The speaker for this session was Mark Tibergien, Chief Executive Officer of Pershing Advisor Solutions, a BNY Mellon company.
1. Managing Growth
What is the rate of growth that we’re seeing in the advisory industry today, Mark asked? After 2008, the rate of organic asset growth was reduced for most advisory firms, he noted, so they have to attract new clients in order to grow. Attracting new clients creates new layers of complexity that make it difficult to manage growth.
Managing growth is not only about growth of assets but also about growth of the firm itself. Growth creates opportunities to develop staff, to create succession plans and to generate profits. But it also places strains on advisory firms in the area of span of control, as well as:
- Dilutes the firm’s sense of purpose
- Impacts the quality and consistency of service
- Reduces the efficiency of resources
What is the optimal number of client relationships that the average advisor can manage, Mark inquired? Depends on the nature of the model. Pure money managers can handle more while a family office might be lower.
According to a Moss Adams study, the typical advisor has about 1,800 hours of inventory per year, Mark reported. Advisors spend, on average, 20 hours annually on each high value client. This means that the optimal number of clients should be no more than 90. Although that would only be true if all your clients were high value and you spent all of your time on client service, which is never the case. You must take into account time spent prospecting, attending meeting (like MMI) and running the business. The typical advisor winds up spending just 56% of their time on client service, he pointed out.
As shown in the chart below, which was taken from the 2011 Advisor Compensation and Staffing Study by Investment News and Moss Adams, the average number of clients per advisor has been increasing over the last three years, although the rate of growth is slowing.
2. Achieving Operational Efficiency
Advisory firms have to keep increasing efficiency as they grow. Otherwise, margins will evaporate as their internal processes are overwhelmed, Mark commented. How can they design a workflow that is both scalable and efficient?
Mark discussed the following advisory business models:
- Advisor-centric – Impossible to scale due to unique processes
- Client-centric – Creates more silos that can’t be leveraged
- Process-centric. The optimal solution. Enables you to be systematic in how you manage your business, yet customized in how you deliver advice.
Problems occur at firms with multiple advisors because most advisors have unique approach to how they do business, Mark observed. Advisory firms shouldn’t be client-centric or advisor-centric, but should become process-centric. This doesn’t mean that advice becomes generic for all clients. It means that you create repeatable, scalable internal processes that enable efficient delivery of customized advice for each client, he stressed.
3. Creating Capacity
The advisory business is fundamentally a people business, not a technology business, Mark emphasized. The biggest challenge seen in advisory firms today is how to create capacity. He went on to define capacity as the physical limits of your resources and must be increased in order for your firm to maintain or, preferably, to increase profitability as you grow.
Many advisory firms are at a crossroads, Mark cautioned, and must choose one of the following options if they want to continue to grow:
- increase the capacity of their advisors
- change their customer service model by decreasing the amount of touches required for each client
- “scale down” by culling the least profitable clients so they can focus on the high value ones.
In Mark’s most recent book, Practice Made (More) Perfect, he identified a number of signals that should alert you when your firm has reached a point of transformation:
- Client complaints
- Exception reporting
- Staff turnover
- Response time to clients
- Overhead as a percentage of revenue
Advisory firms are relying on hiring non-advisors more than ever before. Mark provided a slide with the following staffing breakdowns for an average advisory firm:
- Advisors 14%
- Dedicated Mgmt 12%
- Tech specs 20%
- Suppor staff 19%
- Admin staff 14%
4. How Can You Differentiate Your Business?
Everyone wants to call themselves a “wealth manager,” Mark observed, and the market tends to blur for clients for the following reasons:
- All financial firms use the same terminology
- Cient focus tends to be on asset size, not other characteristics
- Big firms have greater resources to capture top of mind
Mark then enumerated eight strategies that advisory firms claim differentiate themselves from the rest of the market (taken from his book, Practice Made (More) Perfect):
But are these really differentiators or just minimum thresholds for being in the business? What is the reality? How is the advisor known?
- Recognized name brand
- Technical superiority
- Low cost provider
- Personal fame
If you have a clear idea of who your optimal client is then it’s easy to build a client service experience around it, Mark declared.
“I hate the 80/20 rule,” Mark exclaimed. It says that only 20% of your clients are in your sweet spot and they’re subsidizing the other 80%. If your costs are rising in your business, it’s probably because you’re investing in the other 80%, he said.
Mark recommended that it be changed to the 20/80 rule by slowly dropping clients over time that aren’t in your sweet spot. Firms with 80% of their clients in their sweet spot grew three times faster than others, as reported by Moss Adams.
5. Attracting and Keeping People
We hear all the time that people are an asset, Mark noted. But are they diminishing assets or appreciating assets? The RIA segment represents just 15% of the total retail advice population. However, a recent Moss Adams study projected that the industry would need 9,000 more financial professionals over the next five years. Where will they come from?
Top performing firms distinguish themselves by focusing on three elements to strengthen their human capital, Mark explained:
- the nature of the work – they understand what the function is and what excellence looks like
- the nature of the worker – do they have not only the aptitude, but also the motivation and interest to stay on the job?
- the nature of the workplace – Can’t motivate but can demotivate! Your job is to create an environment where motivated people will flourish.
Top performing firms spend more on their people than average, Mark claimed. They have higher median people costs as a percentage of their expenses. (defined as professional+non-professional compensation expenses) The top quartile allocates 70% of their expenses to people versus 61% for the other quartiles. They spend more on their human capital strategy, but are able to manage their overhead while increasing productivity. Their number of clients per total staff is greater than the average firm, Mark reported.
Despite working from a larger base (in revenues, AUM, and clients), top human capital firms are able to match the growth of their smaller counterparts – both top human capital and all other firms each grew at a compounded annual rate of about 5% for clients between 2008 and 2010, and both groups show a compounded annual growth rate of about 23% for assets over the same time frame. Top human capital firms are matching the growth rate of their smaller peers by quickly building size and scale, and adding significant numbers of new clients and assets, even though overall industry growth is slowing.
Top-Quartile firms have more owners in the practice. Whether you’re in a captive or independent environment, the challenge is to think about how many people are acting in a principal capacity within the firm. It means you have more specialization in how the practice is managed, you have more centers of influence and more points of contact. These firms are growing faster, rewarding their principals more and are creating more opportunities in the marketplace.
You can read Part 2 of this article by clicking here.