Building Scale to Grow Your Practice with Purpose

When a firm plots the course to grow, the need to measure profitability is typically an afterthought. To achieve growth that leads to increased profit, however, you must follow a detailed plan. Here, I’ll share strategies for building scale so you can grow your practice with purpose, plus best practices to help ensure that this growth leads to profit.

One of the best ways to build scale is to implement a client minimum. Now, if you’re like many advisors I speak with, you might find yourself “stuck,” making exceptions to client minimums for various reasons (e.g., to be seen as an altruistic service provider). But what if I told you that this approach neither leads to the desired perception nor improves profitability?

In fact, according to the 2016 Financial Performance Study, firms that are more selective are also more profitable. Fully 74 percent of top-performing firms enforce a client minimum compared with 61 percent of all others. Setting your average client AUM as a minimum targets larger clients.

To put it in perspective, the average household AUM for a Commonwealth advisor with less than $500,000 in annual production is $250,000. These numbers jump to $450,000 in household AUM for advisory firms with greater than $500,000 in annual production. Visibility as a high-quality provider—not a low-cost solution—helps the most profitable firms attract the highest-quality relationships and command a premium for their services.

Profitability goes beyond spending time with larger clients. Of course, you feel good when you spend more time with clients who are profitable. But the paradox lies in the fact that client category distribution looks something like a classic bell curve.

• B and C clients, in the middle of the curve, represent the majority of clients.
• A and D clients, on the outer edges, represent the minority.

By volume, B and C clients represent the most service demand; however, when advisors implement change, most of them focus on their least profitable D clients. They are often surprised to learn that C clients, with a slightly larger AUM and profit margin than that of D clients, are also unprofitable, as the sheer number of Cs requires advisors to use more time servicing them than servicing Ds.

Bottom line? Time is money, and creating scale in the service model means recruiting the right clients from the start to improve your firm’s productivity.

Next, it's time to measure your firm's productivity, which requires two critical data points: revenue per headcount and households per headcount.

Revenue per headcount. This data point measures the productivity of revenue serviced by advisors and staff. The average revenue per headcount for Commonwealth firms is $210,821 and for non-Commonwealth firms of comparable size is $190,783.

Households per headcount. This data point looks at staff capacity in terms of the quality of the service experience. The average Commonwealth advisor serves 53 households per office staff member compared with 35 households per staff member for industry firms of comparable size. What does this mean? In order to generate revenue similar to that of his or her industry peers, the average Commonwealth advisor takes on more households.

But the more a firm can grow without adding staff, the greater its capacity. That means maintaining minimum client AUMs and attracting clients who fall in your top 30 percent to prevent staff burnout or avoid the cost of increasing office headcount. Fewer small-client households means more capacity to grow.

Once you’ve gathered your firm-specific data, there are a few best practices to help you achieve growth that leads to increased profit.

Implement client segmentation. Determining how much revenue your A, B, C, and D clients generate and then organizing clients in your CRM system are extremely useful steps. Your data discovery will prove valuable in terms of what you’ll learn about your ideal clients and how to scale your services. Here, it might help to categorize your clients based on revenue and relationship scores (quantity and quality). Once clients are scored, valuable revenue, AUM, ROA, and age statistics can be leveraged to make strategic decisions.

Best practice is to draw a line at the AUM of an average B client. Clients above this line are “ideal.” Recruiting any client with AUM higher than B will help your firm create greater scale as it moves upstream in terms of average client size. On the flip side, make an honest assessment about smaller clients who may take up too many resources. Remember that, all things being equal, roughly ten D clients generate the same average annual revenue as one A client.

Develop a service model. The next step is to develop a tiered service model for A, B, C, and D clients by putting repeatable processes in place based on the financial needs of each client segment. As noted in the Advisor Metrics 2015: Anticipating the Advisor Landscape in 2020 report, the average advisor spends 60 percent of his or her time preparing for and meeting with clients or prospects. We also know that the more investable assets a client has, the broader the client’s need for financial planning; investment management; and tax, estate, and retirement planning. Many advisors take this to mean that A clients require more meetings and check-ins, but this may be painting with too broad a brush.

Instead, start by asking each client how frequently he or she wants to meet. Check-in calls can be effective, but keep in mind that you lose the opportunity to “chew the fat” and learn more about what’s going on in the client’s life or about potential referrals. Ultimately, making in-person meetings shorter and more efficient may have the greatest probability of improving service model productivity.

Create scale with technology. Whenever you can make a labor-intensive task (e.g., product selection, financial planning) more technology-intensive and repeatable, you are creating scale at a very low cost. The key is to optimize the technology that is available to you.

For example, here at Commonwealth, we offer our advisors a “technology x-ray” to help them self-assess how they use our technology products. The result? Our average advisor spends 1.3 percent of net revenue on technology compared with the industry average of 3 percent.

Consider outsourcing investment management. With fee compression in the market, specifically surrounding investment management, and the prospect of increased regulation, third-party management can help you continue to compete as a financial advisor with a focus on goal-oriented financial planning.

As reported in Advisor Metrics 2015, the average advisor spends roughly 17 percent of his or her workweek rebalancing, trading, and selecting securities, as well as ensuring that cash is available for transactions. What if you took those 6.8 hours every week and allotted the time to financial planning, prospecting, and strengthening relationships to generate more referrals? You would have up to 15 more business days a year to grow your business and not just maintain it.

Focus on organizational structure. Did you know that the average cost of human capital for an independent advisory firm is roughly 18 percent of revenue? As such, you want to get the most from staff, which means having regular reviews to go over job descriptions and expectations. After all, maintaining a continuous dialogue about what is accomplished is often the difference between a team staying the course with purpose and completing tasks simply to check off a box.

Simply put, top firms grow faster because they are more purposeful in their growth. From this purposeful growth, community visibility increases, leading to more prospects. In turn, this leads to better clients, improved profitability, and the recruitment of better talent. By implementing some of the strategies and best practices discussed here, I think you will see how growth with a purpose can create more value for your clients and competitive strengths for your organization.

How do you build scale in your practice? Would you consider outsourcing investment management? Please share your thoughts with us below!