Many topics can create excited and hopeful conversations among financial advisors. Process improvement is not one of them.
In fact, this topic is more likely to engender agitated discussion, conjuring up images of dreaded corporate bureaucracy. Common in large companies, this tortured way of doing business often sucks the life out of those whose passion is working with clients.
Ironically, an aversion to structure may be one reason that many practitioners find themselves spending less time engaged with clients or developing business. “Mission Possible III: Strategies to Sustain Growth in Challenging Times,” an independent study commissioned by Pershing Advisor Solutions and developed by independent consultant FA Insight, found that the average advisor was devoting just 50% of his or her time to client service and business development, with the remainder spent on what many regard as non-productive work. Of course, some time away from clients includes continuing education, managing people and meeting with partners, but the point is that as advisory firms grow, so too does organizational complexity.
“Mission Possible III” also reported that just 41% of firms surveyed for the study said they document all major business-to-client processes, and just 32% were consistent in the implementation of the processes they did have in place. Yet growing advisory businesses are fluid, adding new people, investing in new technology, broadening services and pursuing new markets. Many have more than one location. This level of complexity requires active management of processes. Whether or not you desire more regimentation in how you do business, the reality is that growth-oriented advisory firms will hit a wall unless they design a pathway to greater efficiency and effectiveness.
The wall is just around the corner for many growing advisory firms. Witness the rising overhead expense ratio for the average advisory business. When the market crashed, it was understandable that expenses as a percentage of revenue jumped, especially if firms were not able to cut major costs like salaries. Now that most advisors are seeing their top line grow, however, they should expect expenses as a percentage of revenue to decline. For the average firm, this expense ratio has hung steady in the 40% range, meaning that they spend 40 cents of every dollar of revenue on overhead. Optimally, that ratio should be closer to 35% or less.
Is a 5% variance material, you ask? Just multiply the percentage by your own revenue to measure the financial impact. If you are generating $1 million of gross, that impact would be $50,000 a year. While some advisors may regard $50,000 as a rounding error, many firms have a much greater negative variance, with greater consequences.
The decision to improve workflow is not based on economics alone. Other drivers include a desire to be more consistent, to improve the client experience and to enhance efficiency. That latter point can be a critical element in employee satisfaction. If poorly managed, these elements ultimately will create a negative economic impact.
Many advisors mistakenly believe that customizing their approach for each client ensures more fulfilled clients. The risk, of course, is that things will fall through the cracks because the variety of approaches is confusing to employees and subject to error whenever anybody is busy. Further, processes that are neither standardized nor systematized also tend to be more manual, consuming more time and energy.