Recent market volatility has led many financial advisors to yearn for more efficient and profitable businesses. Particularly as portfolios have precipitously plummeted, many advisors whose compensation is primarily tied to assets under management have taken a direct revenue hit, with an even greater proportional loss to profits (since expenses are generally fixed). Even transaction-based advisors will soon suffer, because clients who moved to cash tend to sit on the sidelines for a long time. In either case, financial advisors have little room to cut back expenses and no control over the paramount factor of how well the markets are doing.
There’s a lot of room for improvement. Consider that the 2006 Moss Adams Financial Performance Study of Advisory Firms found that over a five-year period both average assets under management and revenue increased by 100 percent, while average owners’ pre-tax compensation increased just 8 percent. From this we can conclude that many advisors have businesses that are not scalable, efficient or well run. It doesn’t have to be this way.
Refocus Your Time
CEG Worldwide’s groundbreaking Advisors 2000 study found that 9.1 percent of 463 surveyed advisors spent more than 60 percent of their time — and 28.1 percent of advisors spent less than 30 percent of their time — in client-facing activities. Stunningly, advisors who spent over 60 percent of their time this way had a net income almost six times greater than those who spent less than 30 percent of their time in client-facing activities. How, then, can you greatly increase the average amount of time you spend speaking to, meeting with, and otherwise personally interacting with clients and potential clients?
The key to addressing the tremendous operational inefficiencies found in most advisors’ practices — the key that will allow advisors to right-size their practices and make them scaleable — is outsourcing. By outsourcing everything but client-facing activities and business development, you can greatly increase both income and profitability. We strongly recommend outsourcing advanced planning, back-office functions (including account opening, trading, billing, and account reconciliation), business continuity, compliance, technology, marketing (including PR, collateral materials, overall marketing plan and website), and even investment management.
Most small business founders and owners make the key mistake of not understanding the value of, and therefore not optimizing the use of, their time. By outsourcing, you let those who know the most about any given area do their best, freeing you to do your best in client-facing activities and business development. To say, “I prefer to do things myself because I can do them myself, and it’s just too hard and time-consuming to bring in outsiders” is tremendous folly. Yes, correctly outsourcing vital functions will take some time and effort, but it will be well worth it. And yes, outsourcing incurs external “hard costs,” but in the long run the “soft costs” of doing everything yourself are far greater.
After recommending outsourcing, we often get pushback as to investment management. Many advisors have long positioned their investment skills as their unique selling point or value proposition. As a 30-year industry veteran, I have seen advisors make this mistake over and over again. When you live by performance, you die by performance, and given the general ascendancy of modern portfolio theory and asset allocation, your value to your clients better be well beyond a few basis points of alpha. And we know relative performance is only valued on the upside anyway. Not many clients were jubilant this fall when their portfolio was down 28 percent versus their neighbor who was down 32 percent. The affluent overwhelmingly state that what they are looking for in an advisor is a true wealth manager, a long-term trusted relationship with someone who looks beyond investment consulting alone to the big picture.
Take Four Steps
Planning is the first — and probably most important — step to successful outsourcing. You want to hire the right firms, agencies and independent contractors at the right price, so begin by carefully anticipating issues and defining your needs and the skills required to properly perform the desired functions. Make sure you think through the processes in question, and then blueprint them so you’ll know what needs to be done when, and which of your staff members will be responsible for oversight.