Traditionally, financial planning is a lonely profession. Perhaps that’s why we get relatively high attendance at industry gatherings. Today, sole practitioners represent well over 70% of all financial advisors and will probably always be the majority of advisors. Yet, while data on this is hard to come by, my experience tells me that the percentage of solo advisors has fallen in recent years, and I suspect this trend will continue well into the future. In fact, the advisory industry will probably end up closely mirroring the more mature accounting profession, where the majority of practitioners continue to remain solo, but with Pareto’s 80/20 rule solidly in effect: 80% of the revenues are generated by 20% (or fewer) of the practices.
In the advisory business, this is a long-term trend that has only been accelerated by the relatively recent downturn in the financial markets. In the 2002 FPA Staffing and Compensation Survey, for instance, we found that from 1999 to 2001, the average revenue of participating firms increased from $682,000 to $729,000. What’s more, average assets under management rose from $37 million to $48.5 million and the average gross profit margin increased from 52.8% to 53.7%. However, during that same period the average practice’s operating profit fell some 30%, from $97,000 to $70,000.
What’s going on? The underlying cause is simple, and inescapable: economics. It’s becoming harder and harder to make a living as a financial advisor–particularly a financial advisor who is going it alone. In a world where overhead, client satisfaction, quality control, time compression, margin compression, transition options, and retaining trained staff are becoming increasingly important, the inherent efficiencies of ensemble firms become increasingly attractive.
Now I’m not suggesting that creating an ensemble firm is for everyone. Every advisor has to find his or her own solution. But the question every advisor must ask and answer is whether the pleasure of remaining solo is worth the pain, or whether building and growing a business (as opposed to a book of business), providing greater service to more clients, and making more money in less time with less stress would be more fulfilling.
Either answer is right, but how you answer is completely dependent on your personal definition of success.
Why Fly Solo?
Remaining a solo practitioner offers many advantages, some of which are the reasons most folks became financial advisors in the first place. Freedom is high on most advisors’ priority lists, as in the freedom to practice the way you want, service your clients as they require, work with whom you choose, where you choose, and the hours you choose, without answering to anyone (except your spouse, and there’s really no getting around that). In short, most advisors I know very much enjoy being “the boss.” But the solo model by its nature leads to certain problems, including:
o Limited access to skill sets. You can’t be an expert in everything, especially the myriad disciplines necessary in providing comprehensive financial advice. Unfortunately, the vast majority of solo practices can’t afford to hire people who know much about anything, let alone experts. That usually means the services they can offer are limited to their own expertise and the referrals to other professionals that they can provide.
o Limited leverage. Again, since you can’t afford to hire high-level talent, most of the tasks that require a professional level of skill will have to be done by you. That means your “job” has become what’s known in the management consulting business as “labor-intensive.” Thus, your level of service, and your income, is directly and solely related to your time, energy, and abilities.
o A cap on growth. Since you only have so much time and so much energy, the number of clients your firm can service effectively is finite, and relatively small. This is the trap that many advisors have fallen into recently: if you try to grow your way out of shrinking profits, you only make the problem worse, and make yourself crazy in the process.
o An inability to spread operating costs over more revenues. Ironically, many of the fixed costs (such as staff, rent, and technology) that deplete much of your limited financial resources really offer more than your limited services require. But since you can’t hire half a receptionist, buy half a network software program, or half a phone system, you end up paying for excess capacity that you will never fully utilize.
o Limited time to maintain a high level of service to clients while adding new ones. If your resources are stretched to the limit serving the small number of clients that you now have, where are you going to find the time to recruit new clients, let alone service them?