Growing in Difficult

When implemented successfully, your revenue stream stands to eventually grow as a result of new assets, and your need for additional capital spending will be minimal. Needless to say, there are other non-capital expense items that you should try to reduce. Those differ drastically from one practice to another and the assessment of whether to reduce or eliminate them should be made in light of their perceived impact on your operations.

The fee-dependent revenue model is dragging down the bottom line as assets are shrinking: (Average assets declined by 7.3%, revenues from asset management fees declined by 9.79% and net profits declined by 7.42% in 2002) The decline in existing assets under management over the last year has clearly had an adverse effect on revenues from asset fees. Lately, there have been growing discussions about possible means to offset that decline–including imposing a minimum dollar fee on existing accounts, charging a retainer on new accounts, and billing an additional quarter for financial planning services offered beyond the normal course of asset management advice rendered.

Despite the obvious ramifications of such models for the client, even the most successful firms in the business have yet to conjure up more novel ideas to overcome the problem–except for hiking the minimum initial investment to stave off smaller unprofitable accounts. This problem is perceived, and rightly so, as a natural outcome of the fee-based business model. The potential solution, therefore, is doomed to be one of conflicting outcome, such as hiking the asset management fees. But by enhancing and expanding your service offerings–and consequently attracting new clients to your practice–you stand to grow your asset base, and your revenue stream (see “Revenues fell by 9.79% in 2002″ link below).

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Clients are demanding a family-office-like range of services and full-service brokers are moving downmarket: With full-service brokers moving downmarket–offering services ranging from tax planning and executive compensation consulting to cash management and concierge services–many RIA firms are thriving by broadening their wealth management offerings. But offering clients a full range of wealth management services is not for everyone. First, the manpower needed to offer the services competently requires more than just forging a partnership with an attorney and an accountant. Second, many practices don’t have enough clients who require such services. Lastly, offering these services at no additional charge and as part of an all-inclusive asset fee require you to offer them only to clients with very sizable accounts–possibly $2 million and higher–in order to be profitable (see “Full-service brokers continue to go after advisors’ clients” link below).

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Expanding your practice to include such services, therefore, should be a strategic initiative driven by your vision of your practice, as opposed to a sporadic service you offer to a few of your clients. In our interviews with large RIA firms, there was an overriding caution about the soundness of adding such services in cases where the firm did not have the capacity to excel and profit from that expansion. In fact, many firms indicated that they would survey their clients first and determine the demand potential. Additionally, many of the firms we interviewed that already offer these services explained that they initially started by outsourcing these functions. When the determination was made that enough clients would require the service, the firms hired the necessary talent to fulfill their clients’ needs in-house.

While clients are seemingly demanding a comprehensive range of services, advisors should approach this from a long-term perspective, keeping in mind that once they start offering such services, there is almost no turning back. Advisors should determine whether they can offer such services competently, what percentage of their clients are likely to bring in additional assets, and what pricing models would work best. If the decision is made to offer those services, then some of the best practices highlighted earlier should be followed.

With the new year upon us, there are many ways advisors can seek to capitalize on the current challenging business conditions and turn these hurdles into opportunities. While no one can control the stock market, there are steps advisors can take–from investing in your practice to having a warmer relationship with clients–to improve your practice’s response to the market.

Best of luck growing your practice in 2003.