In Practice May 7, 2007

Advisers Need to Better Manage Practice Revenues

Are you getting a fair reward for your labor and risk?
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Speaking at the National Retirement Partners annual conference in California, Mark Tibergien, a principal with Moss Adams, told advisers that despite significant growth in revenue for adviser practices, income for owners has been flat. He said this can be a result of the firms reinvesting in their companies – or it could be a sign of poor management.
Traditionally, Tibergien said, the adviser owning a practice sees his compensation as what he is left with once he subtracts the costs from his firm’s revenue. However, he suggested that advisers should take their revenue and subtract the direct costs (which should total about 40%) to get a gross profit. From that, they should subtract their overhead costs (which should total about 25%, Tibergien said), and that should leave them with an operating profit of approximately 25%. The direct cost figure should include salaries, including that of the business owner, which is his reward for labor. Then the operating cost is the reward for risk, the reward for business ownership. Tibergien suggested this is part of the reason that advisers at a wirehouse have smaller payouts—they aren’t taking the risk of business ownership, he said.
Adviser practices have been growing significantly, but costs are rising faster than revenues, he said. Luckily, the growth in revenues isn’t just a result of a market increase; advisers are garnering new clients and growing assets from their existing relationships.
However, Tibergien stated, passive referrals are still driving growth, which suggests the marketing arm of the practices is atrophying.
Advisers are dealing with significant time pressures, in which they find it is difficult to spend time managing their practices and serving their clients. An Advisor Impact study found that only 39% of advisors’ time is spent on client service, Tibergien said, which probably isn’t enough.
In Practice May 7, 2007

Differentiation is Vital for Adviser Success

What is your value proposition?
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Citing the Vision 2006 Study, Ann Schleck told attendees at the National Retirement Partners Conference in California last week that when advisers were asked what their value proposition is, the two most common responses were independence and dedication to the retirement business. If everyone cites the same things as their value proposition, she said, it is not a differentiator.
Therefore, she told advisers that they should think about their value propositions on a firm level, a team level, and a personal level. Further, she commented, advisers should show their clients the specifics of their value propositions. For example, Schleck said, if you say you have a high touch service model, show the plan sponsor exactly what types of interactions will occur throughout the calendar year.
Niche markets are another area that advisers should examine, she said. Instead of thinking of yourself as a retirement plan specialist, look beyond that and drill your target market down further, she suggested. Advisers can specialize in a particular plan demographic, or a type of firm, a plan size, or something else that happens to work as a specialty.

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Advisers are being transformed from sales people to consultants, she said, and plan sponsors have increased interest in working with advisers. As part of the process of working with sponsors, Schleck predicted that there will be an increased emphasis on plan analytics and less focus on investment analytics. Although investments are important, she said, the best advisers will become better versed in plan design and features and compliance issues. The opportunity exists in helping plan sponsors manage risk – for example, helping a client prepare for an audit, she noted.
Also as part of this movement, there will be an emphasis on outcomes. Schleck suggested that a good practice for advisers would be to complete a personal return on investment (ROI) to give to clients. In the ROI, the adviser should show the positive outcomes they have been able to effect, including things such as changes in plan design, and increases in the participation and deferral rates, among other things. This way, the plan sponsor gets a document showing the value of working with the particular adviser.

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