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Practice Management > Building Your Business

Six Questions That Can Help You Maximize Profitability

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Most independent advisors would be surprised to learn their average hourly rate or how much it costs to maintain a client for a year.

But once you know the answers to the following important questions, you’ll have the tools you need to start running your business more like a business and maximizing your time. By making adjustments to your practice according to this vital information, you’ll have what it takes to become one of the highest earning advisors in the industry.

1. What is your net production?

Most advisors know their gross production each year, but what was your take home after paying all of the expenses it takes to run your business? That’s what really counts when evaluating the success of your practice. As an independent producer, you have to pay for office rent, supplies, assistants’ salaries, benefits, and many other expenses associated with running a small business.

You also have to take into account the ticket charges for stock, bond and mutual fund transactions for the year. The average expenses for an independent advisor typically range from 40% to 60% of their gross production. If your annual gross production is $250,000 and your total expenses is $125,000, then net revenue is $125,000. It’s critical to take a hard look at your expenses and find ways to automate tasks to make them more cost-efficient.

2. What is your average hourly value?

Suppose you work 40 hours a week and take two one-week vacations during the year. That means you work about 2,000 hours a year. How much is one hour of your time worth? Are you being compensated fairly? You can determine your average hourly value by dividing your gross production by the number of hours you worked last year. If your gross production is $500,000 and you work 2,000 hours per year, your average value is $250 an hour.

Now, ask yourself, if every hour of your time is worth $250, should you be paying bills, filing paperwork or tracking down missing documents? Or should you be paying an assistant $20 an hour to handle these tasks? If you want to properly leverage your resources, you should be outsourcing anything you are doing during the day that is not in line with your pay, so you can spend more time focusing on clients and prospects.

3. How much time do you spend meeting with clients or prospects?

According to a 2005 Rydex Advisor Benchmarking study, the more time you spend directly with clients and prospects, the more profitable you will be. Advisors who spent less than 30% of their time in front of clients and prospects generated an average of $248,000 per year in revenue, but advisors who spent more than 60% of their time in front of clients and prospects averaged more than $2 million a year in revenue.

These advisors establish a greater level of trust, get more of their clients’ assets, close more prospects, get more referrals, and lose fewer clients over time. Bottom line: When you dedicate most of your valuable time to working with clients and prospects, you’ll get more clients and keep them longer.

4. How much of your time is spent with your top clients?

If your average hourly value is north of $200 an hour, you need to make sure you are spending your time with the right clients. Who are the right clients? You should segment your book of business based on where most of your revenue is coming from. If you have 250 clients and 25 of them are generating 70% of your total revenue, those 25 clients should be getting 70% of your time.

Analyze your year-end commission statement to find out who your top clients are and who your bottom clients are. You can segment your clients by profitability–put them in categories, such as platinum, gold and silver–and provide your time and services accordingly. As you run the numbers, you may find that after ticket charges and charge backs, some clients are actually costing you money–you are essentially paying them to be your clients. Give them the chance to do more business with you; if they won’t, don’t spend extra time or money on them.

5. How much does it cost to maintain a client for a year?

Add up all of your expenses in the last year and divide the total by the number of clients you served. For example, say your gross production was $250,000 last year and your overhead was 45%, or $100,000. If you have 250 clients, that comes out to $450 per client in overhead ($112,500/250).

Say you and your assistant met with a client once during the year ($125 an hour for your time, plus $450 for per-client overhead). The total annual cost for that client was $570. Invested in a portfolio of mutual funds and variable annuities, the client would need to have $228,000 invested with you at a 25 basis points (BPS) trail, just for you to break even. Sure, you may have made 4% as an upfront load, but after the first year, that money is no longer there. If, instead of charging a one-time commission, that client were paying a 1% advisory fee each year, the break-even point for assets under management would be just $57,000.

6. What percentage of your overall business is generated from a recurring revenue source?

Like many commission-based advisors, you may find it difficult to find new clients, manage the money of your existing clients, and run a profitable business all at the same time. You may find that you frequently aren’t making the best use of your time. Transitioning at least some of your business to a recurring revenue model allows you to have more time because you can turn your attention to working with and developing relationships with fewer clients–your top clients who provide you with the most revenue.

When you run the numbers, small incremental changes to your business mix can have a major impact. Often, merely converting 25 BPS commission-based clients into 1.25% fee-based clients can double your revenue in just a few years.

The benefits of recurring revenue

By offering a fee-based option to your best clients, you can grow your overall business while better meeting the needs of these top clients. Consider these benefits:

o Increase your net revenue dramatically;

o Spend more time with your best clients; and

o Enjoy a steadier, more predictable source of revenue.

As clients’ wealth increases, so does your revenue stream

Greater overall career satisfaction

Now may be the ideal opportunity to evaluate your practice to determine whether it’s time to take your business to the next level. Ask yourself these 6 questions as they relate to your business and consider the answers carefully. The decisions you make today could result in your practice operating at new, higher levels in the near future.

Dan Maurer is senior vice president of marketing and professional development for Curian Capital, LLC in Denver. He can be reached at .


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