I had a former client who constantly complained about his income and the profitability–or lack thereof–of his practice. He had good reason to be unhappy: while having a good client base that generated AUM fee revenue of around $500,000 in what you would call a “solid” small business, he only took home $40,000 of that.
The problem was that he had to buy “the best” of whatever he bought, from computers to office furniture, and he bought lots of stuff he didn’t need at all. This proclivity included periodically remodeling his perfectly nice offices, and a state-of-the-art, professionally designed and produced e-newsletter.
Like far too many advisors, his real undoing was his staff, to which he continually added, despite the fact that his current staff was complaining that they couldn’t find enough to keep them busy. Our relationship ended when he added a senior advisor at $80,000 a year, apparently in anticipation of client growth for which we hadn’t seen any evidence. I realized I wouldn’t be able to solve his problem until he was ready to be helped.
As a business consultant to independent advisors, I’ve found that one of my primary jobs is to protect the income of my clients–from themselves. For reasons that may require a psychological analysis far beyond these pages, I’ve found that many advisors have a pronounced tendency to spend their firm’s revenues almost as fast as it comes in the door. Maybe it’s because they suddenly find themselves making far more money than they ever expected. Maybe it’s because, without a formal business background or education, some advisors don’t realize how quickly any business’s profits can be eaten up by small, but steady, uncontrolled expenses. I suspect it’s probably a little of both.
Yet I’ve also found that when an advisor isn’t happy with her or his income, their enthusiasm for their practices wanes, along with their motivation–and the business suffers. To have a successful firm, it’s important that owners feel adequately compensated for the time and effort they’re putting in, that they’re happy with their income. Ironically, most financial advisory firms do generate enough revenue to adequately compensate their owners. They just waste so much of it that they can’t affort to pay themselves what they deserve.
The Four Forms of Overspending
Overspending in independent advisory firms usually comes in any or all of four main areas: People, technology, client services, and facilities. As you might expect, people (that is, both professional and non-professional staff) typically make up the largest portion of a firm’s overhead, and are also typically the most mismanaged. The problem has been exacerbated in recent years by countless business consultants extolling the necessity of “leveraging” advisors with support staff, under the theory that support staff is relatively inexpensive, and if more expensive advisors can be leveraged to handling more clients, revenues and profits will go up.
In theory this makes sense. In practice, the efficient use of support staff can, and will, increase the productivity of an advisor and the profitability of his or her firm. As is the case in virtually every aspect of business, however, the devil is truly in the details. In this case, attaining this magic “leverage” can be a little trickier than most consultants let on.