Keep Your Eye on the Ball

Unfortunately, time constraints for those who are both managing individual clients and attempting to manage the business are an impossible barrier for many. The typical advisory practice is already at capacity in terms of the number of clients they can handle, so there is no leeway for adding more management duties. How do you find time to ensure the business is performing to its optimal level when confronted with a schedule filled with client appointments, concerns about volatile markets and urgent decisions? Even more significantly, how do you find the time to think strategically about the business—let alone implement a plan?

If you need some incentive to begin viewing your business as one of your biggest clients, just take a look at those survey numbers. A helpful technique is to compare your operating performance over the past three to five years, convert key numbers into ratios, and then compare your ratios to the top performing firms. As a financial step, you’ll want to calculate the financial impact to evaluate the size of the gap between you and the best firms.

To start, let’s assume that your practice generates $1 million in annual revenue (though I encourage you to apply your own numbers to this exercise). The top performing firm in this year’s study showed an expense ratio of 29.3% compared to the industry average of 44.9%, for a difference of 15.6%.  To translate, costs such as rent, utilities, administrative staff, marketing, technology and other administrative expenses consumed 29.3 cents of every dollar.

Multiplying your annual revenues times the difference of 0.156 reveals that the financial impact of the negative variance is $156,000. An average advisory firm generating $1 million in annual revenues is spending $156,000 per year on overhead expenses. That is huge. If your firm falls into the average in terms of your expense ratio, consider these two variables: Are you managing your costs in a disciplined manner, or is your volume too low to support your infrastructure? By gaining an understanding of the problem, you can develop a finer focus on possible solutions. The goal is not to move from average to top performing in one fell swoop just to get your numbers aligned, but to use this data to inform your management decisions.

Let’s look at another example. The top performing firm generated $187,000 more revenue per professional staff than the average firm. The average advisory firm generated $353,000 per professional. Knowing this large discrepancy, how can you adjust your compensation plan, your partner admission process, or the way in which you manage your client engagement in order to increase productivity among your professional staff?

Using relevant data to compare the operating performance of your business against your peers allows you to approach business decisions much like you approach client recommendations. Knowing there is a gap between where the client (or business) is and where it could be, what tactics might you deploy to improve your chances of success?

What Problem Are You Trying to Solve?
Benchmark studies have a way of causing some to gloat and some to curse. For as long as I’ve been conducting these studies for the advisory profession (more than 20 years), I have heard people say things like “the data is not relevant because those firms are bigger than mine” or “my numbers are better than everybody else’s, so I don’t even look at them.” If you don’t have a marker to evaluate how your client is performing against a goal—even your own self-created benchmark of success—you won’t know whether your decisions are leading to the right results. Benchmarking is not a score, but an indicator of whether you are on the right track or woefully off course.

The same is true in evaluating your performance as a manager. Consider whether you view your business as an asset to be actively managed, or merely as a vehicle for acquiring assets to fund your lifestyle. Once an advisory business begins adding complexity such as staff, a diverse client base and a broad offering, it is dangerous to be passive about the management of the enterprise.

Thankfully, a trend is emerging in the advisory business: managers who apply the same ethics, discipline and professionalism to their firm that top advisors apply to client service. During tough markets you earn your keep as an advisor. As this year’s study reveals, tough markets also separate the committed professional managers from the dabblers, and the top performing enterprises that attract better clients and better staff from firms toiling in mediocrity.