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Practice Management > Building Your Business

Don't Run Your Practice Like a Lemonade Stand, Consultant Says

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You can’t run an advisory practice like a lemonade stand and expect to be profitable. Advisors who are starting out need to operate their practices as real businesses. But that isn’t what most do. Result? Instead of turning a meaningful profit, they’re “scrambling to keep up” with growth, argues Jim Palumbo, principal and chief development officer of Dynamic Wealth Advisors, in an interview with ThinkAdvisor.

Advisors are positioned to have “some of the highest profit margins of any professional services business,” but when they reach a certain inflection point, they stop growing, contends Palumbo.

Solution? Outsource back-office operations — much more cost-effective than handling it all yourself, says Palumbo, whose 100% cloud-based RIA (“We don’t own a file cabinet or a stapler!”) offers back office, middle office and asset management services, plus practice development.

Supporting 72 advisors and firms, the Phoenix-based company has approximately $2.1 billion in assets under administration.

Palumbo, 58, who previously built his own RIA ultimately managing more than $100 million in assets, merged the firm with Dynamic — of which he was a client — about 18 months ago.

ThinkAdvisor recently interviewed the IAR, speaking by phone from McAllen, Texas. The Detroit native’s essential message: Advisors who treat their practices like “a personal checking account” will fall far short of what he describes as the profession’s “sky’s the limit” potential.

Here are highlights of our conversation:

THINKADVISOR:  What’s the biggest challenge facing beginning financial advisors today?

JIM PALUMBO: Growth and profitability. When you’re operating without a profit, you’re always scrambling to keep up — so you’re not doing a good job for your clients. A lot of young and starting-out advisors will tell you the biggest challenge is that they don’t know where to find clients. But that’s a, sort of, false problem. All that takes is experience and time. The real challenge is growth.

Aren’t the advisors growing?

The ones that are doing a good job for their clients are growing, but they’re unable to manage that growth and also create capacity for continued growth. There’s tremendous growth on the fee-based side, but the good advisors are having trouble keeping up with it.

Why is that?

They don’t think of their practice as a business. They treat it like their personal checking account. They’re not setting goals other than [client] headcount. You can’t treat your practice like it’s a lemonade stand, just collecting money and spending it [right away]. You need to set [a number of] goals and measure gross revenue and overhead [etc.]

How much profit can an advisor make, realistically?

Advisors are well positioned to have some of the highest profit margins of any professional services business. If they manage to keep overhead to around 20%, that’s an 80% gross profit margin for a solo practitioner. Pretty incredible. If they deliver high-quality advice and guidance, the sky’s the limit for their practice.

At what point do beginning advisors often stop growing?

When they have to go to the next step: adding back-office support. But because they aren’t making a profit, they’re trying to nickel-and-dime it. They feel they can’t hire someone or get the right outsource service provider. But by outsourcing with cloud services, you’re able to gain scale. You don’t have to build it all on your own — you’re just using a fraction of someone else’s platform.

What else goes into being a profitable advisor?

A good cash flow. As you grow, you’re going to need different software, a performance-recording program [etc.]. If you’re not operating on a good margin, you won’t be able to afford those things — and then you’ll begin to skimp. I see practices reaching this inflection point and stop growing. Sometimes they go backward. They’re not able to invest back into the business and deliver good reporting and good advice.

In your first career, you worked for a relief and development organization, which founded Times Square Church in New York City. You also taught money management and personal finance. Was that part of helping people in recovery?

Yes. I taught people who had been suffering from life-controlling problems, like drug or alcohol addiction, who wanted to make a new start in life. They needed to be able to make a living and manage the personal finance part, which is the point where recovery always falls apart — how to make money and handle it responsibly. In the investment advisory business, you’re also trying to help people improve the quality of their lives. And in so doing, we’re compensated nicely for it.

What does the financial advisor of the future look like?

They’ll have a smaller physical [office] footprint. Sometimes they won’t have an office at all. Or it might be a shared office or a shared suite. They’ll have less equipment, less physical staff. Our [company] is [paperless] except for custodians’ account onboarding [paperwork], where a signature is required to be scanned and sent in. But little by little, that’s going away, too. Within 12 months, I think we’ll see all the major custodians offering digital client onboarding without using a robo.

Where do robo-advisors fit into the big picture of financial advice?

I’m a bit of a contrarian when it comes to the robos. I don’t believe they’re a threat at all. We’re going to be absorbing that technology. It’s not putting us out of business, and I don’t believe it brings fee compression either. I believe it’s just the opposite. People with significant money want someone to help and guide them [vs. using an automated system]. But we’re going to see the typical advisory firm have a lot of robo features — simple functions, like online account management. That’s not a hallmark of the independent advisor of today — but in five or 10 years, I believe it will be.

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