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How to Have a High-Revenue Firm

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It’s no secret that compliance and staffing costs are digging into profitability — your profitability. In fact, the chatter about it has been deafening. The surprising thing is how little advisors are doing about it.

Two forces appear to be in play. First, and this isn’t groundbreaking, it’s widely held that financial advisors tend to be poor strategists when it comes to running their own business.

As John Iachello, managing director and chief operations officer at Pershing Advisor Solutions, puts it: “It’s fascinating how so many in our industry are very good at managing money, frequently good at getting new clients and not nearly as advanced and knowledgeable about running a small business. It’s not brain surgery, but it’s remarkable how many of them miss it.”

Next, the surge in business from 78 million baby boomers has sparked enough easy revenue growth that advisors have become somewhat complacent about their business models. In other words, they’re not in enough pain yet. In fact, Stephanie Bogan, president of DP Group, a financial services management consulting firm, estimates that as many as 70 percent of advisors are “riding the wave.” It’s not unusual to see 20 percent growth rates in annual revenue, she said, while fast-growing firms are looking at spikes as high as 50 percent.

Yet compliance costs, according to the Financial Planning Association, rose 95 percent between 2002 and 2004. The results of a new study, due out any time, are expected to show another increase. Meanwhile, experts say, staffing costs are growing as a result of a labor shortage for experienced specialized employees — and it’s even worse in areas outside of the nation’s financial centers. Another factor: health-care costs shot up another 11 percent last year, dragging down the bottom line. Yet against this backdrop, an internal study from Charles Schwab shows that the average advisor is spending only 2 percent to 3 percent of revenues on marketing while growing at an average rate of 20 percent a year.

“There are all these huge increases in costs, yet firms are still growing and that’s what’s saving everyone. At the end of the day, there are more people looking for advisors than there are qualified advisors,” according to Bogan. “The fact that they are spending so little on marketing and growing so fast is evidence of an outside force, not an inside force, pushing growth. Clearly, they are not making the business the driving force.”

But advisors who are focusing on strategic and sound business principles and practices are mustering the tools to push growth from within.


n fact, a new study from Pershing Advisor Solutions [see sidebar] shows that successful high-revenue firms of $1 million and up a year devote more time and money to human capital than those with lower revenues.

The study’s top recommendations:

o Place as much emphasis on building a corporate culture of excellence as on growing the business. Firm reputation and corporate culture are huge recruiting cards.

o Provide employees with a defined career path, formal reporting structure and periodic performance reviews.

o Segment clients to ensure that advisory talent levels align with client value.

“One thing that is pretty obvious from the statistics is that higher-revenue firms do a better job at this,” says Iachello. “If you strive toward being a high-revenue firm, these are the types of practices you should put in place.”

Automation is Key

No discussion today about running a business smartly — and profitably — can take place without homage to automation. Or “technology with a capital T,” as John Rooney, managing principal of Commonwealth Financial Network, puts it.

“It’s our mission here to try and mitigate our advisors’ non-revenue producing activities. If that’s your philosophy, your mantra, the way to get it done is to automate it and get it more efficient,” says Rooney.

Shawn Dreffein, president and CEO of National Planning Holdings, is equally blunt. “The only solution to controlling costs and making things more efficient is automation. The reality is that to [open] the same IRA today probably takes, I would guess, 10 to 20 times more pieces of paper than it did 10 years ago. If you have technology, it doesn’t matter. If you lack technology, it really matters.”

Back to the IRA. Dreffein says an advisory firm staffer is likely to miss something when filling out the 55-page — yes, 55 pages — account application. “If you do it with technology, you don’t miss anything. It forces you to fill in fields. Along the same lines, the technology can also create compliance checks for you,” she adds. “As an example, it can inform you before you get too far down the road that you’re not licensed in a state or whether there is a suitability issue. It can uncover a lot of obvious compliance issues before the business is even submitted.”

In addition to cutting down on compliance issues — and by extension, costs — technology also helps trim the costs associated with people and space. An example from National Planning’s network of 2,600 advisors: One advisor who had eight people doing paperwork now has four. At the same time, the number of rooms dedicated to file storage has been reduced from three to two. [In another scenario, Dreffein adds, four of the eight employees might well be reassigned to other functions.]

“Scale is very important today. Reps who are affiliated with some of the smaller firms lack access to these types of resources. In the olden days, size didn’t matter a whole lot. Today, size does matter,” says Dreffein. “To keep up with the changes regulators are forcing on us plus providing enhancements and other neat things, you really need to have scale so you’re able to spread those costs over a lot of people. I think we’re in an era where we’re kind of at a crossroads where the smaller firm — whether it’s a small RIA or a small broker/dealer — is having a much more difficult time competing because once again they lack the scale to spread the cost of technology over a wide variety of individuals. Unfortunately, there’s nothing you can buy off the shelf that solves the problems.”

In 2006, National Planning Holdings launched a number of new tech initiatives and added 10 developers to its information technology unit, for a total of 28 developers. This year, the firm will integrate its technology package with a contact management system, completely overhauling its advisory platform. It’s also in the process of turning its direct business processing system fully paperless.

Through the third quarter of last year, National Planning’s revenues were up 17 percent, product sales were up 23 percent and the number of reps was up 5 percent. Dreffein attributes the growth almost exclusively to productivity gains.

The Staffing Challenge

Staffing correctly, never easy, is about to get more difficult.

“Staffing is going to continue to be an issue because people are having a harder and harder time finding quality people, particularly on the FA side. It’s one of the sub-issues people are starting to face,” says Bogan. “It’s not just about finding skilled support staff; it’s finding additional financial advisors.”

Eighty percent of advisors are sole practitioners, and more than half are over the age of 50 or 60, according to Bogan. Now, consider this statistic from Tiburon Strategic Advisors: Almost 40 percent of independent advisors plan to retire in the next 15 years but fewer than one in five has a written succession plan.

Every one of Bogan’s clients is looking for a “next generation advisor” over the next 12 to 24 months. But most candidates are inexperienced, just out of CFP programs.

“What everyone wants is someone with five to seven years’ experience who knows how to be an advisor,” she adds. “There’s a limited number, and it’s even more difficult regionally. How do you manage for growth in that environment?”

Among Iachello’s recommendations:

o Create a growth path for employees so that they can train successors who come in without a lot of industry experience.

o Keep people incented and motivated through creative compensation. Consider methods that are longer-term and tied to the success of the total business.

When Bogan first works with a client, she covers a number of basics: What does the advisor want the business to look like in five to 10 years? How is the firm’s financial performance in terms of revenues, revenue streams, staffing models, profitability? What economic model would make a good fit? What’s the real value of the business?

Generally, she says, firms that become pro-active double their profitability in a one- to two-year period.

“It’s not overnight but it’s not a long period and it’s not a particularly difficult process, at least intellectually. It can be difficult emotionally because advisors are used to doing things their way,” she says.

“Hopefully, the group that’s out there now, the 30 percent who get it, are really starting to understand business principles. This is a business that needs economics and management and profitability. These are the folks who are gaining awareness, attending practice management sessions on hiring and compensation, investing in technology. It’s not about riding a wave. Depending on what happens with the [baby boomer] retirement trend, both groups may do fine. I believe the advisors who treat their business as a business will do significantly better.”

A new study from Pershing Advisor Solutions suggests there is a direct link between an advisory firm’s profitability and an emphasis on human capital.

The study, “A View from the Top: Best Practices in Leveraging Human Capital,” said firms with gross annual revenues in excess of $1 million consistently devote more time and money to employee training and orientation, periodic performance reviews and the creation of formal reporting structures.

“To be successful in today’s competitive business environment, advisory firms need to operate at maximum efficiency, gain organizational leverage wherever possible and maximize the value of their associates,” notes John Iachello, managing director at Pershing.

Among the study’s chief findings:

o Among high-revenue firms, 55 percent create client segmentation strategies vs. 40 percent for low-revenue firms.

o High-revenue firms are also more likely to separate the sales and relationship management functions (78 percent vs. 55 percent), and to deploy junior teams to smaller and less profitable relationships (26 percent vs. 12 percent) — in the process creating a career path and making sure that talent levels align with client value.

o High-revenue firms, particularly wealth management practices, do not rely solely on traditional means of client segmentation [such as assets under management] but are more likely to segment by less traditional methods. In fact, wealth managers are more than twice as likely as investment mangers to segment by relationship revenue and more than three times as likely to segment by relationship profitability.

o As compared to their low-revenue counterparts, high-revenue firms place a greater emphasis on attracting and retaining employees and view a range of recruiting tools as effective, including: salary, 64 percent vs. 51 percent; profit-sharing, 60 percent vs. 46 percent; benefits package, 60 percent vs. 32 percent; equity, 55 percent vs. 37 percent; and signing bonus, 16 percent vs. 5 percent.

o While competitive compensation is viewed as important, 70 percent of the high-revenue firms reported that intangibles such as “firm reputation” and “corporate culture” were the most effective recruiting tools of all.

o High-revenue firms are also more likely to terminate a poor-performing employee, 62 percent vs. 40 percent, and the termination process itself appears to be more systematized. Furthermore, 64 percent of high-revenue firms say they have fired a poor performer compared to 45 percent of low-revenue firms. Also, high-revenue firms are more likely to mentor (43 percent vs. 31 percent), as well as redefine roles and responsibilities (34 percent vs. 26 percent).

The study, commissioned by Pershing and executed by HNW, Inc., surveyed principals of fee-based or fee-only practices with a minimum of $50 million in assets under management. Additionally, at least 50 percent of their client base was comprised of individuals vs. institutions. For a copy, email Barbara Gallo at [email protected] or Michael Geller at [email protected]