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.
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