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Where there's a wall, there's a way: when your firm hits a wall, do you know how to surmount it?

MANY TOPICS CAN create excited and hopeful conversations among financial advisors. Process improvement is not one of them.


In fact, this topic is more likely to engender agitated discussion, conjuring up images of dreaded corporate bureaucracy. Common in large companies, this tortured way of doing business often sucks the life out of those whose passion is working with clients.

Ironically, an aversion to structure may be one reason that many practitioners find themselves spending less time engaged with clients or developing business. "Mission Possible III: Strategies to Sustain Growth in Challenging Times," an independent study commissioned by Pershing Advisor Solutions and developed by independent consultant FA Insight, found that the average advisor was devoting just 50% of his or her time to client service and business development, with the remainder spent on what many regard as non-productive work. Of course, some time away from clients includes continuing education, managing people and meeting with partners, but the point is that as advisory firms grow, so too does organizational complexity.

"Mission Possible III" also reported that just 41% of firms surveyed for the study said they document all major business-to-client processes, and just 32% were consistent in the implementation of the processes they did have in place. Yet growing advisory businesses are fluid, adding new people, investing in new technology, broadening services and pursuing new markets. Many have more than one location. This level of complexity requires active management of processes. Whether or not you desire more regimentation in how you do business, the reality is that growthoriented advisory firms will hit a wall unless they design a pathway to greater efficiency and effectiveness.

The wall is just around the corner for many growing advisory firms. Witness the rising overhead expense ratio for the average advisory business. When the market crashed, it was understandable that expenses as a percentage of revenue jumped, especially if firms were not able to cut major costs like salaries. Now that most advisors are seeing their top line grow, however, they should expect expenses as a percentage of revenue to decline. For the average firm, this expense ratio has hung steady in the 40% range, meaning that they spend 40 cents of every dollar of revenue on overhead. Optimally, that ratio should be closer to 35% or less.

Is a 5% variance material, you ask? Just multiply the percentage by your own revenue to measure the financial impact. If you are generating $1 million of gross, that impact would be $50,000 a year. While some advisors may regard $50,000 as a rounding error, many firms have a much greater negative variance, with greater consequences.

The decision to improve workflow is not based on economics alone. Other drivers include a desire to be more consistent, to improve the client experience and to enhance efficiency. That latter point can be a critical element in employee satisfaction. If poorly managed, these elements ultimately will create a negative economic impact.

Many advisors mistakenly believe that customizing their approach for each client ensures more fulfilled clients. The risk, of course, is that things will fall through the cracks because the variety of approaches is confusing to employees and subject to error whenever anybody is busy. Further, processes that are neither standardized nor systematized also tend to be more manual, consuming more time and energy.

As a helpful exercise, identify an area of your business that is not quite meeting expectations. Possible areas for examination include prospecting, onboarding, financial planning, portfolio management, trading and reporting. Look for the following:

* Overly engineered tasks that can be simplified to achieve time and cost savings

* Low-value activities that can be eliminated

* Opportunities to delegate tasks to more junior team members or to outsource tasks to increase capacity

* Bottlenecks that can be eliminated by redirecting workflow

* Opportunities to further embed existing technologies--or a need for new technology solutions


Advisory firms that constantly monitor key metrics have better insight into when it's time to address operating improvements. When they do take action, they are able to reduce their expense ratio and enhance their capacity to grow.

"Mission Possible III" identified top performing firms based on their ability to grow as well as generate more owner income. With regard to operating costs, top firms reveal key differences in staffing, office expenses, information technology and marketing.

As shown in Figure 1, top firms at every development stage spend significantly less than other firms on non-professional compensation. Their lower costs result from maintaining lower sup-port staff ratios. This is a big change for the business of financial advice. Historically, advisory firms would try to gain operating leverage by surrounding their advisors with lower-cost employees who did much of the detail or even menial work that the advisors did not want to perform. While delegating down is always a good approach to freeing up your capacity, an advisory firm full of minions doing non-value-added work also includes a layer of fixed costs that is hard to eliminate when times get tough.
Figure 1: Top Firms Spend Less on Support Staff

Non-Professional Compensation Expenses as a Share of Revenue

             Top Firms  Other Firms

$75k-$500k        3.7%         9.9%
$500k-$1.5M       8.2%        12.3%
$1.5M-$3M         9.4%        13.3%
>$3M             13.3%        17.4%

Source: FA Insight proprietary survey data, 2010.

Note: Table made from bar graph.

A safer strategy is to improve the way in which work is done and leverage technology so that the changes become more systematic. This involves more than shifting certain work from highercost employees to lower-cost employees.

Thoughtful organizational design, well-designed processes and prudent investments in technology enable top firms to deploy a more limited number of non-professionals without sacrificing efficiency or productivity.

"Mission Possible III" also found that expenses tied to business development and marketing were higher for top-performing firms than other firms. An upfront investment in marketing in the early years is important for establishing a firm's brand and jump-starting growth. As top firms grow in size and take on more clients, they are able to reduce marketing spend as a percentage of revenue should they so choose. Or, by freeing up dollars invested in basic processes, they can be more offensive and aggressive in generating top-line growth.

While technology can drive operational efficiency and firm productivity, top firms are not spending more on technology relative to other firms. With the exception of firms in the $1.5 million to $3.5 million revenue size range, top firms spend about one to 1.5 percentage points less on technology as a share of revenue.

The strategy that top firms use with regard to technology mirrors their approach toward people--more is not necessarily better. Achieving operational efficiency and productivity does not require firms to invest more but it does require them to invest more smartly. This means building an operational infrastructure around the desired client experience.

In the end, form follows function. A well-conceived strategy guides the way in which you process business, the technology you deploy and the people you hire. Thoughtfully designing workflow processes and organizational structure prior to making significant investments in people and technology should result in a better return. So even if it's a dull topic for you, the outcome can make it an exciting topic for shareholders.


* Form follows function when creating a more efficient organization

* If your business has grown dramatically, look to see if you are still supporting the workflow properly

* Don't be afraid to eliminate manual functions if technology is a better solution

Mark Tibergien, CEO of Pershing Advisor Solutions, is a former partner in Moss Adams LLP, and co-author of "Practice Made (More) Perfect" and "How to Value, Buy, or Sell a Financial Advisory Practice." He can be reached at
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2012 Gale, Cengage Learning. All rights reserved.

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Author:Tibergien, Mark
Publication:Investment Advisor
Date:Oct 1, 2012
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