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
What accounts for the differences between these successful firms and the rest? One of the first conclusions that we drew from the study and from our experience is that there is no “magic recipe” for success. The most successful firms include both solo and ensemble firms, firms with fee, commission, and mixed compensation, independent RIAs and broker/dealer affiliates, and firms representing every possible strategy.
Instead, we’ve observed that financial success depends on finding the optimal practice model by addressing a series of complex strategic and tactical issues. Indeed, both solo and ensemble firms face similar challenges in finding that optimal model and have to deal with many of the same issues. In fact, we’ve determined that the best predictor of success in advisory practices is how well a firm’s principals understand these complex issues and what they do to maximize the advantages of the business model that they have chosen.
While no two optimal practices will look exactly alike, depending on the strategy of each firm, we find that the challenges that most advisors face are remarkably similar. Regardless of size, number of partners, or level of independence, the most critical issues also typically turn out to be the most common:
- Serve more clients More efficient practices can handle more clients, and do a better job for each one. On average, top ensemble firms handle 20% more clients per professional–60 clients compared to 50 for pros in the other 75% of firms.
- Find more clients Top firms recruit new clients more efficiently and effectively. For instance, our data shows that in 2001, elite ensembles added, on average, 25 new clients with $100,000 each in assets vs. 19 clients with $60,000 in assets for their peers.
- Find better clients One of the keys to the success of an advisory practice is to target and attract the right clients.
- Manage productivity and efficiency It’s one thing to attract more clients and assets. It’s quite another to maintain a high level of quality service in a growing practice.
- Improve profitability Increased revenues don’t always reach the bottom line. Top firms not only bring in higher revenues but also post higher profit margins.
Develop an effective strategy Finding the clients, services, and branding that maximize your talents and those of your staff is the basis for success.
Factors of Success
Consequently, in future columns, we’ll tackle these factors of success, offering insights, benchmarks, and examples to help you find and create the optimal practice for you and your clients, including stories that tell you:
- How to create your personal definition of success You won’t be very successful advising other people where to go if you don’t know where you want to go yourself. These days, advisors face myriad questions about how, where, and how much they work, how much they make, and what’s going to happen when it’s time to stop working. Answering some simple questions can lead you to build the practice that’s right for you, both now and at the end of your career.
- How to perform a profitability analysis Look at each client as a standalone business. If you only use one financial analysis tool on your practice, this is it. In the words of one advisor who’s done it: “Running a profitability analysis will change the way you look at your practice forever.”
- How to draw up a succession plan Who will look after your clients when you can’t? You may not want to think about this, but you can be sure that your clients are. One of the best ways to cement your client relationships, and create a multigenerational practice, is to let your clients know that you’ve arranged for their ongoing care.
- How to look at your practice as an investor To build value in your practice, analyze what makes a practice valuable. You may not know much about running an advisory business, but you do know how to analyze an investment. How would you rate your business?
- How to grow your practice through acquisition At a 10% growth rate, how long will it take to double the size of your practice? You can buy a practice like yours in two to three months.
- How to keep your employees happy If you skimp on paying your staff, you’re really shortchanging yourself. This is one of the principles that is hardest for dollar-conscious advisors to grasp. But the data is clear: top firms hire the best people and pay them very ell.
- How to decide whether to go solo or grow together Your most important decision is whether to create a solo practice or an ensemble practice. There are many advantages to having partners–access to broader talents, leveraging yourself, and economies of scale, to name just a few. But making a partnership work isn’t easy emotionally, financially, or operationally. Deciding if an ensemble is right for you will set the stage for the rest of your professional career.
The list of formulas for success could go on and on. But the simple fact is that building a practice that brings in more revenues, generates more profits, and better serves clients is within the grasp of every financial advisor. We’ll tell you what you need to know. The rest is up to you.