The advisory business is essentially people oriented, but it has changed profoundly over the last several years. Firm principals will need to manage costs and people effectively or risk falling behind their peers, according to speakers at a Money Management Institute conference this week. 

“We are dealing with a different environment where leaders will evolve,” said Mark Tibergien, chief executive officer of Pershing Advisor Solutions during a late morning address. “Advisors need to ask: ‘Is my strategy relevant? ‘Am I structured right?’ and ‘Do I have the right people do the right things the right way?’”

During the life cycle of a client planning relationship, Tibergien said, fees decrease relative to the cost of services. Advisors need to ask themselves do they know the cost of what they are delivering, and do they know market costs for the services, and do they know the value of what they are delivering.

In a revenue-profit model, Tibergien said principals should not allow expenses to exceed 40% of revenue, gross profits should be targeted to around 60%, overhead expenses should be limited to 35%, and the bottom line at firms should be 25%.  Unfortunately, Tibergien said, expenses on average at advisory firms are trending up. In 2009, they accounted for 44.9% of revenue, up from 39.1% in 2007.

While managing costs is critical to a firm’s profit and bottom line, advisory firms also need to learn how to effectively manage people. Tibergien recalled a conversation with a firm principal, during an industry event, who made all of the financial decisions in his household.

Tibergien said the disturbing part of the conversation occurred when he asked if the principal felt confident that the other professionals and staff at his firm would be able to give his wife effective financial advice should anything happen to him. “Absolutely not,” the principal said, as Tibergien recalled.

“The average advisor has difficulty knowing how to manage people,” Tibergien said.

Top advisory firms distinguish themselves by excelling at understanding the nature of the work, the worker and the work place.  It is a critical issue, especially because industry observers project that the RIA segment will need to add 9,000 advisors over the next several years to sustain service to customers. The industry is fond of the saying ‘people are an asset,’ Tibergien said, but they need to clarify whether they are appreciating assets or diminishing ones.

“Top performing firms are dealing with the issue of people as an asset more than others,” Tibergien said. 

Tibergien identified four phases of an advisory firm’s life cycle: wonder, the startup phase; blunder, the period of high growth; thunder, where the firm and the principal settle into an identity; and plunder, after the firm has matured and possible changes are ahead.

An optimal advisory firm adopts systematic approaches to giving clients financial advice. The biggest challenge to that is the notion of accepting that there is a limit to the number of clients a single advisor can take on, and creating capacity for the firm.

Another important principal, Tibergien said, is creating the right 80-20 client balance at a firm. It is a problem is 80% of a firm’s clientele are not a firm’s core, ideal client, and they are subsidized by the 20% who are. Firms need to flip that around, so that 80% of a firm’s client are in its sweet spot, Tibergien said.

“Those firms with 80% of clients who are in the sweet spot are growing three times faster than the average firm,” Tibergien said. “Once you pass the survival stage, you have to think about which clients you want to service.”

Firms also need to think about giving lower-level professionals different career paths, and more ownership opportunities.










Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access