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Practice Management > Building Your Business

Beyond the Numbers

By Angie Herbers

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I just finished reading the 2006 Moss Adams Financial Performance Study of Advisory Firms. It’s undeniably the most comprehensive annual look at the nuts and bolts of the financial advisory profession, and I have a great deal of respect for the massive amount of work done by the folks at Moss Adams. However, every year when I finish reading and analyzing the information contained in their Study, I can’t help but think that Moss Adams approaches the process of building a financial advisory practice somewhat differently than I do.

The Moss Adams studies focus primarily on optimizing a practice’s financial efficiency, by adhering to basic principles that apply to nearly any type of business: maximizing gross profit margins, operating profits, revenues, and pre-tax income per owner. In business school I heard these rules of business management many times. Yet my training and experience as a financial planner gave me a different perspective on managing and growing advisory firms; looking at them as professional practices first, and second, as businesses.

Of course, independent advisors have to wear both hats; as a business person with the goal of selling their services at a profit, and as a professional applying their expertise in the best interests of their clients. Faced with this balancing act, many of the advisors I work with come to realize that as professional financial advisors, there are times when increasing their profit margins–that is, achieving optimal financial efficiency–is simply not in the best interests of their clients. For example, recommending high-commission products, or more expensive custodians that offer myriad perks to advisors, or even jettisoning less profitable clients who clearly need their help but don’t meet newly established minimums. Decisions like these may not be viewed as sound “business” decisions. Worse, some might even be regarded as just plain “bad” strategies. Yet that doesn’t bother many of the advisors I know who in, the interest of offering the best in client services, believe they are in the business of being professionals first, and in the business of making profits second.

That’s not to say that advisory practices don’t need to make a profit. Professional advisors are fully aware that to serve any clients, they have to keep the doors open. And consultants such as Moss Adams are absolutely right that more efficient practices have greater resources with which to serve their clients. Yet, while the ideal business school perspective is to optimize financial efficiency (which seems to be the point of the Moss Adams Studies), I am, like many planners, more concerned about increasing the level of client service.

Translated into business management terms, professional advisors are more interested in maximizing the operational efficiency of their practices than in maximizing their income per owner. Delivering client services efficiently enables advisors to work with more clients or handle more complex client situations, spend more time with clients, have more time to train young professionals, monitor quality control, and vastly increase the value of each client’s experience with the firm. Ironically, because professional practices depend largely on referrals to grow, more efficient operations turn out to be the most effective way to attract new clients, and ultimately to grow those revenues and profits.

Operational Excellence

So how do you achieve operational excellence? Unlike financial efficiency, operational efficiency does not always show itself in black and red. Instead, it’s borne out of many aspects of your professional practice that can be seen in a more tangible form by analyzing your professional skills and abilities, client retention and accumulation, systems management, staffing recruitment and retention, and reputation.

The first and most important step to operational excellence is knowing the basic principles of operational management, as they apply to your professional goals. To serve your clients, start by making an honest assessment of whom your professional skills can most effectively help. The biggest mistake I see planning professionals make is trying to be all things to all people. While you may have the skills to serve a broad range of clients, this usually isn’t the most effective use of your abilities. Your family physician more than likely learned how to perform surgery as a resident, but that doesn’t mean you ask him to do it when you go in for a checkup.

Identify situations that match up client needs with your strengths, while still being open to areas that you truly enjoy, as they may provide some of the most personally fulfilling professional experiences. This will in turn maximize your effectiveness as a service provider while limiting the number of services you supply and increasing the potential number of people you can help, and still be profitable. Once you’ve done this, you can take the advice of Moss Adams and set into motion your business mindset by analyzing your pricing structure to accommodate your services.

With an accurate assessment of your professional abilities, you can then evaluate the true client experience. People hardly ever remember what you do or say, but they nearly always remember how you made them feel. How do you want your clients to feel? Many business managers will use client surveys, focus groups, and advisory boards to get a client’s perspective, and these tools are quite effective. Before employing them, however, you should first have a vision of what you want the client to get out of their experience. Then those client-feedback tools can tell you if that is actually being delivered. If the client experience matches what you want them to get from your practice, then you will keep them as clients and naturally attract more of the same.

Making It Happen

Next, when you know what type of client you want to attract, and you know what you want the client to feel when working with your firm, you can create operational processes to make it happen. In business terms, this is called “systems management.” In other words, do the technology, client deliverables, and procedures you’re using form an efficient structure to serve your desired clients? If they don’t, then how could you reengineer your practice to make them better?

Many advisors get stuck in the valley of systems management because they simply cannot document their financial planning process. The reason is that their firm is always growing and changing. As outlined in the Moss Adams Study, when firms grow, their professional preferences change. A solo startup will probably target clients with fewer assets than those targeted by larger “mature ensembles.” As advisory businesses grow, so, traditionally, do the size of their clients. That requires you to ensure your process and procedures continue to cater to the type of client that not only you desire to serve, but the ones who might also be most attracted to your service offerings. If you cannot document in an operational manual exactly what you are offering clients and how to offer it, then you simply need to go back to “Go.” Start over again (defining your professional skills and the client experience) until you can get it on paper in a way that is understood by both your clients and your employees.

Once you have a detailed outline of your planning process, managing your staff becomes much easier, with the major caveat that you hire the right people in the right jobs. Professional staff is the single biggest investment you will make in your practice–and it will also have the largest impact on your bottom line. The effect will be positive if you have hired the right people and trained them properly using your operational manual as a guide. But if you hire the wrong people and do it before you know exactly whom you want to serve and how to serve them, your staff will be as confused as your clients. That scenario leads to low morale, poor retention rates, and negative bottom lines.

The bottom line about bottom lines? The business of advice isn’t really about building a business at all. In my view, it’s about structuring a professional practice where advisors have the information and controls to make informed decisions that might not increase the owner’s income, but will instead lead to an increased level of service to clients. As professional business owners it is not only our responsibility but our ethical duty to look out for the greater good of those we have been called on to serve.

So how do we put food on the table and pay the bills? Simple. By increasing the level of service and the effectiveness of our operations, we add value to the products and services we offer. This additional value can be then used to nurture managed growth of the firm, moving it beyond a business and into the realm of a true professional practice.

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