Don't Run Your Practice Like a Lemonade Stand, Consultant Says

They don't think of their practice as a business. They treat it like their personal checking account. They're not setting goals other than [client] headcount. You can't treat your practice like it's a lemonade stand, just collecting money and spending it [right away]. You need to set [a number of] goals and measure gross revenue and overhead [etc.]

How much profit can an advisor make, realistically?

Advisors are well positioned to have some of the highest profit margins of any professional services business. If they manage to keep overhead to around 20%, that's an 80% gross profit margin for a solo practitioner. Pretty incredible. If they deliver high-quality advice and guidance, the sky's the limit for their practice.

At what point do beginning advisors often stop growing?

When they have to go to the next step: adding back-office support. But because they aren't making a profit, they're trying to nickel-and-dime it. They feel they can't hire someone or get the right outsource service provider. But by outsourcing with cloud services, you're able to gain scale. You don't have to build it all on your own — you're just using a fraction of someone else's platform.

What else goes into being a profitable advisor?

A good cash flow. As you grow, you're going to need different software, a performance-recording program [etc.]. If you're not operating on a good margin, you won't be able to afford those things — and then you'll begin to skimp. I see practices reaching this inflection point and stop growing. Sometimes they go backward. They're not able to invest back into the business and deliver good reporting and good advice.

In your first career, you worked for a relief and development organization, which founded Times Square Church in New York City. You also taught money management and personal finance. Was that part of helping people in recovery?

Yes. I taught people who had been suffering from life-controlling problems, like drug or alcohol addiction, who wanted to make a new start in life. They needed to be able to make a living and manage the personal finance part, which is the point where recovery always falls apart — how to make money and handle it responsibly. In the investment advisory business, you're also trying to help people improve the quality of their lives. And in so doing, we're compensated nicely for it.

What does the financial advisor of the future look like?

They'll have a smaller physical [office] footprint. Sometimes they won't have an office at all. Or it might be a shared office or a shared suite. They'll have less equipment, less physical staff. Our [company] is [paperless] except for custodians' account onboarding [paperwork], where a signature is required to be scanned and sent in. But little by little, that's going away, too. Within 12 months, I think we'll see all the major custodians offering digital client onboarding without using a robo.

Where do robo-advisors fit into the big picture of financial advice?

I'm a bit of a contrarian when it comes to the robos. I don't believe they're a threat at all. We're going to be absorbing that technology. It's not putting us out of business, and I don't believe it brings fee compression either. I believe it's just the opposite. People with significant money want someone to help and guide them [vs. using an automated system]. But we're going to see the typical advisory firm have a lot of robo features — simple functions, like online account management. That's not a hallmark of the independent advisor of today — but in five or 10 years, I believe it will be.

— Related on ThinkAdvisor:

• Why It's Time to Remake the Rainmaker
• What's Behind the 'Great Unbundling' of Wealth Management?
• The Dark Side of Broker-Dealer Scale: Pain for Advisors

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