“Coach’s Forum” is a place in which you can ask your questions, tell your stories or give your opinions on any aspect of practice management. For each column, George selects the most interesting and relevant comments from readers and offers his advice. Our objective is to build a community of people with a common interest in making their financial advisory practices as effective as possible.



> Putting The Focus On Profitability.

Advisor: I am a regular reader of your column and have seen several of the “sitting here late at night, feeling sorry for myself” messages you have received from fellow advisors. Although I have always wondered what would motivate someone to expose themselves that way, here I am now doing the same.

The tipping point for me was a visit with my accountant today to review my financial statements for the past fiscal year. The good news was that not only have we fully recovered from the economic collapse of 2008-09, but my revenue has actually increased quite significantly for the third straight year. The big disappointment is that my bottom line hasn’t. So, although my business is growing, profitability as a percentage of revenue is declining. In other words, at best, I am “spinning my wheels” and sinking deeper into the mud.

In fact, I haven’t been able to increase my personal compensation over the past three years because we had to take on additional staff, expand our office space, upgrade some technology and so on to cope with the growth in new clients. To top it all off, we just got slammed this week by another market mini-meltdown, which will no doubt curb revenue — at least, in the short term. I used to really love this business, but the fun (and the profit) is waning fast. Any magic potion you could recommend?



Coach says: First of all, I must confess that I, too, am sometimes surprised at the openness of some of the financial advisors who write to me. (You should see some of the ones we don’t print!) Having said that, I am delighted that we are able to provide a forum in which advisors feel free to express themselves.

Second, allow me to congratulate you for even thinking about profitability in your practice. Too many advisors follow an “eat what you kill” approach to their practices. Regardless of earnings, they strip their bank account clean of any cash over and above what is required to meet monthly expenses. This, of course, represents their personal income and, in their minds, their profitability. So, a bad year is simply one that is “less profitable” than a good year — even though it might, in truth, actually be an “unprofitable” year. With no notion of “retained earnings” or a “rainy-day fund,” at some point, lack of cash to sustain operations or to fund growth will threaten their businesses.

On to your comments now. There is no doubt that the events and challenges of the past few years have been significant and, in many ways, unprecedented. Of course, we had the market collapse in 2008-09 that eroded top-line revenue for advisors as clients’ asset values declined by as much as 40% (or more). Even with the recovery to previous levels, current assets are often generating less revenue than they did previously because clients have opted for so-called “lower-risk” investments, which often generate lower revenue for advisors.

The good news for you is that you obviously did a number of things right to gain new clients and have your revenue grow throughout this period. However, as you just experienced, continued volatility in the market remains a potential threat to the profitability of many advisory practices — even at higher asset levels.

Please take the following comments as a general observation only. Without knowing more about the inner workings of your individual practice, it is impossible to identify specific factors that may have come together to create the situation in which you find yourself today. That said, my view is that advisors experiencing the kind of challenges you describe are, in many ways, victims of their own success.

It wasn’t so many years ago that most advisors’ practices were growing at a torrid pace, fuelled by an aging population of increasingly affluent consumers seeking participation in markets that seemed to go only up. There was also a proliferation of attractive new investment products, more effective marketing and an increased demand for advice. As a result, if you were positioned even reasonably well in your market, you didn’t really have a choice but to grow your business significantly.@page_break@What too many advisors did not consider, however, was the implementation of sound business practices that would allow them to cope with the increased scale of their practices in an efficient way. Human nature being what it is, less attention was paid to bottom-line profitability because top-line revenue was steadily increasing. So, for example, rather than implementing systems and technology to manage a growing clientele, most advisors simply added more staff to cope with the increased workload; after all, that was the traditional way to handle growth. However, this strategy did not account for many other pressures advisors have experienced — market setbacks, rising compliance costs, lower commissions and fees, higher service commitments and so on — all of which were collaborating to put the squeeze on profitability.

The outcome is that today you have a much more complex business to manage but with compressed profit margins. As we have stated numerous times in this column, most advisors did not come into our industry to manage complex businesses; rather, they came to practise their craft as advisors. However, as their businesses grow around them, they inevitably find themselves spending less time as advisors and more time managing the enterprise. No wonder it isn’t as much fun anymore.

So, what is the answer? Unfortunately, there is no magic potion or miracle cure. A step in the right direction, however, lies in what I describe as “retooling your practice for profitability.”

“Profit” is not a dirty word — and having it as the objective of your business isn’t blasphemous. In that regard, please permit me to emphasize a point I have made in earlier columns: unless you intentionally decide to do pro bono work for people (which many advisors do), every client relationship should be a profitable one. Therefore, you must make sure that everything you do in your practice and the entire infrastructure you have in place to attract and serve your clients all lead to a profitable relationship.

So, how do you do that? Essentially, it means carefully evaluating all aspects of your business in search of ways to increase your efficiency for the sole benefit of increasing profitability. And although different advisors will apply different tactics at different stages of their practices, some of the things you can do include:

> Segmenting your client base and aligning your service commitment with client value to the firm.

> Downsizing your client base to focus primarily on higher-value clients.

> Investing in technology that improves the scalability of your existing resources, such as client relationship management software.

> Looking for technology that will free your staff to focus on client service.

> Ensuring staff members are well trained in all the tools and processes they use.

> Standardizing processes such as financial planning, investment policy statement construction and portfolio rebalancing.

> Narrowing your market to become an expert in efficient problem-solving for similar clients.

> Simplifying your product line to focus on fewer suppliers.

> Looking to outsource some non-core tasks, such as marketing, accounting and technology.

Most successful and profitable advisors I have seen have invested the time and money necessary to make changes such as these before they added staff — not after.

Ultimately, it will be the balance of your people, processes and technology that defines the efficiency of your practice. Seek outside assistance if you feel the need. But, most important, commit the time to get the balance right. The trend to lower profitability isn’t going to let up, so you must be proactive to stay ahead of the curve. IE



George Hartman is president and CEO of Market Logics Inc. Send questions, comments and opinions on any aspect of practice management to george@marketlogics.ca.