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June 01, 2010 at 04:00 AM
These days, when so many advisors feel they dodged a bullet in terms of business survival, it may seem insensitive to bring up the idea of business fulfillment. But the best leaders are those who keep their eye on the goal even in the midst of calamity. Recent changes in fortunes may have given advisors reason to pause–but only for a water break. After a quick rest, it’s time to return to work.
Advisors can’t sit back and wait for the market to get them back to whole. In the new business environment, clients are more demanding, competitors are more aggressive, and the best employees are being poached by growth-oriented firms seeking talent. No, the sky is not falling. But there are very few times in the lifecycle of a business when the pieces have shifted and we see the potential for a new world order. Advisory firms must look ahead and position themselves for faster growth, improved profitability, and enhanced productivity–or they will be looking back with regret five years from now. The goal in operating terms should be how to get to critical mass, a destination not even on the radar screen for the vast majority of advisory firms.
First, let’s define what we mean by critical mass: It is that sweet point at which the business starts to achieve an optimal level of productivity, profitability, and growth. It is the holy grail of any service business, that elusive, coveted target. You know you’ve arrived at critical mass when the departure of an employee or significant client doesn’t send the business into a tailspin. The business just continues on its course, growing revenues, generating profits, and providing opportunities for others to make an impact.
Most independent advisory firms with at least 20 people in varying roles from advisory to administration to management can handle staff turnover and increased client growth while consistently producing a reasonable level of profitability. This generally means that a firm with $5 million of revenue has reached critical mass. But because fixed costs are rising for most advisors, that number is creeping up as well.
Getting Back to Your Target
Every business is unique in terms of its clients, its people, and the way in which it does business. Individual advisors are also unique in how they view success. But there is one immutable truth about all businesses–profitability is critical because it funds your future.
A well-managed advisory firm will consistently generate a gross profit margin in the 55% to 60% range, and an operating profit margin in the 20% to 25% range. Exact margins depend on the business model. Over the past five years, compensation and overhead costs as a percentage of revenue have gone up. This pattern accelerated during the market cataclysm when revenues dropped precipitously. So the question for advisors is this: what changes in pricing, client mix, service mix, expense control, or revenue generation will have to occur in order to get the business back on target?
Productivity is critical to enhanced profitability. Productivity manifests itself in ratios like clients per staff, revenue per staff, error rates, responsiveness, and other leading indicators. Productivity is also impacted by a high turnover of associates (see sidebar, next page).
How can your firm achieve critical mass? How much will you need to grow? Many advisory firms have a passive approach to business development, adding a comfortable six to 12 new relationships a year. But what if this pace is not sufficient to address the problems exposed through your analysis? What if you have to accelerate your rate of growth? How many new clients paced over what period of time can you absorb? How will the new marketing initiative impact your costs, thereby pushing your break-even point even higher? How will your staff respond to the intensified on-boarding of new clients? How will your existing clients be impacted?
Positioning for Growth
