📊 How to Switch to a Recurring Revenue Mix

Did you hear? The OECD took a long, hard look at South Africa’s economy and identified a firm pipeline failure as a growth blocker. By comparing SA regulations with those of other countries and mapping them to real-world business data, they’ve shown that SA has a healthy pipeline of new companies. But regulations that are now more restrictive than even China gut SA’s mid-sized companies as soon as they try to scale. 

This creates a "missing middle" in the JSE, explaining why the index remains so top-heavy and reliant on a few massive, productive incumbents.

This week in Seed Analytics Advisor Connect:

We recently began looking at increasing your brokerage’s earnings multiple (business value), starting with last week’s feature on building owner independence.

This week, we look at your revenue mix. Because not all revenue is valued equally by a potential buyer – if your practice relies heavily on upfront insurance commissions or initial investment fees, your cash flow starts at zero every January 1st. 

Buyers discount that unpredictability, but they’ll pay a premium for practices with an 85%+ recurring revenue.

Here are 3 ways to begin transitioning your book to a recurring model today.

1. The As-and-When Risk Pivot

Building an insurance book entirely on upfront commissions feels great for cash flow today, but it creates a "treadmill" business. If you stop writing new policies, your revenue dies. That’s why you want to transition your risk business from a transactional model to an annuity model. 

Take action: Start migrating all new life and risk policies to an "as-and-when" (ongoing) commission structure. Yes, it hurts short-term cash flow, but every policy you write becomes a compounding, sellable asset on your balance sheet. 

For existing clients, use structural updates or cover increases as the inflection point to renegotiate the structure with the provider.

2. The Hybrid Subscription Model

While relying 100% on ongoing AUM fees is better than upfront fees, your entire practice's valuation is at the mercy of the JSE or global market swings. There is always a level of cross-subsidy in a practice, i.e. the fees from larger AUM clients are paying for the cost of servicing the smaller AUM clients. 

One way of reducing the cross-subsidy is to start introducing a Rand-based fee (a.k.a. “subscription fee for advice”). You could introduce this subscription fee to clients who have less than, say, a R2m threshold of investment portfolio. It may mean that you still earn the AUM % based fee to subsidise the subscription fee. In turn, you can consider reducing the AUM % based fee for the larger clients. 

This will help to reduce the cross-subsidy between clients and allow clients to understand the value you bring versus the fee they pay. 

Take action: Decide what the threshold is in your business, i.e. is it R2m, R5m or R10m. Decide what the monthly subscription fee should be for those clients less than the threshold. Also, decide whether you want to introduce it to both existing and new clients. Do A/B testing to see how clients feel about it.

3. Institutionalise the Invisible Value

Stack your value proposition. Not all clients are the same, and not all clients need the same SLA. Make a list of all the services you are currently providing your clients. It may be things that you just do, but try to give it a name, e.g. if you discuss the client's cash flow, then call it something like “Budget overview”. 

If you discuss tax issues, then that would be “Personal finance tax planning”. Group the different services into three packages. This helps set out your SLA per package. Put a price on it. The price may be a combination of a fixed Rand fee per month plus % of AUM. The main point is to think about your value proposition and how you package your services for different clients.

Use your Seed OBR and make a list of your clients with:

The graphs can help you understand your block of business.

This will give you a clear sense of the expected income from each client. You can then also map one of your three SLA packages to each client (see the article above). This will help you distinguish between advice-heavy customers not generating enough consistent income and the ones you are making enough from, but are too light on the SLA. 

With the clients where the % AUM fee is too small, you can think about how you can approach them to take up one of your three packages that includes a fixed Rand fee. 

With your clients where you are making a good margin, you can think about how you can increase your value proposition for them, like meeting more frequently, offering consolidated statements, offering coaching services, etc., or how you need to reduce the fee to match the value proposition. 

Already on Seed? 

Use your Seed Statements this way to enhance your value proposition. 

New to Seed? 

Virtual Financial Advisor (JHB) @ PPS

Private Wealth Advisor (George) @ FNB

Financial Advisor (Klerksdorp) @ Old Mutual

Internal Broker Consultant (JHB) @ iTOO Special Risks

Financial Advisor (Garden Route) @ Metropolitan

Financial Advisor (Umhlanga) @ Envestpro

Wealth Manager (PTA) @ Nedbank

Did You Know? This week, in 2006, Jack Dorsey, the founder of Twitter (now X), sent the world’s first-ever tweet. It’s still live, you can see it here. Bet you he wishes he’d said something more interesting than “just setting up my twttr”.

Till next time,

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