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.]