"Business owners have only so many levers they can pull to drive profitability," Kalbaugh maintains. "Labor and real estate comprise the majority of your business expenses, so focus on [staff] productivity."
One way to improve productivity is to clarify goals and shift compensation to variable comp and align it with the firm's goals. "Having the ability to reinvest in your firm" is critical, Kalbaugh says. "The more robust your practice, the easier to adjust your infrastructure and take care of clients while still growing." It's also one reason his team of business consultants sits down with advisors right after they move to LPL, and occasionally before they do.
Importance Of Succession Plans
If LPL's team of business and marketing consultants finds a receptive audience among advisors for most of their services, there is an elephant in the living room that Kalbaugh calls "alarming." It's called succession planning.
Procrastination, coupled with an aversion to facing up to one's own mortality, are driving forces behind this gaping hole in so many advisors' own personal financial plans. That said, it's a major challenge, not just for the entire independent advisor business, but also for the vast majority of the five million small businesses in America.
Speaking at the Financial Services Institute conference last January, Bruton discussed this thorny problem with other broker-dealer executives and cited an industrywide survey LPL conducted with FP Transitions. The survey found that 4% of advisors in the U.S. have done a valuation and only 10% have created a formal succession plan. "With the fall in the housing market, their firm is the biggest asset for many advisors," he says.
Surveys of small business owners across all industries yield similar results, so it's an issue advisors frequently face with clients.
Bruton also believes that succession strategies ideally should entail planning today for retirement in 20 years. Advisors need to start asking themselves serious questions long before they start thinking about succession, much less a sale or merger. All too often, Bruton notes that advisors wait until they get ill or die or some other event forces them into retirement, and then the firm the advisor has spent a lifetime building gets sold at a bargain-basement price.
"Every year we see a few tragedies," Kalbaugh says. Advisors spend a "ton of time taking care of their clients. One of the best ways to take care of them is through a succession plan. "
To address this problem, LPL entered a partnership with FP Transitions that allows advisors to do quarterly valuations. Performing a valuation for the first time can expose a big gap between perception and reality. "Sometimes the valuation is a rude awakening," Kalbaugh says, adding that once an advisor knows what factors determine a valuation he or she can address the weaknesses.
A Mosaic Of Information
At the end of the day, most clients go to advisors for help with their investments. At the same time, the advisors who team up with LPL don't have to use its research. And its research team thinks that this freedom might just be a virtue.
The world we knew two years ago, when the centralized decisions of Wall Street could bring financial chaos, has created skepticism among advisors on the ground, maybe even toward their own firms' investment ideas. Yet LPL maintains the meltdown has presented it with an opportunity to show that it, too, was independent all along-that when Wall Street imploded, the firm was outside the blast radius, living off the fat of its own independent investment research. And since LPL's advisors know they don't have to listen to the company, ironically, that means they might actually listen, says Burt White, the firm's managing director of research and its chief investment officer.