In 2007, CEG Worldwide undertook an extensive study of 2,094 financial advisors across all three channels — registered investment advisors (19.8 percent of those studied), independent broker-dealer representatives (27.5 percent) and brokers employed by wirehouses (52.7 percent). As the first table shows, although the advisors in each channel are making good incomes, few are very satisfied with their current level of success. Similarly, despite their income level, few advisors are very satisfied with recent business growth and many believe their practices could be more profitable.
So while it’s relatively easy for financial advisors to make good money, it’s relatively difficult for them to build a great business, have a great lifestyle, and achieve all that they’ve always dreamed of achieving. To understand why this is so, the study delved deeper into the advisors’ use of best practices by dividing them into four quadrants based on client base and income.
Best Practices by QuadrantThe Quadrant 4 advisors — with a base of 150 or fewer clients and incomes of more than $300,000 — are by definition considered the most successful advisors. They also had the greatest amount of assets under administration, with an average of $530.0 million, followed by the Quadrant 3 advisors with $461.0 million, Quadrant 2 advisors with $248.77 million, and Quadrant 1 advisors with $144.2 million. These elite Quadrant 4 advisors represented only 12.8 percent, or about one-eighth, of all the advisors studied.
What enables these Quadrant 4 advisors to earn the highest incomes while serving the fewest clients? Just as important, since we intuitively and anecdotally know that having the highest income and the fewest clients correlates with having the best possible quality of life, what has enabled these advisors to achieve their sought-after lifestyle?
Consider some in-depth results by quadrant as shown in the “Best Practices by Quadrant” table. Note that in every case — whether it’s regularly asking clients for additional assets to manage, systematically asking clients for referrals, having a formal business plan or marketing plan, or frequency of contacting their Top 20 clients — the Quadrant 4 advisors followed the best practice at a substantially higher rate. By contrast, their number of years in the business was irrelevant.
Two Business ModelsClose to half of all the advisors studied described themselves as following a wealth management business model. However, according to CEG Worldwide’s definitions, 93.4 percent of advisors are investment-oriented while only 6.6 percent are actually wealth managers. Those who use the wealth management business model (work with clients in a consultative process, offering customized solutions over a broad array of financial issues, delivered in close consultation with the client over the long term) had an average income of $881,000, compared to an average income of $279,000 for investment-oriented advisors.
A related finding: While 76.8 percent of wealth managers outsourced their money management to third parties, only 21.2 percent of investment-oriented advisors did so. The most successful advisors outsource these activities to their network of qualified third-party providers so that they can remain focused on client-facing activities. In short, the most successful advisors have found that they can’t be both asset gatherers and asset managers, but instead stay focused on the former. They understand that working with fewer, wealthier clients, and providing these clients top-notch access to the broad array of services they require, is the real key to success.