As independent business owners, financial advisors face unique challenges as they seek to balance the increasing needs of their clients with the demands of running a profitable and efficient practice. With the advent of the fiduciary era, financial advisors have renewed their focus on business management techniques that seek to maximize productivity within new pricing models and economic realities. And amidst this new reality is a sense that by viewing an advisory business through strategic, objective lenses, financial advisors are better positioned to make sound decisions and grow sustainably over the long term.
Central to this paradigm is the need to approach the management of a financial advisory firm through a disciplined process creating realistic and measurable goals based on an agreed-to plan. Five core areas of business management form the foundation of a successful advisory business and are integral to its long-term health:
Business development, the most important function of an advisory firm, is consistently cited by financial advisors as one of the biggest areas for potential improvement. According to InvestmentNews’ 2016 Financial Performance Study, 54% of firms failed to meet their growth goals due primarily to poor marketing and business development methods. Relying solely on market growth to drive top-line revenue is unreliable and unsustainable over the long term.
Marketing an independent advisory firm should be a function of all team members, regardless of their position in the firm, and based on an annual marketing plan with explicit revenue and growth goals. Encompassing brand messaging, sales and collateral materials, and a firm’s digital footprint (website, social media, etc.), marketing needs to be seamlessly designed in a systematic way that is repeatable and scalable. Allocating a lead advisor or principal’s time to business development and client acquisition is critical to the marketing process, and all resources should be aligned to allow for this to happen.
Taking a holistic wealth management approach to relationship management also can reap large dividends to an advisor’s practice versus merely providing investment management or financial planning services. Studies have shown that one of the largest advantages to providing comprehensive wealth management services is asset retention and an opportunity to strengthen the client relationship through increased wallet share. And that inevitably leads to increased business. The Certified Wealth Strategist® program and designation provide a concrete approach to offering comprehensive services through its 13 Wealth Management Principles.
Focusing only on top-line revenue growth without considering bottom-line profitability is an unfortunate reality in many independent advisory firms and prohibits many organizations from reaching their full potential. In their 2015 research study “People and Pay,” FA Insight found that overhead expenses dropped three points to 33.6% in 2014 compared to 2013. In combination with a 14% revenue growth, this drop in overhead caused a four-percentage-point increase in median profit margin to 26.1% in 2014.
Aligning technology, processes and systems yields the biggest efficiency rewards for an advisory firm and can dramatically improve how well it operates. Beginning with a customer relationship management (CRM) system as the core of your technology infrastructure, one should document all the key processes within their firm. By doing so, they can build workflows and assign corresponding tasks to specific team members, thereby avoiding errors and delays. The end result is a more consistent client experience, and one that can be leveraged for business development.
By far, the biggest asset of an independent financial advisory firm is its people, and considering team members to be human capital sets the right philosophical tone; however, human capital is the area of practice management in which advisors typically need the most help. Most advisors did not enter the business to manage people; yet people management affects every aspect of a financial firm and directly influences client satisfaction. In fact, according to a recent InvestmentNews study, approximately 77 cents of every dollar of expense can be traced back to human capital, and human capital represents the largest expense category for independent firms.
Effectively managing people as human capital begins with a sound process for identifying, screening, hiring and onboarding team members and extends through compensation design, career pathing and professional development. Taking the long view of organizational design helps ensure the right associates are being added to, or subtracted from, the firm at the right time and aids in capacity planning. Remember, the goal of team building is to allow the lead advisor or principal an optimal amount of time to concentrate on business development activities.
Any good business management exercise begins with a plan, and central to high-performing advisory firms is the strategic planning process and annual business plan. This living document should consistently be leveraged in the decision-making process. Providing a look back and a look forward, the business plan should first review the previous year’s financial and business results and use those results to build future goals.
Successfully managing an advisory business begins with a solid understanding of the financial indicators—both revenue and expense—that drive firm performance. Ratios and metrics such as revenue per principal, advisor time spend, and cost per client, among others, provide objective guideposts against which to measure the health of the firm. Building an income statement and a balance sheet for the firm and making management decisions that align with them provides insight into the firm’s performance and allows for tactical adjustments to the business plan based on financial results. Moreover, having a formal disaster and emergency management plan helps ensure the firm can weather any short-term environmental disruptions in its ability to service clients.
Consistently building an advisory firm with an eye toward exit planning provides principals with a framework in which to make strategic decisions, whether related to continuity, succession or inorganic growth (mergers and acquisitions). For the solo advisor, basic continuity planning helps to emphasize the sustainability of the firm during an owner’s unforeseen absence. As good business practice, solo advisors need to identify possible continuity partners who can step in and run the business if the owner is unable to do so, given that the majority—if not all—of a firm’s revenue is generated by the lead advisor/principal. Longer term, these continuity partners can become part of your succession plan. Ultimately, after having diligently worked to build, grow and manage a successful firm, the owner will have created tremendous enterprise value for their practice and can extract that value to its maximum potential at the time of their choosing.
Tools and Resources to Help You Get Started
Your dedicated business consultant has both the resources and expertise to be a strategic partner as you build your ideal practice. Pentameter™ provides a framework through which you can manage all aspects of your business, and your business consultant can act as an accountability partner to help you stay the course.
About Cetera® Advisors
Cetera Advisors LLC is an independent broker-dealer and registered investment adviser (RIA) firm offering efficient and convenient access to an extensive network of people, products and services to financial professionals. As part of Cetera Financial Group®, a leading network of independent retail broker-dealers, the firm is able to offer all the benefits of a large, well-capitalized broker-dealer, including innovative technology, leading wealth management and advisory platforms, and comprehensive broker-dealer and RIA services, with the personal relationships often found only at a boutique firm.
Cetera Advisors is a member of the Securities Investor Protection Corporation (SIPC) and a member of the Financial Industry Regulatory Authority, Inc. (FINRA). For more information, visit ceteraadvisors.com.