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.
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.