Operating an independent advisory practice requires expertise in a multitude of various fields. Many advisors will typically focus on client relationship management and financial planning as their primary disciplines (and rightfully so), as these are the core functions of the profession. However, it’s also important to remember that your advisory practice is a business and should run as such to achieve the levels of growth and profitability that you desire.
Many independent financial professionals don’t track important business efficiency metrics like average hourly rate or the annual costs to maintain a client. However, once you know the answers to a few crucial questions, you’ll have the tools to start running your practice more like a business and start maximizing your time and profitability. You can start by answering these six questions.
1. What’s your net production?
Most financial professionals know their gross production each year, but what was your take home after all expenses were paid to run your business? That’s what counts when evaluating how successful your practice is. The average expenses of an independent financial professional typically range from 40% to 60% of his or her gross production.
2. What’s your average hourly value?
Suppose you work 40 hours a week and take two, one-week vacations during the year. That means you work about 2,000 hours a year. How much is one hour of your time worth? Are you compensated fairly?
If your gross production is $500,000 and you work 2,000 hours a year, your average value is $250 an hour. If every hour of your time is worth $250, should you be paying bills, filing paperwork, or tracking down transfers? Or should you be paying an assistant $20 an hour to handle these tasks?
If you want to leverage your resources properly, you should be outsourcing anything you’re doing during the day that’s not in line with your pay. Meaning you can spend more time focused on clients and prospects.
3. How much time do you spend meeting with clients or prospects?
It’s widely understood that the more time you spend directly with clients and prospects, the more profitable you’ll be. Financial professionals that focus more of their activity on interacting with clients and prospects build more trust, get more of their clients’ assets, close more prospects, get more referrals, and lose fewer clients over time.
When you dedicate most of your valuable time to working with clients and prospects, you’ll get more clients and keep them longer.
4. How much time do you spend with your top clients?
You need to make sure you’re spending time with the right clients. Who are the right clients? You should segment your book of business based on where most of your revenue comes from. If you have 250 clients and 25 are producing 70% of your total revenue, those 25 clients should be getting 70% of your time.
5. How much does it cost to maintain a client for a year?
Add up all your expenses in the last year and divide that figure by the number of clients you serve. Make sure to include your business expenses, cost of time spent, cost of mailings and client events, etc. Then, you can compare that with the average fee that you charge clients and determine what the breakeven assets under management (AUM) are per client.
This allows you to gauge your current clients, as well as focus your prospecting parameters to ensure that the revenue generated from adding a new client will improve your business’s profitability.
6. What percentage of your overall business is generated from a recurring revenue source?
Recurring revenue sources can help increase the profitability and enterprise value of your firm. Most advisors participate in some mix of both commissions- and fee-based production. As a firm matures, typically, the production mix will shift profoundly toward fee-based activities because the fee-based model allows you to focus more on higher revenue-producing clients without the need to prospect as heavily for new business.
Furthermore, as one looks to exit the industry or sell their practice, recurring fee-based revenue will command a higher business valuation than a firm that’s focused on one-time, commission-based revenue sources.
These are just a few high-level questions that financial professionals should be able to answer to assess the efficiency and profitability of their business. With the full range of responsibilities associated with operating an independent financial planning firm, it’s easy to neglect tracking-specific business efficiency metrics. However, it’s a significant undertaking to achieve your business growth and profitability goals.