First-aid hints to stop the bleeding and get your practice healthy again.
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 [www.naviplancentral.com], MoneyGuidePro
[www.pietech.com] and Advice America's AdvisorVision
[www.adviceamerica.com] 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
(www.alphagroup.org). 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 (www.zeroalphagroup.com). 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 (www.fpanet.org) 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
(www.napfa.org) embraces the fee-only advisor and offers benefits to
that group of practitioners. The National Association of Insurance and
Financial Advisors (www.naifa.org) 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.
(www.efficientpractice.com)