Taking Off

The market meltdown combined with the events of September 11 took a toll on Steve Wightman’s planning business last year. Spooked by the shaky market performance, or just plain spooked, prospective clients that were about to come aboard shied away, causing Wightman’s workload to drop.

But by reducing his employee overhead through an outsourcing plan that he’d implemented earlier that year, Wightman’s practice was able to weather a dry spell in new client fees while maintaining a healthy revenue stream. “With outsourcing, you’re not paying a staff every week, so it becomes more flexible and profitable, especially for a small practitioner like myself,” says Wightman, a sole practitioner with Lexington Financial Management, a fee-only planning firm in Lexington, Massachusetts. “When the market drops out for us as far as new clients, or just the inverse of that, if we get really busy, outsourcing helps even more. We’re only paying for the actual use of the services, unlike a practice that is always paying the same amount [to employees] regardless of how busy or efficient they are.”

Since delegating back-office and administrative support, technology, and marketing services to other professional firms, Wightman has not only increased the quality time that he devotes to clients, he’s also opened up more time to pursue his passion of building and flying his own airplanes. Now he’s watching both his business and personal lives soar to new heights. Thanks to outsourcing, his year-end 2001 operating margins of 28% are projected to skyrocket to a whopping 94% by the end of this year. “I’ve seen my net profit more than double since I started outsourcing,” he says. And in his spare time, he’s constructing the world’s fastest flying single engine amphibious aircraft, the Seawind.

Like other small planning firms–and even larger ones–Wightman has found that he can run a more efficient–and lucrative–practice by getting rid of “unnecessary drag,” those mundane, time-consuming, and expensive chores that bog down even the most proficient advisors, and keep them from growing their businesses and servicing clients.

By letting go of a “do-it-myself” attitude–not always an easy feat for most advisors–Wightman has also freed himself from becoming a jack-of-all-trades, a predicament many advisors find themselves in when their business snowballs. “I found myself becoming a human resources manager instead of a financial advisor,” he says. Rather than wasting time, money, and energy on training an employee who could up and quit at any time, Wightman decided to turn over low- or no-profit tasks to those persons or firms with the needed expertise. “[Outsourcing firms] want referrals so they maintain excellence. Their reputation is on the line and they know it.”

Surely balancing a successful personal and work life is within every advisor’s reach. New technology innovations as well as the Internet have without question broadened the array of outsourcing options available. And outsourcing is becoming an accepted business model among a variety of businesses. According to Dun & Bradstreet’s 2000 Barometer of Global Outsourcing, outsourcing in the United States was projected to grow from a $295 billion business in 2000 to a more- than-$340 billion business in 2001.

Asset Management, Trusts, and More

An informal Investment Advisor poll of advisors who are outsourcing services found that many are using the tried-and-true turnkey asset management programs offered by SEI Investments, Brinker Capital, Lockwood, and Frank Russell; these firms are now outsourcing separate accounts. Among the most popular services being outsourced are database management and back-office support, accounting, recordkeeping, reporting, technology, marketing services, Web sites, and portfolio management via Centerpiece and TechFi’s product, Portfolio 2001. Advisors are also outsourcing their internal administration, payroll, and tax preparation.

Outsourcing is also creating opportunities for advisors to add services that they weren’t using before, like trust services, philanthropy, account aggregation, and the administration of 401(k)s.

Popular names being bandied about in trust services are Capital Trust Company of Delaware, Wilmington, Delaware, (www.ctcdelaware.com) and Santa Fe Trust Company in Santa Fe, New Mexico. And new on the philanthropic services block is Foundation Source of Norwalk, Connecticut (www.foundationsource.com).

Mark Tibergien, director of Business Succession Services at Moss Adams, counsels advisors to use this rule when contemplating which services to outsource: “If you can’t translate the service into either one that clients would value and use consistently, or one that is going to cost you great sums of money to have as a permanent offering without a commensurate return, you might consider outsourcing. It’s kind of like the decision about whether to lease or buy. Buy it if it’s going to produce returns and you can leverage off of it.”

To be sure, most advisors are accustomed to redefining themselves as their business evolves and as clients pressure them with ever-increasing demands. But Mark Hurley, CEO of Undiscovered Managers in Dallas, says the current market environment is forcing advisors to run a more efficient business. “For the first time, advisors don’t have a hidden subsidy in their revenue,” he says. “Through the 1990s you had 18% annual returns in the equity markets, and even if you deduct for fees and assume that advisors have some part of their clients’ portfolios in bonds, you’re still talking about returns of 14% to 15% a year. So an advisor’s costs could go up 10% a year, and they would still see margin expansion if they weren’t adding clients. Well, guess what happened? Right now the market is negative; let’s assume we give 5%, 6%, 7% a year returns. Net of fees with a balanced portfolio of any kind, you’re going to be generating returns in the 3% to 4% range, which means margins are going to come down by 7% a year, and remember that’s gross margins. So let’s say I’m a typical advisory firm and I have a 30% operating margin before I pay the owners any compensation. If I am going down by 7% a year, that means the owners’ compensation is being cut by 25% a year.”

Before the market crumble in 2001, Hurley says, advisors could shake off worries about operating efficiencies or cost accounting because the market’s growth rate masked any potential cost inefficiencies. “Even if you think the market is going to go up, which I do, it’s not going to go up that much.”

The Virtual Office Solution

David Drucker, principal with Sunset Financial Management Inc., in Albuquerque, New Mexico–who’s co-authoring a book with fellow NAPFA member Joel Bruckenstein on virtual office tools–says that by investing in technology, advisors can move beyond the dire predictions that say they must either establish a niche or grow their firms to survive. “A lot of these [advisory] firms are chugging along at 50% overhead rates and have become resigned to the fact that that’s the best they can do,” he says. “I think people don’t realize that it takes a major paradigm shift in their thinking to change those numbers dramatically, but it can be done.”

Drucker shifted his business model by splitting from his former financial planning business and creating a one-person C corporation. “I looked around to see if it was possible to outsource every staff function I’d had in the past to either a separate business or independent contractor, and eventually was successful in doing that,” he says.

“My concept of a virtual office is really putting together the labor side with the technology side, and outsourcing is half of the puzzle,” Drucker says. “The other half is all the different technologies you can use to replace human functions, or just to save tremendous amounts of time and space that had been very inefficient to your practice.”

Drucker now runs a virtual office, using a CFP who performs planning functions for clients via the Web. He also uses a virtual account administrator to perform tasks like number crunching, setting up Schwab accounts, handling the money, setting up automatic withdrawals from the account, and IRA distributions. The core communication process, Drucker says, is via e-mail and Intranets. For administration, he uses Sherry Carnahan, who runs a virtual secretarial business called Total Office, Inc., based in Akron, Ohio. “Of all the people, she’s very critical,” Drucker says; “she’s the person I’m in touch with the most.” And then there’s the virtual trader. “I actually have an independent broker who does about 95% of the investment work for my clients: making sure their asset allocation is on target, their liquidity needs are being met, all those things.” He also uses Centerpiece reporting for an asset management solution provided by Asset Management Solutions in Vista, California. The company was recently renamed Back Office Support Service.

Since moving to a virtual office structure, Drucker’s profit margins have ballooned. “It’s unbelievable! My profit margins are in the 75% to 80% range consistently. And a lot of that [growth] is because of outsourcing.”

Drucker says that, as a whole, advisors aren’t embracing outsourcing. “We are right on the leading edge [of outsourcing]. Opportunities are growing pretty rapidly, but acceptance isn’t,” he says. “Everybody has heard of outsourcing or examples of it, and there are peers who may be doing it, but very few [advisors] have adopted it in the wholesale manner.”

What keeps some advisors from outsourcing, Drucker says, is a false assumption that different due diligence steps are required when retaining an outsourcing firm. “When I speak about this topic at conferences, people say to me: ‘Don’t you have to have confidentiality agreements with these people because you don’t have any control over them?’ What I tell them is that you’ve got the same situation as someone who’s present in the office with you from day to day; there’s no difference. You need the same safeguards, the same confidentiality agreements, understanding and hiring process, and the same reference checking process.”

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