Just as the market volatility of the last few years has been challenging for investors, it’s also been challenging for advisors.  In addition to the higher level of effort required to keep nervous and frustrated clients on the books, high volatility in client accounts makes it harder to be confident of fee-based revenue and therefore confident of a practice’s overall financial health.  Maintaining a successful business in this type of environment is more and more dependent on good management, efficiency and discipline.  And with the advisory firm landscape about to dramatically change (more on that later), profitability within advisory practices is more important than ever.  So what are the hallmarks of advisory firms that are achieving it?

Focus & Discipline

According to a recent study, top performing firms are offering fewer services overall and working harder to leverage the services they do offer. Successful firms have figured out that it’s not such a great idea to try to be all things to all people. 

Of course, it’s much easier to stay focused on current offerings and avoid adding more and more services (potentially at higher per client costs) if the firm has maintained good discipline with regard to client segmentation.  With a solid core of ideal clients and a service offering built around their needs, successful firms are able to leverage a smaller bundle of services across a wider segment of their client base.  The residual benefits to this strategy shouldn’t be overlooked:  lower costs per client, greater ability to determine effective pricing and therefore profit margins, and a higher likelihood of developing and exhibiting expertise within the service offering—which in turn reinforces the firm’s value proposition with ideal clients and potentially leads to more ideal client referrals.

The biggest difference between firms with good focus and those without is in client retention.  This was particularly true during the recent downturn, when top performing firms had a lower attrition rate (2.4%) compared with other firms (3.1%). With greater expertise around a defined value proposition, advisors are better able to set client expectations, keep those clients happy and keep their assets on the books.  Even in tough times.


Another major area where top performing firms are bolstering their bottom lines is productivity.  Quite simply, they are getting more return on their investment in people.  Top performing firms have a median of 1.0 staff per professional within the office (while other firms have 1.5) and have only 8.2 total staff members compared to 10.4.

That top performing firms are more efficient isn’t much of a surprise.  What is surprising is that they actually have a higher cost per client than most firms ($4,306 per client compared to $3,717).  The difference is in the type of staff on which that money is spent.  Top performers are weighted more heavily toward professional expertise than support staff.  But through efficiency and better defined processes that come with the focused approach and well-defined value proposition, those professionals are much more productive. 

The numbers are actually quite startling: median revenue per professional of $540,750 at top firms and $353,274 at others.  In other words, top firms have traded in an additional few hundred dollars in cost on a per client basis for a nearly two hundred thousand dollar difference in revenue per professional.  As trades go, it’s not quite a few beads for the isle of Manhattan, but it’s up there.

One might argue that this difference comes from the fact that top performing advisors are likely servicing clients with more assets.  But one could just as easily argue that top performing advisors, by fulfilling their value promise through better focus and efficiency, are pulling more wallet share and increasing AUM through effective investment management.  In other words, those advisors have higher per client AUM because they’ve earned it.  No matter how you parse the numbers, the bottom line is simple: Top performers are achieving a 53% difference in relative production on a per professional basis.

The difference in approach to staffing at top performing firms versus all others is subtle but important.  Top performers are focusing resources on their professional staff (i.e. the people in the office directly working to add clients and build value) and making sure that support staff has efficient processes and technology to support those professionals.  Additionally, top performers are not cutting staff to save money in lean times.  To the contrary, in 2009 top performers actually added staff while other firms were reducing payroll to manage costs.  Again, the focus here is productivity.  Top performers are confident they’re getting good productivity from the people they have, so their strategy during lean times is to keep supporting those producers to sustain growth.

Got Data?

It’s hard to monitor productivity if you’re just waiting for the accountant to send over the balance sheet at the end of the quarter (or year) to see if you made a profit.  To effectively assess the health of a business, it’s important to monitor the numbers more carefully and compare those numbers to industry benchmarks.  This helps advisors identify areas that need improvement and building strategies to focus on those areas.  So what are the critical metrics advisors should be monitoring?

Though there are many data points that can be generated within an advisory firm, some of the most useful fall under four main headers: Revenue, AUM, clients and profit.

The starting point, of course, is revenue. Knowing a firm’s gross revenue is obviously important, but just as important is having more granular data such as total revenue per advisor, per full time employee (FTE) and per client.  Advisors should also know the total fee-based revenue per client versus non fee-based, because this will help assess the extent to which revenue is recurring and not contingent upon new and existing client transactions.  These data points will help clearly identify where the firm’s money is coming from and assess staffing and efficiency, among other areas of productivity,  (e.g. low revenue on a per FTE basis may indicate some work needs to be done on processes).

Next take a look at AUM, particularly the fee-based portion.  What is AUM per advisor, FTE and client? In addition to opening another window on a firm’s productivity, these metrics will indicate how successful the firm has been at client segmentation. Low AUM per client may indicate the firm has taken on too many clients that don’t fit its ideal client profile, rendering the firm “bottom heavy” and potentially hampering productivity. 

Critical client-level metrics to consider: number of clients (with a breakdown of fee-based vs. non fee-based), clients per advisor, clients per FTE.  And of course, the all important cost per client. Does each advisor within the firm have enough clients?  If not, the firm may require some active marketing.  Too many clients to keep them all happy?  Might be necessary to add an additional advisor or more staff.  Taken together, this data will help realistically assess service requirements for the firm.  A firm appropriately staffed for its client base obviously has more value than one requiring time and energy to reorganize.

Finally, take a look at your profit.  What is it per client, per advisor, per FTE?  When it’s plainly clear what all the effort, responsibility and cost are generating at the end of the day, the numbers can either be a shock or a pleasant surprise. But shocking numbers should be a call to action.  What areas need work?  What can be improved quickly and easily?  What areas require more foundational shifts?  Having the entire suite of metrics at hand will help you measure the success of the strategies you put in place to address any shortfalls.

Why Bother?

Given the effort involved here, some advisors might ask: Why should I spend my valuable time doing all this number crunching and re-strategizing when I could be generating new clients or providing service to my existing ones? The answer is simple: change is coming.

The advisor population is aging, and more and more advisors are looking to retire in the next five years. At the same time, merger and acquisition interest continues to rise, particularly among higher revenue firms.  These two trends tell us a lot of firms will be changing hands in the next few years (and perhaps decade).  It also means business metrics and accurate valuation are going to be key in helping exiting advisors realize the full value of their firm and helping acquiring advisors assess a firm’s current levels of efficiency, productivity and, ultimately, profitability.

Even for a profitable business, if the data hasn’t been developed to prove profitability, an acquiring firm will have a lot harder time accurately assessing value.  Clear data also gives an acquiring firm confidence that costs within the business are recognized and accounted for, that skeletons won’t be uncovered after acquisition.

Beyond all the numbers, the real bottom line is this: having a healthy business with transferable value better ensures your clients will be taken care of both now and in the future.

Matt Matrisian is the director of practice management for Genworth Financial Wealth Management. He is responsible for helping advisors develop sustainable growth strategies and maximize the value of their practices. He can be reached at matthew.matrisian@genworth.com.

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