Many advisors, even those who do an excellent job for their clients, fail to devote sufficient time to analysing their business practices, maintains Mark Tibergien, a principal at Seattle-based accounting firm Moss Adams and co-author of Practice Made Perfect: The discipline of business management for financial advisor.

Although the industry has undergone substantial change in recent years, the top 10 business challenges facing advisors haven’t changed — apart from their order of importance, he says. Those are:

> lack of capacity to serve clients;

> building the value of the
practice;

> improving efficiency;

> uncovering better clients;

> managing growth;

> offering value added services;

> keeping up with technology;

> developing specific expertise internally;

> maintaining a personal life; and,

> time management.

In Practice Made Perfect, Tibergien and co-author Rebecca Pomering, a senior manager at Moss Adams, takes them all on.
Their aim is to reduce what they see as a huge disparity between those relatively few advisors who, through prior training outside the profession or natural business sense, have created financially successful practices and the majority of their peers who are too busy making a living.

To accomplish this, the authors suggest that advisors take a close look at how their businesses are structured and how they operate. Tibergien and Pomering say top-drawer practices see planning as their core business — not collecting assets or selling products. These firms know which clients they serve — and why — and are concerned about managing cash flow and profitability at the same time as they look after clients. And, the authors maintain, the very best firms do not apologize for their fees, have a positive attitude toward costs and operate in a team environment.

Accountants by training, the authors are at their best when they’re discussing the finer points of financial reporting and management. But the book is not all about ratios and number crunching. For instance, Tibergien and Pomering offer a detailed discussion of the importance of understanding clients, the value of client surveys and how to get the most out of them.
Interestingly, much of this material is drawn from the work of Julie Littlechild, president of Toronto-based practice management firm Advisor Impact Inc. and a joint-venture partner with Moss Adams.

Another section of the book deals with an area in which growing businesses appear to be weakest: human capital. Where will advisors find the right people and how do the new recruits fit into the overall business strategy? How much real training can a practice provide? How will the additions be nurtured? And, more important, what will they be paid?

When thinking about the financial aspect of a practice, the authors say that it is important for the advisor to keep in mind that he or she, as the owner, is being paid (or should be paid) for two things: the work done as an advisor, and the risk taken as a business owner. As the owner of the business, the advisor is also entitled to a fair return on investment in capital, time and liability exposure. Separating the two sources of compensation will not only help the advisor understand what really is happening in the business, but it will also make him or her feel better about making substantially more money than the employees, they say.

Over the past 15 years, overhead as a percentage of revenue has been steadily increasing — even in good markets, Moss Adams research suggests. The firm’s consulting division provides various benchmarking services for advisors looking to compare and improve their practices.

The three fastest-rising costs have been rent, salaries and payroll-related expenses.
When the authors analysed the numbers further, they concluded that much of the increase was the result of costs associated with unproductive support staff kicking their work back upstairs.

In essence, too many advisors have become slaves to growing overhead expenses, the authors say. Studies show that expenses as a percentage of revenue actually increase as practices grow, peaking at an expense ratio of 44% at the $1-million revenue mark. It’s not until a firm reaches $5 million in annual revenue that the expense ratio declines to the optimal level of roughly 35%. These gross numbers may not apply to solo practices, but, they say, advisors won’t know this unless they are monitoring
profit and overhead margins.

The authors recommend that the advisor produce a balance sheet, income statement and a cash-flow statement on a monthly basis. And they go into great detail about how to do this. Depending on the advisor’s business training, the suggestions about how to develop and understand these statements will either be helpful or insulting.
But, either way, the process could be useful to businesses of all sizes.