Cornerstones of the Professional Practice - Business Management for Financial Advisers

As elite firms have discovered, building an organization that has the professional capacity to help manage relationships and extend the enterprise often brings more reward than pain. Without growth, it’s almost impossible to provide a career path for staff members.

Without a career path, it’s almost impossible to recruit, develop and retain excellent staff. And without excellent staff, it’s almost impossible to build capacity and create operating leverage in a practice. Ensemble models provide an opportunity to do all of this: handle growth, offer career development and create leverage — the cornerstones of every professional practice.

Growing Concerns

Of course, there are legitimate concerns about whether growth can work for you, such as:

  • Rising costs
  • Loss of management control
  • Loss of quality control
  • Client satisfaction
  • Training staff that may later become your competitors

But these threats exist whether you grow or not. Let’s break them down.

Cost: A key concept to keep in mind is the difference between operating profit and gross profit. If your gross profit margin is declining, it’s likely to be due to one of five factors: poor pricing, poor productivity, poor payout, poor product or service mix, or poor client mix. If your operating profit margin is declining, any of three factors might be involved: reduced gross profit, insufficient revenue volume to support your infrastructure or poor cost control.

Since we began in the mid-1980s to benchmark the financial performance of financial advisory firms, we’ve observed that overhead costs as a percentage of revenue have been steadily increasing, even in good markets. The three fastest-rising costs have been rent, salaries and payroll-related expenses like benefits.

And these costs have been increasing at a faster rate than revenue has, making the trend even more alarming. When practices add overhead costs without adding productive capacity, it’s logical that their profit margins will suffer. So if the squeeze is on anyway, why not add professional staff that will add productive capacity and not costs alone?

Loss of management control: The extent of control is a legitimate problem for any business, regardless of size. It appears that practices hit the wall managerially when they grow to eight people, then again at 15, and again at 25 to 30. It’s as if the communication links get disconnected and the management process breaks down. Advisors in all firms, but especially smaller firms, are at a disadvantage when this happens, because they have no one to whom they can delegate key responsibilities. Larger practices need to build in structure to manage and communicate effectively.

Loss of quality control: The increasing size of the business may cause the owner and lead advisor to lose touch with much of what’s going on. The absence of protocols to manage client relationships simply makes the problem more glaring as the practice gets bigger and attracts more clients. These protocols are critical, regardless of the size of the business, to ensure clients are served and work is done consistently.

Client satisfaction: In a firm headed by an advisor who has little time to manage the business and serve existing clients, and whose grip on quality control is loosening, client interaction and consequently client satisfaction are likely to suffer. Remaining small does not prevent this, although having competent administrative staff to tend to clients does help. Limiting the number of active client relationships per professional staff enhances your chances of having fulfilled clients. But putting a limit on relationships also puts a limit on growth if there is no one else in the firm able to deal with the new clients.

Training your competitors: It seems that the No. 1 reason solo practitioners do not want to add professional staff is because they fear that by training them and giving them access to the firm’s clients, they’re spawning new competitors with an insider’s edge. Yet we’ve seen many examples of firms that have provided a legitimate career path, including the opportunity for ownership or partnership, and consequently have retained outstanding people to help the business develop. Through the use of restrictive legal agreements, the firms are also usually able to protect their client base from poaching by a disaffected former employee or partner.

Models That Work

Elite practices positioned as wealth-management firms have two common structures: the multidisciplinary model and the leveraged model.

The multi disciplinary model

multi disciplinary model

The multidisciplinary model entails an integrated combination of skills that allows advisors to take a more comprehensive approach to the financial lives of their clients. Financial advisors of this type are usually relationship managers and have surrounded themselves with experts in relevant areas such as risk management, investment management, financial planning and estate planning.

Of course, the disciplines represented on the team depend on the business’ strategy and the predominant needs of the clients served. For example, if your optimal clients are business owners in transition, you may need to surround yourself with experts in management succession or family dynamics to assist with the emotional issues that inevitably arise. If your optimal clients are dentists, you might include on your team experts in dental practice management, since this is such an important part of the clients’ wealth creation.

The point is that you work from the client in, rather than the service out. Using a client survey process, you can begin to define the expectations and needs of your optimal client.

The limitation of the multidisciplinary model is that it provides fewer opportunities for development of career paths. Typically, specialists stay within that role rather than evolving to primary relationship managers. Although this route may be acceptable to them, the challenge for you is to develop enough relationship managers to help you grow and attract more primary client relationships.

Some multidisciplinary practices create multiple teams that are all relationship oriented, then either outsource the specialties or treat the specialists as staff positions. From an organizational perspective, this means that the line positions (the advisors and relationship managers) focus on selling and serving clients; the staff positions (the technical specialists) focus on supporting the advisors and relationship managers. This is an effective way to leverage your business as well.

The leveraged model

The leveraged model

The leveraged model seems to be the strongest model in terms of driving growth and building capacity, leverage, expertise and client focus. In this model, the senior financial advisors play a strategic role in client service, while the associates (or junior advisors) serve a tactical role. The senior financial advisor develops new business and leads discussions about critical planning and implementation decisions that the client must make. The associate implements the plans and is the primary day-to-day contact with the client.

We’ve found that wealth managers operating alone can effectively manage between 60 and 90 primary relationships; pure investment-management firms may not be able to manage as many relationships if they have numerous accounts per client, but each firm can define the number for itself. In either case, by building out the leveraged model, the team is able to manage two to three times more client relationships than an advisor working alone.

This approach also provides the context for a career path. For example, a professional staff member can come in as an analyst or a planner, rise to the next level of senior analyst or senior planner, then to financial advisor, and ultimately to senior financial advisor.

In either the leveraged model or the multidisciplinary model, clients belong to the business, not to the individual advisors. Each staff person should be asked to sign a restrictive covenant agreement, which recognizes this fact and protects the firm against the possibility of its members hijacking clients. The team approach also helps protect the advisor against defectors, because the client relationships run deep and broad and are not tied to a single individual.

Compensation to the participants in the team—especially the professional staff—should be a combination of base salary plus incentives. Base compensation will rise for the members as their responsibilities, experience, credentials and contributions increase. Incentives should be tied to team success and individual performance, revolving around critical benchmarks such as client satisfaction, revenue per client, profit per client, and the team’s gross profit margin.

It’s important for leaders of such teams not to assign low-priority clients to the associates. A decision should be made about which clients you’ll serve and why, and the whole team should be focused on serving optimal clients.

The downside of this model is that it tends to involve a higher level of fixed costs in the beginning, especially costs related to staffing and infrastructure. But that is the power of leverage. Once you break even, your return over and above labor costs goes up exponentially.

The basic difference is that solo owners can get a reward only for their own labor; in the ensemble model, owners can get a return for other people’s labor as well. This is not to say the ensemble model is exploitative. In fact, it’s entrepreneurial because you’re leveraging resources—in this case, human resources—to add value for your clients while at the same time focusing on your own unique abilities.

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