What’s the biggest challenge facing financial advisors today? The stock market? The economy? The threat of war in the Middle East? Managing client portfolios in the new investing environment? Based on over 20 years of experience consulting with advisors, I’d have to say “none of the above.”
You see, I’ve found that like most professionals, financial advisors are well-trained to help their clients, but receive no formal education about how to make a living doing it. Consequently, our team at Moss Adams has discovered a huge disparity between those few advisors who, through prior training outside the profession or natural business sense, have created financially successful practices and the majority of their peers. In these pages every month, I’m going to explore what the most successful practices do to get that way, and what you can learn from them to increase the success of your own practice. After all, if you can’t make a living as a financial advisor, you probably won’t be very helpful to your clients, either.
Perhaps the best snapshot of the difference between successful advisory firms and the rest comes from the 487 practices that participated in the 2002 Financial Performance Study of Financial Advisory Practices, which Moss Adams produced for the Financial Planning Association. In that study, we divided the data between solo practitioners and ensemble firms, but the message is the same for both categories: the top 25% of advisory practices show dramatic differences in revenues, profits, and efficiency when compared to the other 75% of their peers.
For in- stance, the top 25% of ensemble firms generate over twice as much revenue annually as the rest: $1.5 million vs. $743,000. For solo firms, the difference is even more dramatic: $425,000 a year in revenue for the top firms vs. $137,000 for the other 75%.
What’s more, these disparities extend right down to the individual level: top ensemble firms average revenues of $319,000 per professional vs. $172,000 per pro at their less successful peers. And looked at from the other end of the equation, top solo firms generate an average $2,056 in revenue per client compared to $1,580 for the other 75%, while top ensembles bring in $4,500 per client vs. $2,360.
These striking differences in revenues translate directly to the bottom line. While the profit margins of the top firms aren’t quite as dramatic, the difference is still highly significant: 57.6% vs. 49.8% for ensemble firms; and 55.3% vs. 36.5% for solos. When translated into real dollars, the success of the top firms is nothing short of astounding. We found that top ensemble firms bring on average $316,000 to the bottom line each year, compared to just $35,000 for their less successful peers. For solo firms, the difference is $235,000 in annual profits vs. $50,000 (see charts, page 42).
The Secret(s) of Success