the good times”, they refer to 2019 when they earned a salary of $150,000 each and the business made a profit of $80,000 per annum.

That’s what good looks like in magazine importing and exporting.

By that measure, many advice businesses – including some bumblers – are shooting the lights out.

But the days are numbered for bumblers. In today’s highly regulated, fast-changing environment, advice businesses need to continuously refine their strategy and value proposition.

Like Aaron Smith, they increasingly need the ability to fend off larger, stronger opponents because the super firms are coming.

These businesses will have greater capability, capacity and scale.

That scale will enable them to drive cost savings and spreads fixed and variable costs over a larger number of clients. It will reduce their cost to serve, increase profit margins and improve competitiveness.

Fortunately, success in professional services is not like success in professional sports. It is not a pie with limited slices.

There’s plenty to go around for world class businesses of every size.

Read more of Paul Barrett’s articles in Professional Planner.

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