It’s a good question?
I got challenged in a workshop the other day from a seasoned and successful owner of a financial planning firm when I cited that, in our experience, BEST PRACTICE profitability target is around 40% (ebit) per advice client per annum.
“What rot!” was the quick retort from my attendee. “If we can make 90%, why shouldn’t we be able to? Apple makes lots of profit per unit sold. It’s fundamental to running any business”.
The hearty debate that followed really got me thinking. The 40% figure originally appeared over the last ten years in our Dashboard Report from our best advice firms no matter the marketplace conditions.
These firms were not focused on chasing ‘opportunistic’ profit margins.
The advisers running these firms also understood that profits are a RESULT rather than a FOCUS of consistent, methodical and specific approaches to attracting, pricing, engaging and managing advice relationships.
These advisers also understood that excessive profit margins are not sustainable. Students of economics understand the vacuum-filling speed competition will pounce upon someone else’s ‘excessive’ profit margins (witness the retail to wholesale platform transfers being undertaken today with many of the savings being ‘pocketed’ by the so-called advisory firm).
Building profit streams on something that isn’t sustainable doesn’t sound like a viable long-term business model.
Sure, there must be spectacular deals or individuals who command spectacular profit margins (e.g. the country’s best entertainer, best judge), but can you build a business model around spectacular profits from spectacular one-off people or deals?
There is, obviously, another consideration – the client.
Why make 40% profit from a client when I can possibly make 90% (or whatever)?
Because you’re ripping off the client?
(Some consider the old benchmark profit should be around 33% but in the increasing out-source world and higher price of resources, I personally believe the IDEAL margin is closer to 40%)
Do you take what you can get?
Or, do you ask what you consider fair return?
What do you reckon?