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Client segmentation should be the first step for advisers looking to cut costs, says Wellian


Fresh research from the Association of Professional Financial Advisers indicating that the cost of regulation can now be up to 20 per cent of income for many small advisory firms has prompted Kent-based Wellian Investment Solutions to offer three cost saving strategies for IFAs.

Research from the firm has indicated that the main struggle advisers are confronted with when trying to cut costs is the ability to initially identify where in their client portfolio they can make cost savings.
Chris Mayo, investment director at Wellian Investment Solutions has suggested that before trying to cut costs in other areas, advisers should adopt a strategy for ‘segmenting’ or categorising their client base according to the level of ongoing service they require.
He recommends that clients are categorised into three groups, ranging from the clients needing a very close relationship with the adviser, to those whose requirements could just as easily be serviced with a small amount of the adviser’s time. Mayo says that this simple process of client segmentation will help advisers to effectively identify where they are able to make the most considerable cost savings.
Once advisers have identified the most suitable areas of the business to outsource, Mayo recommends three key areas for advisers to consider:
1    The use of platforms
One of the best ways to dramatically cut costs is to migrate all of your client assets onto one or more different platforms. The platforms have usually negotiated the best price with the fund groups on different funds, which could already give you a significant cost saving. Additionally, you can remove the need to do your own valuations as this will all be taken care of by the platform. Similarly, you can cut the cost and time of any additional administration and paperwork created each time you need to contact your clients regarding a switch or rebalance of your portfolios, as the platform will handle this on your behalf. You may also be surprised at how much you can save on IT costs by using the platforms’ own back office system rather than running your own.
2    The use of DFMs
Fund research is an especially time consuming and therefore costly process for the majority of advisers. Particularly if you are a small firm, you are probably spending over half of your time on fund research which would be better invested in developing your business and identifying new clients. This is where the role of a discretionary fund manager can add a lot of value for many small advisory businesses, as they will have an expert team of analysts dedicated to researching hundreds of funds on a daily basis and identifying crucial changes which could have a considerable impact on the success of your client portfolios.
3    The role of compliance
With the growing cost of regulation having a serious impact on advisers’ profitability, many small firms are struggling to stay afloat. Rather than employing an in house compliance professional and if you are not already part of a network, Mayo suggests you outsource this function to one of the many third party contractors offering on-demand services and expertise in compliance and risk to make considerable cost savings.
Mayo says: “The current downward pressure on pricing means advisers need to attract new clients as they may not be able to charge the same price for their services post RDR. Therefore, the best way for advisers to remain profitable is to first accurately identify and then focus on the most high value areas of their businesses, which are maintaining and creating relationships with new and existing clients then finding ways to outsource the rest. However, there is still a degree of nervousness around outsourcing for most advisers, which is a real issue as it is ultimately the best way for them to make real cost savings.
“However, before making the decision to outsource any part of the business it is vitally important to review your client base and do your research thoroughly when deciding which DFM (s) to partner with so you can make sure you are going to be allocated to an investment manager who is dedicated to keeping you updated as regularly as possible. For that reason, most small firms prefer to partner with someone locally, to ensure they are not at risk of being cut out of the process altogether.”

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