Читать книгу The Enduring Advisory Firm - Mark C. Tibergien - Страница 8

That’s why it is so critical to review what you know about the business and try to understand what the data and trends are telling you about its future, and your role in it.

There are several irrefutable facts that should be informing the strategies for leaders in financial services.

● The business is experiencing margin compression.

● Growth for mature firms is coming more from existing clients than new.

● There is an oversupply of clients and an undersupply of people to provide advice.

● The industry in general has a tarnished reputation among prospective employees and clients.

● Compliance and regulation is a growing component in a firm’s financial statements.

● Industry consolidation is inevitable as age and economics drive owners of advisory firms to make difficult choices.

Margin Compression

At a time when the average advisory firm is growing and the average advisor is making more money than ever, it is not always obvious when an advisory firm is suffering profitability challenges. This is why we recommend that advisory firms maintain proper financial statements with key ratio reports that show trends in gross profit margin and operating profit margin.6

Profitability in advisory firms is affected by several forces. Earlier in this chapter we rebutted the notion of price compression for the best-performing firms, but the reality is that the average advisory firm has not been able to keep the prices aligned with their rising costs of doing business or adjusted for the added services an advisory firm may be delivering to clients. Furthermore, with most fee structures tied to asset values, it is difficult for many advisory firms to keep pace with inflation in a low-return environment.

In addition to pricing, five other variables that affect profitability the most are:

1. Poor service mix

2. Poor productivity

3. Poor client mix

4. Poor cost control

5. Low revenue (sales) volume

In our experience, most advisory firm leaders do not actively manage to profitability and as a result are unaware of the insidious nature of some of their decisions. For example, it is common to introduce new services or take on new clients because of a perceived opportunity, not because of a conscious strategy. As a result, substantial resources and attention get diverted to a new initiative that costs more than it generates.

The advisory firm of the future will need to be more disciplined about the investment decisions it makes in its own business, much like it creates a framework for making investment recommendations for clients based on risk, reward, diversification, and other drivers.

Growth for Mature Firms

As advisory firms evolve through their life cycles, they take on the same characteristics as the humans who manage them. In the early years, it runs on energy, not on wisdom. In the teen years, the firm acts with an insouciance derived from the belief that nothing bad can happen. When it arrives at adulthood, the business acts with confidence and wisdom. In the later years, its energy begins to wane and the decisions that emanate from the business seem to be focused on conserving rather than growing.

For advisory firms that have not invested in the development of people, it reaches a limit in regard to the number of active client relationships that can be served effectively. Depending on what is being delivered and how the clients are being served, that limit is somewhere between 50 and 150 clients per advisor.

Once advisors reach capacity, they tend to slow their efforts to develop new business. In firms containing multiple professionals, all with responsibility for getting new clients, this is not a concern. However, in firms in which all the advisors have reached their peak, it’s not uncommon to see revenue from new clients drop from 15 to 20 percent of the total to 5 to 10 percent.

Why is this a concern? Often in parallel with the aging of the advisor is the aging of the client. There comes a point that with limited renewal of the client base, most clients shift into withdrawal phase away from accumulation. The old rule of thumb was that investors could afford to withdraw 4 percent of their wealth in order to live their lives comfortably. Assuming this as your guide, and assuming your revenue is tied to assets under management, advisors would need to replace these assets each year just to stay even. But of course, this gives no consideration to death or termination of the client relationships, let alone the rising costs of doing business.

It is clearly important for advisors to define reasonable growth objectives in clients, assets, and revenues, and manage them all to a goal. Without a conscious target, it is possible to become complacent about the need to refresh one’s center of influence, seek out referrals, and urge everyone in the firm to be aware of the need to grow each year.

An Oversupply of Clients, an Undersupply of Providers

Every industry would love the unique dynamics of the financial profession. Throughout the world, we have seen a marked increase in the number of millionaires. Simultaneous with this trend, we are seeing a decline in the number of advisors guiding these individuals whose lives have become more financially complex.

For example, in the United Kingdom since the implementation of Retail Distribution Review (RDR) in 2013, 10,000 independent financial advisors (IFA) have left the business. In the United States, since the market collapse of 2008, there are 40,000 fewer financial professionals in all channels.

Many of these clients are seeking do-it-yourself (DIY) solutions that they can obtain online, but there is still considerable demand for the wisdom and insight that come from working with a professionally trained advisor – especially when their decisions go beyond the investment realm.

The talent shortage is a risk for advisory firms that are seeking to grow because it is more difficult to find the right people to do the work they seek. It also means that compensation costs are rising in order to create the right inducements for people to join these organizations.

The talent shortage is also an opportunity for advisory firms that are able to position themselves as the employer of choice in their markets. They can establish a presence on college campuses where personal financial planning or related disciplines is a legitimate major. They can recruit from other firms by promising a career path, an opportunity to work with more challenging clients, and the appeal of greater financial rewards.

For advisors contemplating the future of their business in a sea of uncertainty, being positioned clearly among prospective employees and partners creates an opportunity unique in our business.

Tarnished Reputation

In a recent survey, most investors believe the financial services industry puts profits ahead of client interests.7

The reputation of financial services has diminished a lot over the decades. The financial crisis of 2008, the nefarious activities of players like Bernie Madoff and his compatriots, the mortgage crisis, the collapse of previously trusted financial institutions have all contributed to a negative image. Even those who have held themselves out as fiduciary advisors got caught in the mix, with several leading advisors being indicted and convicted for illegal behavior.

As much as Main Street advisors try to distance themselves from the stink of corruption, both the trade press and Main Street media highlight the misdeeds of people in the business constantly. Furthermore, members of Congress and regulators persistently cite the abuse of elders and the less informed as reasons to tighten the rules on bad behavior.

Of course, it doesn’t help that industry regulators have diluted the terminology, thus making it difficult for the average consumer to truly understand whom they are dealing with. For example, the term advisor was meant to be the province of those registered with the SEC but when broker/dealers purloined that nomenclature as a replacement for the term broker, no one objected. Yet broker/dealers operate under an exemption that says their registered reps can give advice as long as it is incidental to their business. Imagine holding yourself out as an advisor without having to register as one because it’s not considered core to what you do.

Other terms that tend to confuse is fee-only versus fee-based. Or suitability versus fiduciary standard. If you are the average client without reason to understand the jargon of this business, it may come as a surprise to you when you are recommended or sold something that doesn’t fit your goals, your risk profile, or your level of comprehension.

This is not to imply that one segment of the business is less trustworthy than another. It would be as if a chiropractor held himself out as an osteopathic doctor. Chiropractors and osteopaths are both medical professionals who treat patients with a focus on the musculoskeletal system. But the two disciplines require different levels of certification.

A chiropractor is a medical professional trained in chiropractic medicine, typically in a three to four year program. An osteopath, on the other hand, must be a licensed physician and is able to perform surgery and prescribe medicine.

The parallel to financial services is that clients do not know if they are being served by someone who gets paid based on the products they sell them, or paid for the advice they give regardless of which financial solution they use. Furthermore, when a bad act is committed, the press usually uses the word “advisor” in the headline, which reinforces the idea that the entire business is suspect.

In the end, advisors and brokers who are able to convey confidence and trust and who are transparent in how they conduct business will go a long way toward giving comfort to clients, prospects, and centers of influence. But the apprehension people have in dealing with financial services providers remains a headwind in the conduct of business.

Compliance Costs Are Rising

Regardless of which business model financial professionals operate under, the cost of compliance continues to rise. For independent firms, this cost can represent 2 to 4 percent of all expenses. For the most part, it is a variable cost, meaning that it goes up and down based on the volume of business one is doing.

Much of what has to be done in the advisory profession is prophylactic and not to remedy bad deeds, but the cost of surveillance and enforcing rules of behavior is meaningful. To be effective, it requires at least one individual whose sole job is to monitor activities and take remedial actions when something is amiss. It’s like having a traffic cop on every corner.

Most advisors would say they are honest and ethical, so the cost of compliance seems especially burdensome. But the myriad rules in place to ensure both brokers and advisors are acting in the best interests of their clients require well-trained specialists to educate, inform, and direct partners and employees to stop, look, and listen before acting.

Consolidation Is Inevitable

All of these forces of change contribute to the need for advisory firms to become bigger. “Bigger” is a relative term, of course, since for the most part, advisory firms are small businesses, even micro businesses.

But complexity and costs require firms to be managed professionally. Adding layers of process and management to a business means that revenues also have to increase to cover those costs. The need to generate more requires the addition of people and thus begins a never-ending cycle of growth.

Many firms have grown naturally by adding layers as needed, but others have found benefit in merging8 with like-minded firms to more efficiently consolidate certain costs, gain operating leverage, and establish a bigger market presence more quickly.

Firms like Hightower moved quickly to create a semi-national Registered Investment Advisory firm focused on recruiting people out of wirehouse brokerage firms. Focus Financial was an early roll-up firm that has acquired numerous large advisory practices around the country though it has not tried to merge them into a singular brand or common client experience. Middle-wear providers such as Dynasty serve as a bridge between advisors and their providers, providing outsourced solutions to those not yet big enough or disciplined enough to create their own management infrastructure for this purpose. Numerous advisory firms throughout the United States and in other countries have merged, as the founders of one looks to retire but seeks to provide continuity to their employees and clients.

While we do not predict the end of the solo-practitioner, it is clear that there will be a divergence in size and presence in different markets. It is not unfathomable to see some truly national advisory firms much like we see in the accounting profession with its Big 4 CPA firms. More likely, we will see the emergence of super regional advisory firms – what the accounting profession labels as “Group B” firms.

These super regional advisory firms will be managed professionally with a branch manager system not unlike the brokerage industry. While there will be some that are scattered across the frontier, more likely the best-performing super regional firms will have a geographic concentration that provides for tighter management, tighter branding, and operational leverage.

We expect there will also be smaller, local advisory firms that find value in banding together with other advisors to create some economies of scale and continuity of practice. Many of these will be formed by second- and third-generation advisors who do not have the same fear of working with others that many of the industry pioneers seemed to have.