This article appeared in the December 2016 issue of Investment Advisor.
Many industry benchmarking studies are reporting that profitability has been falling in most independent advisory firms over the past two years. While there are a number of possible reasons for this, in my work with independent firms, I've found there are really only a few reasons. One is technology. Or perhaps more accurately, it's the failure of many advisory firm owners to efficiently integrate the flood of new technology into their businesses.
Let me explain. While digital technology has been a growing part of the lives of most Americans since the 1980s, for most of that time, the independent advisory industry has been too small to attract the attention of major tech companies. Consequently, much of the technology that has been available to independents has been cumbersome, limited in functionality and not well integrated.
To their credit, despite these drawbacks, many independent advisors realized both the immediate benefits from and the tremendous potential of adding technology solutions to their businesses. They have persevered with inefficient tech, even though it didn't live up to many of its promises of increased efficiency and cost savings. Ironically, adopting that technology not only didn't result in significant reductions in staff, it often required adding more staff to make the tech solutions perform the way they should.
Things have changed significantly from those bad old days. The 10-year boom in the independent advisory business — driven by the tremendous increase in assets under management and the flood of breakaway brokers who want to get in on the action — has forced custodians and broker-dealers to up their technology game. It also has driven the success of the smaller tech companies who were serving the industry, to the point of getting the attention of many larger technology players. The result has been dramatic improvement in the quality and efficiency of technology platforms for advisory firms in recent years.
However, while this improved technology has been a blessing to independent advisors in many ways (ease of use, smoother integration, operational efficiencies), we believe it's also led to the current declines in profitability. That's because many firm owners are failing to maximize the benefits of their new technology. While they are spending more on vastly improved platforms, which truly do create operational efficiencies, they are also continuing to operate in their old mode of adding more staff right along with it. The double whammy of increasing tech costs and adding staff is eroding their bottom lines.
Unfortunately, that's not all the bad news. I suspect that in 2017, the increasing competition from breakaway brokers and robo-advisor platforms will make it harder for independent advisors to keep all of the clients they currently have, and to attract new ones.
To address these problems, I suggest owner-advisors do five things to increase their operational efficiency: stop hiring people before they have to; stop adding technology before they need to; improve their sales efforts to add new clients; strengthen their relationships with existing clients; and track the following five indicators.
Indicator 1: Lead Ratio
Every firm has a list of potential clients who have contacted the firm but haven't scheduled a meeting. They are a major, often untapped, source of new clients. With increasing competition for clients, these leads are more and more valuable.
We suggest firms track changes in the number of prospects on this list over the past calendar year. You can do this on a quarterly or even monthly basis. Look at how many names were on the list a year ago, and how many are on it now. If the number is increasing, you're doing well. If it isn't, it's time to take steps to increase your referral rate from existing clients or your outside business development efforts.
The number of folks on this list will determine your future growth rate: If it grows, you'll grow.
Indicator 2: Close Ratio
During the past calendar year, how many of the people who had prospect meetings became clients? If the number is going up, great. If it isn't, it's time to rework your sales pitch and process.
