Consider the Burj Khalifa in Dubai, the world’s tallest man-made structure, standing a whopping 830 metres (2,722 ft.). While the laws of physics dictate that you must build skyscrapers from the ground up, building a profitable financial advisory practice isn’t beholden to that rule.
“You want to build [your business] from the top, not from the bottom,” says Jennifer Black, an advisor with Dedicated Financial Solutions in Mississauga, Ont. “It’s essential to helping to build a more successful practice.”
Building your business “from the top” means focusing on your most profitable clients, recruiting more, similar clients and gradually severing ties with those clients who do not generate profits.
Black offers some tips on how you can build your business this way:
> Measure your value
If you suspect that you spend too much time working on client accounts that do not generate strong revenue, run a financial audit of your book.
Start by assigning yourself what you consider to be a reasonable hourly fee for the services you provide. Then, calculate the amount of revenue each client brings in on a quarterly or an annual basis. Tally the number of hours you spend servicing each account for the corresponding period; multiply that total by your hourly fee. Compare the value of your time with the revenue generated by that client. Does the client bring in enough to justify your time?
If not, think about whether you should continue working with that client.
> Adopt a “rolling” technique
Consider referring some of your high-maintenance, low-revenue clients to another, junior advisor.
Make a list of all your clients. Note the total revenue and profitability generated by each client (as described above), along with other important factors, such as whether the client provides referrals, his or her growth potential and whether the client shares your investment philosophy. Arrange your list of clients in order, with high-value clients at the top and less-than-ideal clients toward the bottom.
As you recruit new, profitable clients, consider letting one (or more) of your bottom clients go.
“I should have started building my business this way from the beginning,” Black says. Since implementing this system, she adds, “we’ve brought in [more business] doing this, with only a handful of clients rather than tens of handfuls.”
> Make better use of your time
Once you have dispatched the accounts that are a drain on your time and resources, you will have more time to spend cultivating relationships with profitable clients and networking with high net-worth prospects.
“You might see letting assets go as a step backward,” Black says. “But you shouldn’t. It’s moving you forward because you are removing the time constraints that are holding you back in the long run.”
This is the fourth and final instalment in an occasional series on improving profitability.