Employed vs Self-Employed Advisers: which is best for business?

The self-employed adviser question

In my time consulting with businesses across the UK and Ireland I’ve worked with hundreds of different firms. Some made up of employed advisers and some with advisers who are self-employed. Which works better? My experience has been that firms with self-employed advisers tend to do worse than those with employed advisers.

Let me explain why.

There’s no I in Team

What’s your vision? What kind of business are you building?

You could just say, ‘a bigger one’. But that doesn’t really cut the mustard.

Most business owners, if pressed a little, do have a vision for what they want their business to look like. And all great businesses I know have a very clear vision, honed over years of constantly asking themselves, “What are we trying to build here?”

Once you know what you’re building, you need to ascertain if everyone on the team is aligned with that vision. In fact, they have to be.

Now, I realise you can influence that to some extent by the way you explain and communicate the vision. However, if someone perceives that they work for themselves, how effective is that likely to be?

Even the name ‘self-employed’ sends all the wrong messages. Most self-employed advisers truly believe they are self-employed, when in fact the business often provides quite a bit of infrastructure and support to help them function effectively as advisers.

Self-employed can create a mindset that is at best unhelpful, and in some cases positively destructive, driving a wedge between the business owners and their advisers.

The financials

The biggest issue with most self-employed advisers is how much they get paid. Often it’s 55-60% of the revenue they generate or manage, and I’ve seen even higher amounts paid away.

As the business owner you can’t make any money at these levels.

Here are the key financial ratios for a financial planning business:

From 100% of initial revenue you can pay away up to 40% to the advisers. That goes for owner-advisers too.

You can then spend up to 35% of total revenue on every other expense of running the business; administrators, paraplanners, offices, telephones, computers, software licenses, paper, printing, coffee and tea, accounting costs, Professional Indemnity insurance, etc. Anything that is not the cost of an adviser is an overhead and gets lumped in here.

That leaves 25% as a genuine net profit, which is your reward as an owner for the effort and capital you have at risk. It’s also an amount over and above what you get paid for your day job. This margin works well as it allows you to take some extra dividends as a shareholder, it also allows you to reinvest in your business each year using profits.

The other benefit is that in a market correction, when your recurring revenue might drop for 12 months or so, you have a buffer. The business can support itself, you don’t need to become the bank and take a pay cut.

A couple of points to note.

It’s no walk in the park to keep overheads at 35% of total revenue. Most businesses struggle to do so.

So if you are paying away 60% of gross revenue to the advisers, you are not making any money.

How could you get around this?

You could have the advisers do their own administration, paraplanning and report writing. Is that productive? No. Is it a major compliance risk? Yes. I wouldn’t do it if I were in your shoes.

The complications these cause

The challenges I’ve highlighted in these two points can show up in your business in two obvious ways:

a.) Lack of motivation from the self-employed adviser
If one of your self-employed advisers is earning enough to achieve their lifestyle goals, good luck trying to get them being more productive or to increase the annual revenues that they generate and manage.

b.) Chasing the wrong clients
Most self-employed advisers are catching and killing their own clients. It’s rare that the niche or target market of the larger firm matches with the types of clients they are going after. That’s an absolute no-no in my opinion. It just creates exceptions in your back office and increases the complexity of your business.

An ideal business

What’s good productivity for an adviser?

£100k-£200k p.a. is pretty bog standard. £300k-£400k p.a. is very good, and £500k-£600k p.a. is what excellent looks like.

If you’re not doing those numbers right now, please don’t beat yourself up. Over the next three to five years, if you can get the right support around you, it’s possible to move to those sorts of numbers.

What are the implications of that?

Imagine your current business with those sorts of numbers. If you’re a one-person business you could be doing £600k p.a. with a small team supporting you. If you’re a two-partner firm you could be doing £1M+. Or if you’re a four-adviser business you could be doing £2M+.

I’ve spoken to some firms where they have ten self-employed advisers generating £2M of annual revenue, plus the support staff that go with that. That’s a tough business to run. You can bet adviser performance is like a bell curve, with two or three advisers doing very good annual numbers and two or three being quite poor. The rest will be somewhere in between.

Which business would you rather own and manage; the smaller tighter firm, or the larger one? It’s a no-brainer.

The right fit

Running a great business is about a clear vision from the owners, aligned values across the whole team, and a desire to be more and more productive over time.

If your current batch of self-employed advisers don’t fit in and don’t want to adjust to fit in, then my advice is let them go.

What you’ll find is that you can shrink the business significantly, letting go some self-employed advisers, some office space, and some staff and other overhead expenses.

However, even on a greatly reduced turnover, you will find you are making a lot more money.

The exceptions

Does this mean there are no good businesses running with a self-employed adviser structure? No. However, I can only think of one, maybe two who would go against these observations.

The choice is yours

Remember, turnover is vanity, profit is sanity. What do you want your business to look like when it’s done? You are the architect of your own business future. You have the power to shape it and make it in an image of your choosing.

Use your power wisely.

“You are the architect of your own
business future.”