If your crowd of prospective clients has trickled to nary a phone call or a few disgruntled customers are making a beeline for the door or your assets are hemorrhaging, you're not alone. After a decade of remarkable and often unplanned success, many advisory firms are feeling the triple pinch of a volatile stock market, a rising tide of investor pessimism and a softening economy. Some are less prepared than others to confront the cold, hard reality of actually having to build business and manage expenses for the first time in 10 years.
It's a shock for some advisors, who experienced sizzling growth with little effort during the long-running bull market of the 1990s. In fact, the noise and spectacle of the market's tremendous performance may have hidden many advisors' inefficiencies, notably their failure to do strategic planning or even sound bottom-line financial planning for their own firms. Now, it's becoming clear that business as usual and seat-of-the-pants management, which passed for success as recently as 1999, isn't working anymore.
"I don't think that anyone can afford the status quo these days," says Karen Spero, founder and chairman of the 13-person advisory firm Spero-Smith Investment Advisers Inc. in Cleveland. "The days of clients lining up at your office are over, at least for now. You're either getting bigger or you're getting smaller, and if you're planning to get bigger, it may
mean having to allocate some part of your income to a marketing budget to attract clients."
Firms that have grown with little or no idea of how much it actually costs them to work with a client, add staff or ramp up operations now are finding themselves in the unenviable position of creating a strategic vision and marketing plan at the very time their bottom lines are shrinking.
Make no mistake, they are shrinking. On average, assets at advisory firms across the country fell 13% during the first four months of the year and are down as much as 30% to 40% at some firms, according to research conducted by Prince & Associates.
At the same time, some advisors are not only out of practice when it comes to marketing their services, they're also not really even practiced at communicating with clients in a meaningful way. Less than 22% of advisors used a recent market downturn to call and reassure clients, despite the fact that those who did wound up adding assets to client accounts.
The good news? Advisors who have rolled up their sleeves to do for their firms what they routinely do for clients are finding that their strategy is flexible enough to not only weather a potentially lengthy market downturn, but also to create the kind of shop that both they and clients desire.
Recently, the best and brightest advisors, along with leading consultants and number crunchers, shared their insights with Financial Advisor about what is working for advisory firms interested in reshaping their companies into profitable businesses capable of responding to and even anticipating change. Leading researchers are finding the keys to running a successful advisory shop, and they include the size of your firm, the type of client with whom you work, how you charge and the outsourcing team you put together to take care of needs such as estate planning and taxes. First, let's look at what your own firm's numbers can tell you about the viability of your business.
Beyond The Bottom Line
When it comes to evaluating profitability, there's only one place to start: your firm's bottom line. While some advisors are great at keeping track of gross revenue-the checks that actually roll in the door-that's only a small piece of a firm's overall financial picture and how much bang you're getting for your expense bucks.
"Most planners aren't trained to manage their own businesses," says Deena Katz, a principal with Evensky, Brown & Katz in Coral Gables, Fla. "Many planners start out on their own, and the next thing they know, they're managing an office and people, and they're not good at it. Many don't use basic tools, like cost analysis. So they can't tell you how much it costs them per client to deliver services, employ a staff or rent office space. There's no other way to tell if you're earning $300 a year from a client or $3,500," says Katz.
If you don't know how much you're earning per client, how do you know if you're working with the right kind of investors or even pricing your services correctly? More on pricing and the evolution it's undergoing later. For now, it's important to determine how much it's costing you to bring in revenue. Once you find those numbers, you can determine whether your costs and revenue are going up or down.
As for advisors' bottom lines, the news isn't good. Top-line success has covered up many management miscues. Mark Tibergien, a principal with Moss Adams Advisory Services in Seattle, has been studying the profitability of planning shops for more than a decade. In that time, he's seen "the cost of doing business at a typical advisory practice go up-a lot-while the productivity of firms continues going down."
The problem? Not taking their business seriously enough to want to measure its costs and profits. Tibergien should know. He's done business valuations on more than 400 planning shops in the past several years. "What we find is that there are a lot of good firms in terms of client satisfaction, but they don't devote much attention to their businesses. As a result, they struggle with the same problems year in and year out."
Some of the typical advisor complaints Tibergien hears include:
"I don't have time to manage my office and service my clients."
"I can't afford to add staff."
"I don't have time to bring in new clients and still serve existing ones."
"If I look at firms that tell me they're drowning in opportunity, I know there is something fundamentally wrong," Tibergien says. "I ask them: 'If business is so good, why are you complaining so much?' I think planners have been able to exist in a lifestyle type of enterprise for years, and many will continue that. I'm OK with it as long as they're building value and a going concern. If they're not doing the things that improve the financial health of their business and their own personal financial health, then I think they have a credibility problem with clients."
When a firm's financial picture is foggy, there are no simple answers. Adding staff just to add bodies isn't the answer, any more than buying pricey technology is. Instead, the solution comes from evaluating a series of fairly straightforward measures that can help you see where your firm has been, where it is now and where it is going. The top six ratios that Tibergien recommends advisors compute and compare with industry benchmarks include: clients to staff, clients to principals, revenue to principal, revenue to professionals, revenue to clients and operating profits to clients.
Tibergien, who conducts an annual benchmarking study on advisors' compensation for the Financial Planning Association, says that what a firm deems healthy depends on its business model. But growing evidence shows that bigger firms are more profitable. The 2001 Moss Adams compensation survey found that sole practitioners brought in $177,218 to $515,780 in annual revenue, while multiplanner firms brought in $661,194 to $1.7 million. Broken down further, the top-tier multipartner firms averaged $5,708 in revenue per client, compared with sole practitioners' top rate of $2,634 per client. Average sole practitioners brought in just $1,458 in revenues per client, compared with average multipartner firms' revenue per client of $2,683.
Not surprisingly, the multiplanner approach also yields significantly more income for principals, the Moss Adams survey finds. Partners at multiplanner firms raked in an average of $162,500 to $535,363 in compensation last year, while sole practitioners averaged $90,000 to $312,000.
The amount of advisors' take-home pay depends not only on how closely they manage their bottom lines, but also how wealthy their clients are and how much competition is in their area. "Planners who say there isn't competition should be capturing every asset in their area," Tibergien says. "Chances are, there is competition just about everywhere, and it's very intense in some areas of the country."
How do good multiplanner shops maximize profits? Moss Adams finds that common traits include:
Keeping overhead to no more than 30% of revenue.
Capping compensation expenses at 33% of revenue.
Creating effective incentive-compensation plans for staff.
Building multiperson administrative and professional staff, including paraplanners, who do extensive client work but have limited client contact.
Hiring a dedicated business manager.
Although not all advisors want to give up their solo practices, many are deciding that extra revenue and the benefits of creating going-concern businesses are worth the tradeoff. "Sometimes, the starting point for any analysis you do should be: 'How much do I want to make?'" Spero says bluntly.
Defining your ideal compensation gives you a concrete number you can work from as you pull together a plan to measure your expenses and revenue and decide what kind of firm you want to build.
The Shape Of Success
What does the prototype of a profitable financial advisory firm look like?
The growing body of research-both quantitative and qualitative-points to a client-focused team approach with a greater emphasis on fees, rather than commissions.
A recent report from Boston-based Cerulli Associates finds one way advisors can achieve a marketing advantage in the next five years and attract higher-end clients is to build a team of experienced CPAs, estate planners, tax attorneys, trust officers and investment managers that they can offer to their clients in a seamless package.
Not all "teammates" should be employees. In fact, many, if not most, functions can be outsourced. But reliable, state-of-the-art services should be available to clients who need them, and such services are imperative for high-net-worth investors, says Shealyn McGuire, the author of the Cerulli report. To build the team, planners need to get out from under the day-to-day operations that often consume them and begin creating and putting in place a strategic vision that puts them ahead of other competitors, McGuire adds.
A client-focused approach builds relationships and meaningful communication with clients in good times and bad. Although almost all advisors believe they're client-centered, less than 14% actually are, according to a new survey from the consulting firm of CEG Worldwide.
Instead, advisors spend their time focused on investment strategy, risk analysis and portfolio construction. The purpose of being client-centered isn't to minimize professional investment services, but to create or outsource excellent, efficient systems and services that allow you to devote time to communicating with clients and addressing their needs.
When was the last time you picked up the phone to see how clients are faring? Or asked them if they have any other assets they want you to manage? Doing so creates an opportunity for collecting assets from a variety of sources, including self-directed accounts clients may now want their advisor to manage for them.
Making the client your priority really does pay off. M. Anthony Greene, chairman and chief executive officer of Raymond James Financial Services Inc., headquartered in St. Petersburg, Fla., says these days, advisors who rely primarily on commission-based business are finding revenue down significantly more than those who use an asset-based fee-driven model. "If revenues are down 12% to 15% for those planners who use fee-based asset management, it's probably down twice as much for commission-based planners."
Greene says there are exceptions to both rules, but that in general, commission-based practices are being impacted more severely.
Why are fee-based firms faring better in the down market? "I believe fees are more needs-based and relationship-based driven," Greene says. "When you charge a fee, there is no incentive to do anything but work in the client's best interest. One of the things advisors have to do today is become the client's most trusted advisor, the first person they come to for advice on all issues, financial or otherwise. When that happens, compensation becomes transparent, and the most important issue is the planning relationship."
When it comes to weathering this market, planning firms aren't really that different from broker-dealers, Greene says. "It's a matter of controlling costs and finding and cutting the fat in our systems after years of explosive growth. Planners are probably better at producing revenues than they are at controlling costs. That needs to change," Greene says.
Cliff Oberlin, who launched his second brokerage firm, Oberlin Financial Corp., in Bryan, Ohio, in March 2000, says getting advisors to focus on expenses can be "like pulling teeth." He encourages the advisors with whom he works to hire or appoint someone at their firms to create budgets, track actual numbers and be accountable for expenditures, which frees principals to concentrate on client relationships.
"The business processes and procedures have to be institutionalized to be meaningful," Tibergien says.
While the industry can point to various business practices that can make or break an advisor's firm, other financial services executives are looking for the personality traits and values that advisors have that create success. "We're studying what makes advisors successful, from a human-engineering perspective," says Jeffrey R. Lauterbach, president and CEO of The Capital Trust Co. of Delaware.
Lauterbach has contracted with behavioral analysts, The Wendling Group and Target Training International, to administer and analyze two surveys that have been sent to more than 1,800 advisors, CPAs and attorneys. "We believe that we'll find such traits, and when we do, we can use them to help planners modify and evolve their behavior," Lauterbach says.
Preliminary results of the study show that client relationships, forward-looking planning and entrepreneurial spirit are all valuable attributes in creating profitable planning practices. The study also found that female advisors value knowledge, continuing education and client rapport more than male advisors, which may lead to women capturing a greater share of the planning market in the years ahead, behavioral analyst James Wendling predicts.
In the meantime, the group is conducting interviews to flesh out the data it's collected and plans to release its findings to advisors this fall. "Our goal is to get good data and give it to the industry, because if advisors aren't profitable, none of us will be successful," Lauterbach says.
When confronted with the problems of practice management, many advisors react viscerally, saying they are in business to serve their clients, not to make money. But to consultants like Tibergien, that explanation is starting to sound like a hollow excuse.
To be able to provide meaningful services to their clients, advisory firms need to be financially viable. Unfortunately, many advisors are discovering this belatedly, as a result of this year's downturn in the business. The fact that many firms are surviving this year without sound business management practices is an indication of their intrinsic financial health.
It's not too late to embrace a more professional approach to practice management. The firms that do so are far more likely not only to prosper, but also to service more clients at a higher level in the future. And they'll be the winners over the next decade.
It May Be Time To 'Fire' Clients
By Raymond Fazzi
Building a client base is one of the first orders of business for any financial advisor.
But many advisors don't recognize there is a threshold at which the growth should stop, says Steve Gresham, formerly of The Gresham Co. LLC financial services consulting firm. Gresham, who recently was named chief marketing officer of Phoenix Wealth Management based in Hartford, Conn., spoke on the topic at a June conference of the Institute for Certified Investment Management Consultants.
Advisors often have a reason to avoid this issue: It usually involves "firing" clients, he says. That, he adds, is a concept that many advisors have a hard time dealing with-particularly at a time rife with competition and uncertain prospects.
Much of the profession, he says, is built on the "Statue of Liberty" model of operations. "Bring us your poor, your tired, your huddled masses-anybody that has even a scratch opportunity to create a dollar in the future," he says. "We've got this demographic wave, the boomer generation. The industry has been raining clients-why send them away? And the model is compelling. That's how everyone grew up."
What this formula fails to consider is the strain that large client loads place on quality of service, Gresham says. One big firm, for example, recently kept track of its customer calls and found that calls from small clients outnumbered those from large clients by a ratio of 17-to-1.
The question a business has to ask itself, Gresham says, is whether time would be better spent focusing on the larger, more profitable client. If the answer is yes, he says, the smaller client must be let go. Or it could be a case of dropping larger-asset clients who drag down the business because of heavy service demands or other reasons, he says.
"It's not just small clients. It's someone who doesn't fit in the practice," he says. "We don't mean anything negative about these people ... The question is whether or not you're willing to take steps to eliminate them."
Taking stock of a client base first requires considering what type of business an advisor wants to run, he says. Among the considerations are how much time an advisor wants to devote to the business, what products he or she wants to offer and what level of service to provide.
Advisors who try to identify "suboptimal" clients need to consider gross revenue and assets per account, a client's growth potential and total wealth prospects and how easy the client is to work with. "The test is whether they're a lot of work individually," he says. "One bad client could take a disproportionate amount of your time."
The process may require a significant change in thinking, he notes. As an example, Gresham cites physicians-normally thought of as a valued client group. Although this can be the case, there are also some downsides to consider, he says. "The problem with physicians is they come out of school, they have more loans than assets," he says. A first-year resident, he says, may have an annual salary of $27,000 to $35,000, and they also may have loans three or four times that amount.
Another potential trap is the "legacy" client who is in line to inherit a substantial amount of money. "The problem is the parents never die ... so the entire concept of waiting for the entire legacy to be worth something goes on and on past (the client's) retirement time."
Once suboptimal clients are identified, how should an advisor drop them? Depending on the business and the type of client being fired, it could range from a letter to a face-to-face meeting, he says. If it's a case of letting many clients go, mailings may be the best route, he says.
"The 'little buyer' letter is still around ... (saying), 'You just don't fit for whatever reason' or 'We've found a better place for you to go,'" he says. "Even though it is probably not the best way to do it, it is an efficient use of your time. The mistake is in small communities to just fire the people in bulk, because that's just dumb," he says. Some clients-those with a history with the firm, for example-require either a phone call or a meeting to explain the parting of ways, he says.
The trickiest goodbyes, he says, involve clients who've become dependent on an advisor for more than financial advice. "It's very common to have a client get older ... and now you're the only person they will talk to," he says. "This is one of the very, very difficult clients to deal with because where else are they going to go?"