From the February 2008 issue of Research Magazine • Subscribe!

Back on Track

In 2007, CEG Worldwide undertook an extensive study of 2,094 financial advisors across all three channels -- registered investment advisors (19.8 percent of those studied), independent broker-dealer representatives (27.5 percent) and brokers employed by wirehouses (52.7 percent). As the first table shows, although the advisors in each channel are making good incomes, few are very satisfied with their current level of success. Similarly, despite their income level, few advisors are very satisfied with recent business growth and many believe their practices could be more profitable.

So while it's relatively easy for financial advisors to make good money, it's relatively difficult for them to build a great business, have a great lifestyle, and achieve all that they've always dreamed of achieving. To understand why this is so, the study delved deeper into the advisors' use of best practices by dividing them into four quadrants based on client base and income.

Best Practices by QuadrantThe Quadrant 4 advisors -- with a base of 150 or fewer clients and incomes of more than $300,000 -- are by definition considered the most successful advisors. They also had the greatest amount of assets under administration, with an average of $530.0 million, followed by the Quadrant 3 advisors with $461.0 million, Quadrant 2 advisors with $248.77 million, and Quadrant 1 advisors with $144.2 million. These elite Quadrant 4 advisors represented only 12.8 percent, or about one-eighth, of all the advisors studied.

What enables these Quadrant 4 advisors to earn the highest incomes while serving the fewest clients? Just as important, since we intuitively and anecdotally know that having the highest income and the fewest clients correlates with having the best possible quality of life, what has enabled these advisors to achieve their sought-after lifestyle?

Consider some in-depth results by quadrant as shown in the "Best Practices by Quadrant" table. Note that in every case -- whether it's regularly asking clients for additional assets to manage, systematically asking clients for referrals, having a formal business plan or marketing plan, or frequency of contacting their Top 20 clients -- the Quadrant 4 advisors followed the best practice at a substantially higher rate. By contrast, their number of years in the business was irrelevant.

Two Business ModelsClose to half of all the advisors studied described themselves as following a wealth management business model. However, according to CEG Worldwide's definitions, 93.4 percent of advisors are investment-oriented while only 6.6 percent are actually wealth managers. Those who use the wealth management business model (work with clients in a consultative process, offering customized solutions over a broad array of financial issues, delivered in close consultation with the client over the long term) had an average income of $881,000, compared to an average income of $279,000 for investment-oriented advisors.

A related finding: While 76.8 percent of wealth managers outsourced their money management to third parties, only 21.2 percent of investment-oriented advisors did so. The most successful advisors outsource these activities to their network of qualified third-party providers so that they can remain focused on client-facing activities. In short, the most successful advisors have found that they can't be both asset gatherers and asset managers, but instead stay focused on the former. They understand that working with fewer, wealthier clients, and providing these clients top-notch access to the broad array of services they require, is the real key to success.

The Big PictureMany advisors are doing well as to income, but by their own admission, they aren't as profitable or successful as they'd hoped. We also know that many of these same advisors are not experiencing the quality of life that they'd originally desired. What explains this lack of greater all-around success?

First, as our research shows, it's a simple fact that many advisors just aren't following the best practices that correlate with higher incomes and better lifestyles. Similarly, in a somewhat surprising turn of events, the percentage of advisors following the wealth management business model has substantially declined in recent years. In 2001, CEG Worldwide's research showed that 12.2 percent of financial advisors were wealth managers. By 2004 it was down to 8.6 percent, and in this last in-depth study it had fallen to 6.6 percent.

Sadly, human beings are most likely to change their habits only under substantial duress, in times of crisis, rather than when times are good. For example, people are most likely to start regularly exercising and eating well, and stop smoking and drinking to excess, in the six months after a heart attack -- not in the six months before a heart attack when it would do them the most good.

Similarly, back in the "bad" times of the last bear market, a lot of people were willing to try something new, and those who persevered are now among the most successful financial advisors. Since then, with the passing of the crisis, many advisors have regressed back to their old ways, and while they're doing "just fine," they're not doing great.

We're not saying that it's easy to follow these best practices and to undertake the wealth management business model. It's hard to make these kinds of changes. You must be willing to do things differently, to break the mold, and to go against the tide of what you've probably been taught for most of your career. But the rewards from doing so with intelligence and determination will be substantial, and just might result in the truly great business you've always dreamed of.

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Patricia J. Abram is a senior managing partner with CEG Worldwide in Florida; see www.cegwordwide.com.

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