First-aid hints to stop the bleeding and get your practice healthy again.

    Many one-and two-person financial practices have come to realize that the small practice is facing increasing difficulty in making a profit. This may be due to a variety of factors, but clearly the economies of scale are weighing heavily on the smaller practice.
    To remain competitive with larger firms, many fee-only and fee-based practices have found it necessary to reduce their fees, which impacts profitability. Commission-based advisors have seen their profits shrink from increasing broker/dealer haircuts (Gross Dealer Concession splits with advisors) and increasing service fees. With costs spiraling and fees pressured downward, smaller practices are facing little or no profit margin.
    The question is what can the small practice do to stop the bleeding, given substantially increased compliance requirements that add to the cost of doing business, along with the expense of satisfying the security of information (disaster recovery planning) mandated in Sarbanes-Oxley? Surprisingly, there may be at least two answers to this question.

Strength In Numbers!
    Have you ever wondered how broker/dealers can offer software at a substantial discount over what a single user might pay? The answer is leverage. It is far less expensive to license 500 users (on a per-user cost basis) than one user. Smaller firms that do not enjoy this pricing advantage may not be out of options, however. A number of firms have formed associations (also referred to as study groups) to leverage the combined strength of their respective businesses. Such groups can negotiate for lower prices on software, hardware, service oriented fees, Web site hosting and many, many other items. Such associations (or groups) may elect to negotiate for lower costs on errors & omissions insurance, health benefits, etc. In short, there are many reasons why this might be a good idea.
    One drawback is the cost of the association itself. Generally, to keep the association (or group) running, membership fees are necessary. This could reduce the bottom line. Therefore, in considering the advantages of joining a group of financial practices, it might be wise to study the specifics of what you gain versus what you have to pay to gain it.
    There may be other cost efficiencies associated with such groups. One member of the group might have staff specifically trained in a particular skill that other firms would like to outsource to or otherwise benefit from. As an example, perhaps one member decides to outsource its financial plan production. With the right financial planning software, collaboration easily could be accomplished. (Naviplan Central [], MoneyGuidePro []  and Advice America's AdvisorVision [] offer such a feature).
    Another member might have skills in the area of compliance reporting that could be made available to other members. This type of collaborative relationship could have the impact of strengthening all of its members while reducing overall costs. Often, such associations choose members that are geographically diverse to avoid the possibility of competition between firms.
    An example of this type of group is The Alpha Group ( A veritable think tank of some of the best known and most widely respected financial planners and investment industry experts comprise the membership of this austere group. According to their bylaws, "The Alpha Group is a membership of nationally recognized and respected investment consultants who believe that the financial planning process and perspective is a fundamental part of prudent investment management. Alpha Group members are dedicated to learning, sharing and expanding, at the very highest level, technical and professional knowledge regarding all aspects of individual portfolio management. Members support each other individually and collectively in areas of investment research, practice management and practice development, in order to further each member's professional and financial success."
    Another example of this type of group is the similarly named Zero Alpha Group ( According to one of its members, James E. Wilson, CFP,  CEO of JE Wilson Advisors in Columbia, S.C., "Our firm benefits by the best practices that we are exposed to, the relationships which provide us some depth and continual forward-looking strategic thinking. (As an organization)...we benchmark our financial data and track a number of metrics that prove helpful."
    Established groups such as the Alpha Group or the Zero Alpha Group may or may not be accepting new members. However, this does not stop a new group of firms forming a similar type organization. Beyond the other benefits, being able to point out the combined financial strength of the associated firms has marketing value.
    Many firms have turned to national associations to help provide them with the support they need. The Financial Planning Association ( offers a number of benefits to members, including discounts on insurance products, access to practice management tools and information, ability to participate in local chapter activities that might include continuing education credits, public outreach and public awareness programs and joint advertising opportunities. The National Association of Personal Financial Advisors ( embraces the fee-only advisor and offers benefits to that group of practitioners. The National Association of Insurance and Financial Advisors ( caters to the insurance profession. In short, there are many associations from which to choose. Even though there may be other compelling reasons to join an industry association (such as advocacy issues, relationships, etc.) your choice(s) should be aligned, at least in part, with your practice needs and how those choices might help reduce your costs overall.

Practice Cost Cutting!
    Cost-cutting techniques usually involve pain. It may be painful to reduce your staff size or the size of your office. Often firm principals delay making these decisions because they are so painful. However, it may not be necessary to take drastic steps until you have exhausted all the minor steps first.
    One interesting alternative is office ownership. Owning your own office instead of leasing office space can provide financial benefits if structured properly. A practice might purchase an existing building or build a new one. One consideration is to build a space that can be divided into two or more "suites" of offices. These, in turn, could be leased out to provide an income stream that covers your mortgage payment, taxes and insurance costs. Thus, your practice now has eliminated one of the top three expenses, office lease or rental. Yes, there may be the financial commitment of a down payment and the potential building upkeep costs, but the benefits could easily outstrip those costs. Some practitioners have considered the benefits of post-retirement income from leasing out the entire building at some point (presumably after the mortgage has been paid off or substantially reduced).
    Another alternative is using an executive suite type of office arrangement. Companies offer executive suite services such as receptionist service, mail handling and conference room rentals that, when taken in total, might be substantially less expensive than trying to run all of that yourself. Office operations, in this example, could be moved to a less expensive location or a home office.
    Some practitioners have retained some staff on a virtual or outsourced basis. This is where the employee works on a computer out of their home and may only go "to the office" occasionally. This works well for specific functions, such as financial plan processing or computer-based illustrations. Though not an ideal solution for all; this alternative can substantially reduce office overhead expense. One word of caution, though, is that because services are offered typically on an a la carte list, costs can quickly spiral upwards if not closely monitored.
    There is also the move by some smaller practices to merge with others in order to benefit from the economies of scale. Sharing office expense or creating revenue sharing arrangements can help smooth out income and costs per advisor should be less overall. (See the March 2005 of Financial Advisor, "Merging Options," by David L. Lawrence)

Determining Staff Size
    There is a school of thought in the profession that suggests you should only hire additional staff when the workload demands it, rather than hiring an employee in anticipation of increased business. Often, practitioners feel that if they hired someone and as a result had more time in their schedule, they could devote that time to increasing their client base. The reality may be that the same amount of business is processed and the free time for the advisor becomes just that, free time. But now, that advisor is faced with increased costs. Increasing net profit requires either an increase in net revenue or a decrease in gross expenses. If the practitioner can positively impact both areas of cash flow at the same time, the practice stands the best chance of overcoming the profit crunch. 

David Lawrence is a practice efficiency consultant and is President of David Lawrence and Associates, a practice consulting firm based in Lutz, Fla. (