Practice Management

Five ways to boost your bottom line

Consider these strategies if your profit margins are not where you'd like them to be

By Lavonne Kuykendall

Sep 18, 2011 @ 12:01 am (Updated 9:00 am) EST

Building a successful practice is a marathon, not a sprint, and eventually, every runner hits the wall. When that happens, you have to change things up a bit to get back up to speed.

“We generally work with firms that are several years old, rather than brand-new firms,” said Michael Slemmer, a principal at Advisors Trusted Advisor, a practice management consulting firm. “We are often brought on because of a feeling of stagnation or [because] the firm believes "we could be doing things better.'”

A number of predictable problems come up after a firm has been around for a number of years, causing profitability to sag, financial advisers said. Unlike the struggles during a firm's early years, when survival is the prime objective, the problems of a midlife advisory firm can be more subtle and might need a more creative, outside-the-box approach.

Here are five ways to break through:

1Rethink the asset-based- fee model

Charging a fee to investors based on the assets that they hold was a paradigm shift back in the days when most clients worked with commission-based brokers. The beauty of charging a predictable fee is that clients have a complete understanding of how much they are paying and the assurance that advisers have no incentive to recommend one product over another.

But advisers who start out as pure investment managers frequently find that as they become more successful, their businesses “evolve” and become full-fledged wealth management firms, said Eliza De Pardo, a principal and the director of consulting at FA Insight.

“Some services cannot be adequately compensated for under a pure asset-based-pricing structure unless you understand the cost,” she said.

Some examples include tax and estate planning, as well as cash flow management, Ms. De Pardo said.

Advisers may want to charge separate fees for time-intensive extra services but don't know how to implement a dual structure.

The first step is to understand what each client costs in terms of an adviser's time, Ms. De Pardo said.

For clients who need a variety of individualized services, “there is a likelihood you won't be profitable for those individual clients under an asset-based fee,” she said.

Although the vast majority of advisory firms use asset-based pricing, many should consider incorporating other pricing methods, such as hourly fees based on time and resources involved, or perhaps a flat or variable fee according to the level of advice needed, Ms. De Pardo said.

In a study published last month by FA Insight with Pershing Advisory Solutions LLC, the firms said that a good option could be combining an asset-based fee with a flat fee, according to the level of financial planning advice delivered.

2Consider nontraditional partnerships

Creating a formal partnership is hard to do. Contractual issues, conflicts about the division of work and the issue of compensation keep many advisers from considering the option of working with another professional.

But Lenny Zaytsev, president of recruiting firm Green Tree HR, said that advisers who think creatively can get the benefits of partnership without all the “sturm and drang.”

“Partner with an accountant or an insurance agent, and become an adviser in their office one day a week in a reciprocal deal,” he said.

A typical accountant might have 500 to 2,000 clients, Mr. Zaytsev said, while a property/casualty agent might have up to 5,000.

It is a plan that typically only works for well-established professionals with an already solid business, he said, but he has seen professionals in related businesses do well in these reciprocal deals.

3 Get rid of small, less profitable accounts

One of the downsides of success is making some tough choices, said Eric Armstrong, president of Armstrong Financial Group Inc., which works with advisers who are changing firms. It can help to examine your client list and cull small or other less profitable accounts.

“You get stagnant in any field if you are working the same book, the same types of clients and the same types of products,” Mr. Armstrong said.

“Million-dollar-plus” advisers with whom he works call it “re-engineering their book,” he said.

“Sometimes the answer is moving, or stripping down your client list and passing some accounts down to a junior adviser,” Mr. Armstrong said.

Advisers who have gone through the process said that it isn't easy.

Thomas J. Henske, a partner at Lenox Advisors Inc., said that he has raised his account minimum several times over the years as his business has grown.

“I really struggled personally with this decision,” he said. “I felt like these were the people who helped me build my business.”

The firm makes it a practice to move below-minimum accounts to junior advisers.

4 Hire some specialists

Advisers at small firms usually start out as jacks-of-all-trades, but eventually, that becomes counterproductive, said Michael Slemmer, a principal at Advisors Trusted Advisor.

“We see this in midlife or more mature firms,” he said. “Initially, the founder was the visionary, but as time went on, he has to take on the role of leader and not the rainmaker.”

That brings up all kinds of questions, ranging from organizational structure, job descriptions and the ultimate “Pandora's box” — compensation, Mr. Slemmer said.

“Some firms don't want to spend the money, so Joe Founder tries to do it all, and it gets harder and harder as you get larger,” Mr. Slemmer said.

Firms that have grown rapidly for a few years often seem to get stuck, and growth slows to a crawl.

One frequent fix is to hire a dedicated sales or operations professional, Mr. Slemmer said.

“Often these firms' founders get things going, but they are not salespeople at heart. They have the vision but don't know how to construct job descriptions for professional salespeople,” Mr. Slemmer said.

The issue also comes up when two firms merge.

“They get kind of top-heavy and need to assign job duties” Mr. Slemmer said.

“It is not just the money. Politics and ego get in the way,” he said.

5 Raise your fees

The median asset-based fee has been flat at least since 2009 and has even dropped a bit for some accounts, according to the FA Insight/Pershing study. The median for accounts of $1 million or less is unchanged at 1%.

For accounts between $1 million and $2 million, the median fee is up only one basis point to 0.81%. And for accounts of $5 million to $10 million, the median had dropped 3 basis points to 0.65%.

And only 57% of all firms have a minimum fee.

At the same time, rent, payroll and compliance costs are all up, and clients are more demanding than ever. As a result, adviser profit margins have been dropping over the past two years.

“A lack of attention to actively managing the firm's pricing strategy appears across all firm stages,” the study noted.

Clients may not be pleased to see a price increase, so it is important for the adviser to develop a persuasive case and to decide what to do for clients who resist, according to the study.

lkuykendall@investmentnews.com