Financial advisors may be great financial guides for their clients, but that doesn’t mean they’re good business people. Nevertheless, in the independent channel, an advisor’s work includes running a business. This becomes particularly evident when we look at numbers.
Beyond revenue, many advisors don’t spend enough time understanding the profits of their firms. That’s why in our third workshop, part of Commonwealth’s Power in Practice coaching program, the focus is on money. Specifically, the workshop addresses analysis of the advisor’s book of clients; ongoing production enhancement; analysis of the advisor’s fee structure; analysis of the firm’s financials; and valuation of the practice itself.
Analysis of the Advisor’s Book of Clients
Advisors understand the concept of the 80/20 rule, but it is only when they see their revenue by household that they begin to internalize it. That internalization is the difference between intellectually understanding and doing something with the data and information gleaned.
What Your Peers Are Reading
In the workshop, the questions asked require advisors to calculate:
- The number of households they have
- The average revenue per household
- The percentage of households that account for 80% of revenue
- The households that account for 80% of revenue that do not get enough time and attention
- The households that account for 20% of revenue that get excessive time and attention
- The households that account for 20% of revenue that the advisor believes he or she has to keep because of some existing relationship
- The households that are of great value to the firm because they generate referrals or have some specific contribution, regardless of monetary reward
- The five to 10 clients whom they most want to replicate
This analysis makes the advisor aware of the specific dynamics of his or her book. At this stage in the workshop, however, understanding the makeup of the book does not incite an advisor to consider taking action. Perhaps this is because of the personal relationships that the advisor has with clients, a sense of moral obligation, or not knowing what to do with clients who may no longer be a good fit for the firm. Many advisors keep all clients until they realize that they actually lose money on some of them—even then, an advisor’s personal value system takes precedence over everything else. Full appreciation of the importance of book analysis kicks in when individual advisors benchmark their fees and consequently understand their gross and operating profit margins.
Ongoing Production Enhancement
From the start of the program, participants apply the 20-point system to help them stay focused on the activities most likely to generate revenue (See “Power in Practice: A Coaching Program to Last a Career,” Investment Advisor, May 2012). This system may seem simple, but its simplicity is what makes it so powerful.
In the workshop, short-term versus long-term activity is articulated. Short-term activity is defined as actions that are likely to be associated with new revenue coming in the next 12 months. Long-term activity is defined as actions likely to yield revenue after two to three years of priming. Creating powerful strategic alliances, purchasing a practice, growing a junior advisor, and transitioning from commissions to fees fall into the long-term category.
One approach is not more right or wrong than the other. A common problem is that an advisor may get overly excited about the prospect of a particular long-term effort coming to fruition. In his or her excitement, the advisor may focus on the long-term effort exclusively and ignore short-term activity, only to have the single long-term effort blow up at the last minute. The perfect example is when an advisor is consumed with the hope of purchasing a practice that would double his or her revenue. In the end, the seller decides on another advisor. The point: Advisors need to pursue both short- and long-term revenue-generating activities.
Analysis of the Advisor’s Fee Structure
Another component of the monetary analysis is a review of existing fee schedules and comparing them with industry benchmarks. Some advisors learn that they charge significantly more or less than the industry average. Some may learn that they are the lowest-cost provider, but that they are also the provider of the highest-quality, most comprehensive services. In short, they may never have stopped to consider whether their fees were competitive.
For some advisors, the reason for not adopting a competitive fee structure is that they simply fear having a conversation about fees with clients. Whether it is a matter of changing their fees for managing money, introducing a retainer, or adding a planning fee or hourly fee, role-playing the conversation can help advisors confront their anxieties.