Adapted from an AdvisorRADIO interview with Horsesmouth Editor in Chief Sean Bailey, the following edited excerpts of Jim’s radio interview ran Oct. 10 on the Horsesmouth Network, “Treat Your Business Like a Business: How to Increase Advisor Profitability.”
I (Jim Palumbo) started an RIA about 25 years ago and built it up on my own until I started outsourcing back-office support to Dynamic Wealth Advisors. My partner and I liked the team there, and we decided to merge the firms and become Dynamic Advisor Solutions. We have approximately 70 RIAs, or IARs, in our network and manage over $2 billion in assets. We’ve been blessed with some success and done things right along the way.
Treat your business like a business
That’s how many businesses in our industry grow. Each investment advisor starts small, either a solo practice or sometimes a partnership. Too often, these solo practices don’t really treat the firm as a business. Their business checking and their personal checking are the same account. Calculating your profit margin is very simple. You have gross revenue, then subtract overhead, then you pay yourself. Yet many advisors I’ve met put every quarter in the bank account, then spend what is left after paying the phone bill and rent.
That’s no way to run a business, not if you want to grow. If you aspire to something more than a lifestyle practice, you have to start treating it like a business and measuring that profit margin. This is a great industry, the best job in the world. We get to help people and have great income, and it’s sophisticated and interesting. You’re learning about the world, investments, business. It’s fantastic. But that’s how many advisors become victims of their own success.
Even the advisors that are not trying too hard but are still growing reach a certain point where they are trapped by scalability. All of a sudden, they have $20, $30, $40, $50 million and somewhere in there they realize that they can’t do this by themselves. So, they have to hire somebody. But holy cow, you don’t want to be an employer! And now you need more office space. And it goes on…
From our perspective, looking at the industry nationally, there are a lot of terrific advisors, but not all of them are great business people. As soon as they cross the bridge from being an advisor—helping clients, managing investments, doing financial plans—to being a business owner—payroll, overhead, networking, a server to manage, cybersecurity—all of a sudden the wheels start to come off the bus and the successes stop. Advisors grow very quickly to a certain point and then they get jammed up.
Success breeds success
The discussion about advisor profitability starts at this point. If you’re just pulling all of your cash out of the business like it’s your own personal piggy bank, you don’t have capital to invest in the resources to grow that business to the next level.
Success breeds success. Your clients are looking. If you seem financially successful, you’re going to be able to help clients be successful. The advisor who is not himself financially successful on his own is going to have difficulty leading clients to it.
Second, you have to be profitable in order to invest in the resources you need, whether that’s research, software or portfolio management. You need cashflow, profits and reserves to be able to invest in those things to deliver better end results for your clients.
Businesses that are not profitable and growing tend to have lower client satisfaction scores and higher attrition. Again, success breeds success. There’s a very strong correlation between successful advisory practices and low attrition with higher client satisfaction.
And I always tell advisors that you must take your own medicine. You give all this financial advice to your clients. How about you? Do you have too much debt? Are you able to make your bills? Do you have positive cashflow? Are you saving at the rate you should be? Is your retirement plan on target to meet its goals?
Keep your personal financial house in order
We at Dynamic Advisor Solutions meet a lot of advisors, and I can tell you that more than half do not have their own personal financial house in order. That’s one of the first places to start. From there you develop entrepreneurial savvy and create an image in your community that people look to for success. There’s nothing worse than a poor advisor.
Most advisors say they are too busy to keep track of profit margins. They say, “I don’t have time for that. I’m answering emails, got to watch CNBC, I’m making trades,” whatever it may be.
For others, it’s not a priority. They just don’t see the business that way. They really see themselves as a solo gal or guy providing good advice, managing some accounts and that’s it. They never make that leap to envisioning their business as a business.
Sometimes, it’s the complexity. You would be shocked by how many CFPs I know who cannot read a financial statement, balance sheet or tax return. They’re challenged by the sheer complexity and don’t take action.
Do you have the entrepreneurial mindset?
I would say the ratio of advisors who have an entrepreneurial mindset to those who don’t follows the 80/20 rule. In any group, you have 80% who are pretty content where they’re at and then you have 20% who are ambitious and charging forward, with an entrepreneurial mindset and a vision for the future. They are aspirational. They’re looking for something more and better, not just for themselves, but to bring to clients.
When you look at the investment advisor landscape, that 20% dominates our industry. Those are the firms that are growing, merging and acquiring other firms, the ones that have that entrepreneurial mindset. There are many.
I was at a conference recently, listening to other development and M&A people, and the practices of folks in their 60s and 70s are being snatched up at an incredible rate. The landscape is changing as a lot more younger and entrepreneurially-minded advisors are coming on to the scene.
You can control the top and bottom lines
The first thing advisors need to understand is that they can control the top and the bottom lines in their businesses. These are parts of the process. Most people look at the top line, revenue, and think, “I need more clients so I can have more revenue.”
Solo practices can operate around an 80% profit margin as you grow. How do you grow that business? You look at it strategically and organically. You control those numbers. After you’ve been in business a few years, how easy is it to find a couple of younger folks and bring them in? You perhaps tripled or doubled your top line. You might shrink the margin, but now you’ve got a different gross profit to work with.
Your profit margins are controllable, but you have to give up control over some other things. The biggest thing is giving up ego. Many advisors feel they need to control the software. None of that matters. People have debates all day long about which financial planning software to use. It doesn’t matter. What matters is the trust and confidence and good advice you give your client.
The software is just a support tool. You have to find a way to outsource that, to share resources or something. You can’t own all that stuff and be a $20 million practice. You are now down to a 40% margin, or maybe you’re barely making money. If you’re trying to buy all those resources yourself, you have to find smart ways to get them.
Look to the (virtual) future
The other thing to consider is more ego stuff. Do you really need a 3,000-square foot office? How important is that to clients today? People are doing more and more virtual meetings. My clients love “that screen share thing.” That’s great for me, too; I don’t have to drive downtown. Virtual is the future.
I know you love your office, you love your image. But there are better ways to do it. The No. 1 rule in real estate is to have the smallest house on the best block. Same thing with an office. Have the smallest office in the best building and that’s good enough. Don’t let your palace be a reflection of your ego and crush your profitability. You’ve got to be practical. You’ve got to focus on what matters most, delivering to your client.
Dynamic manages over $2 billion in assets, but we don’t own a desk, a filing cabinet or a fax machine. We built our business entirely in a cloud-based environment with virtual employees and staff. And it is incredibly efficient, much more so than having a controlled office environment. Advisors have to be flexible. Don’t be looking to the business you run today or that you ran in 1994, but look to the future. What is our business going to look like five and 10 years from now?
Observe, study, measure and improve
I’m a fan of the old General Electric “Six Sigma” theory. It had a simple premise: Every business has processes that can be observed, studied, measured and improved. If you start to change your thinking about being an investment advisor and realize that you’re really running a business, then run one of the best businesses in America. I’ve spent the last few years looking at the investment advisory business and saying, “Look, we can observe it. We can measure the deliverables to the client, the profitability, the quality of advice, etc., and we can improve those processes.”
I believe that in our business, there are 7 processes:
1. Business development
3. Asset management
4. Holistic wealth advisory
5. Portfolio management
6. Risk management
7. Succession and continuity
If you’re able to bring best practices to these seven areas, you will hit a home run in your investment advisory practiced. You now have a balanced system.
What I want to do is show advisors how beautiful their lives can be, how incredibly easy and successful their practices can be. It does not need to be 14-hour days of panic management and paperwork and emails and solving problems.
There’s a way to have a balanced approach to the entire business, handle it efficiently and comfortably, and deliver a much better end result to the client.
Nobody wants to do paperwork
Despite all the great technology available, the thing most advisors want from us is to fill out paperwork and applications. The number one leading question is, “Do you have somebody that can fill out the darn paperwork for me?” We actually created a virtual assistant program with client-facing assistants who can do that. They’ll prep and sign DocuSign files to clients. That’s one of the most popular functions we offer, followed by back office support and asset management.
I would say there are two different camps of advisors who come to us. One set of advisors is doing really well, but they’ve reached a glass ceiling of scalability. They have a few people on their office staff, maybe five or six, but don’t have the capacity to grow without literally stopping being an investment advisor and starting to run the business full-time.
These people are looking for back office support. They just want to offload all of the administration—“Just get it out of my hair. I want to go back to talking with clients and managing assets.” These are usually larger, $300 to $500 million firms who have personnel or technology limitations. They can’t manage it on their own anymore.
The second camp of advisors who come to us are more mid-sized, $20 to $200 million firms. They are looking to offload the investment management. Not everyone separates into these demographics of course, and there is some overlap. But by $300 million you usually have a CFA on staff and you’ve got the investment management down pretty well. Although some advisors offload the actual trading to us. They design the portfolio, but don’t have the staff to do the trading.
Fee compression? Not an issue
We’ve heard about fee compression and we decided we’re not participating. The data doesn’t support it. I dug into the robos and my conclusion is that they are not going to replace advisors, but rather advisors are going to absorb robo technology. The last numbers I saw from Betterment showed that the average account balance was $15,000. Are they capturing billions of dollars? Yes. But it’s a particular niche where they’re capturing money. I don’t think it’s a threat, based on anecdotal evidence and benchmarking studies.
What we really see is that fees are going up for successful advisors. The mediocre advisor is feeling the fee compression. But the successful advisory firms that have multiple concrete deliverables—asset management, financial planning, charitable and trust planning, etc.—fees are going up. In our advisor population, 155 basis points is the average billing across the board, for the assets that we manage for other advisors. I think the answer is absorbing technology.
So, if you’re the advisor that is still doing pen and paper, you’ve got eight file cabinets behind your desk, yes, you’re going to feel fee compression and you’re going to feel the attrition in your business. But if you’re the advisor that’s willing to adopt technology, understand our changing times, and roll with it, you’ll be fine.
You don’t have to be the first person to adopt a technology, but don’t be the last. A lot of these tools allow advisors to grow and be successful. I’m not worried about losing a $15,000 account to one of the robos, but in 2025 you don’t want to be delivering a 100-page stack of papers to a client’s office for him to sign.
How to get started
It starts with vision and a plan. The advisor has to step back from working in the business so that they can work on the business. Step back from it. Think about what you want your business to look like three to five years from now. Think, make a plan, then begin to execute. Profitability is going to be a part of that because now you’re organized. You have a goal and some processes that you’re working on.
Number two, put a business system in place. Identify the areas you need to work on and do it. You can get there. Successful advisors are doing it every day. If you’re willing to pull back from the administrative mania, the panic management and spend just four hours a week working on your business, you’re going to reap so much profitability and quality results. It will blow your mind.
Finally, and very practically, know your financial statement—your margin and your net worth. Work to improve both of them. If you say, “I don’t know how to do that,” look it up online. You’ll at least have the basics within 10 minutes. Or take a class at a local community college. You’re a wealth manager, a captain of your destiny. You’ve got to get this stuff figured out.
If you’re working on growing your profit margin and net worth, isn’t that true wealth management? It’s what we do for others. Do it for yourself.