The client-service dynamic in the financial advisory business has changed and continues to evolve. With both market-driven changes in client expectations and advisors setting the bar higher for themselves, the reality is that managing client-service expectations has become more costly and more time-consuming.
At the same time, the more successful advisors are at servicing their clients, the more likely that the their practices increase in size. Practice growth in turn fuels a greater appetite for expanded capabilities, where advisors look to offer more services to their clients. These new service offerings have to be backed up by systems, technology and people who can execute them.
Advisors who have responded to the heightened client-service expectations and have worked to grow their practice have another obligation to consider-how to ensure that their practice has the continuity infrastructure that is critical in terms of staff and systems. With turnover, business disruptions and system breakdowns a reality in life, investing in these continuity measures is essential.
These three issues-increased client-service expectations, additional service offerings and continuity planning-add up to present an outsized time-management dilemma. The advisor has to decide: Which of these areas will I tackle on my own and which of these will require me to seek a qualified outside resource?
Addressing Inefficiencies In Practice Operations
Practice operations are the biggest source of inefficiency in the advisory business. Despite what one's intuition might tell you is at the root of this inefficiency, the real culprit is low advisor productivity. While the symptoms might be seen as the high overhead, including salaries, the "illness" is the fact that advisors spend too much time on operations and building infrastructure and not enough time on the revenue-generating portion of their business.
Consider the FPA Study on Financial Performance conducted by Moss Adams in 2005. The study revealed that the increase in average operating costs inside advisory practices outpaced the growth in revenues even during a time (2001-2004) when the top line for firms was growing quite nicely. The study also discovered another troubling statistic-overhead costs as a percentage of revenues increased as the size of the practice increased. The study went on to state that practices with under $250,000 of annual revenue pay on average 42% in overhead, while practices generating between $500,000 and $1 million per year pay 44%.
Experience would tell us that, when properly managed, overhead costs as a percentage of top-line revenues should actually decline when revenue is increasing. For firms in their growth cycle, determining justifiable levels of costs and managing them to match target margins can be supremely difficult.
The implication of all of this is that when advisors work to respond to the increased client-service expectations, their efforts are often rewarded by decreased profitability. That is clearly not an incentive that promotes healthy client-advisor relations. The problem begins as soon as the advisor adds one staff member to add depth to their service team, which begins the cycle of inflated overhead costs. For each salary they add, the more clients they must add to cover costs; the more clients they add, the more staff they must hire to support them.
Thus, The Rationale For Outsourcing
Time spent with clients and prospects is an irreplaceable investment for advisors who want to see their productivity grow. Other time expenditures can and should be reevaluated. Advisors need to determine what technology and outsourced solutions can be implemented to better leverage their time. Streamlining business operations, while containing overhead costs, is the real secret to profitable growth.
Let's look at the situation as it relates to client expectations. The accessibility of information has had the effect of ratcheting up clients' expectations for performance, services and accessibility of the advisor.
Everyone has gotten used to having a ton of data at their fingertips, and chances are clients will continue to want more, delivered faster. Monthly or quarterly reports by snail mail have been replaced by e-mail updates and client-service Web sites. Clients are more tuned in than ever to new investment product offerings, swings in the stock markets and information about how to tackle financial problems themselves. This, in turn, creates more work for the advisor in the nonrevenue generating aspects of their business and distracts them from doing what they got in the business to do.
This is why more and more financial planners are turning to outsourcing for many of the day-to-day activities of trading, reporting, compliance, client communications, Web site maintenance and execution of client paperwork administration.
The Right Partner
Believe it or not, the greatest challenge in finding a qualified outsourcing company parallels the main issue clients have in finding a qualified planner to whom they wish to outsource their financial planning. An outsource company and a financial planner must both take the time to listen and react to their client' goals and objectives. It is very important to have a clear understanding as to what each party is going to do. This may seem like common sense, but this lack of understanding undermines these relationships.
In evaluating an outsource partner, an advisor has to identify what the core value-added service will be in terms of his or her clients. Too many advisors make the mistake of defaulting to the "I've been doing business this way for years" approach to business decision-making. The challenge remains for advisors to revise their business infrastructure to respond to the trends and issues that the ever-evolving marketplace presents. By utilizing the right outsource partner, advisors can do what they do best and reap the rewards.
Marcy Burton is chief marketing officer at Partnervest Financial Group, a leading independent broker-dealer and RIA based in Santa Barbara, Calif. She is responsible for the recruitment of new advisors as well as their transition to an independent role. She has more than 20 years of executive experience in the financial industry.