Lightening the Burden of Success

Deep thinking about work flows and client segmentation is needed to surpass the $100 million mark in assets under advisement.

Currently a director of practice management at Russell Investments focusing on U.S. adviser-sold business, Sam Ushio has spent much of the last 11 years coaching and collaborating with financial advisers across the Russell enterprise.

Some elements of the financial advice business have changed substantially since Ushio started working in the space, he tells PLANADVISER. On one hand a renewed focus on fees and expenses has emerged, compressing adviser revenues even as deeper service and responsiveness are demanded by clients. On the other hand looms the takeoff of new automation technologies and the ascendance of digitally enabled self-service investing—calling into question many longstanding assumptions about what value traditional advisers can bring to the table.

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As the industry charges headlong into another paradigm shift, Ushio says a few consistent themes remain as true today as they were in earlier periods. Chief among those themes: “Advisers typically don’t have a good handle on the value of their organization’s time,” he says, leading to less-than-optimal decisionmaking that stalls or even stymies practice growth.

Ushio feels one of the most important metrics for an advisory firm owner to hold in mind is the value of an hour of their organization’s time. It’s a number that will inform almost all aspects of the business, he says, from service staff alignment to the adoption of new client-facing technology tools.

“Very early on in the coaching process at Russell, we take an adviser’s gross annual revenue and divide it by 2,000, and that gives us roughly the value of a work hour of the organization’s time,” Ushio explains. “It’s a simple metric, but we use it all the time to encourage an adviser to think more like a CEO—to keep a pulse on their business. It’s a way of thinking that will help drive success even as the market shifts and client demands change.”

Ushio steps through an easy example to highlight the importance of the gross work hour value metric.

“Just as an easy example, let’s think of a new adviser getting started in the industry at $0 assets under management—and over time we see them hit and surpass $100,000 in revenue,” he explains. “At this point the value of the business’ time has grown to be about $50 an hour, or in other words, the firm is going to have to deliver $50 per work hour in value on average during the year to earn this revenue. As the firm grows and hits $200,000 in revenue with the same staff, the value to be delivered jumps to $100 per hour.”

One can see that, as the advisory firm moves through this cycle, the value of the business’ time becomes greater and greater, meaning more and more value must be delivered per hour to earn the increasing amount of revenue. As Ushio notes, growth can actually become a problem when the adviser is wedded to their old way of doing business and does not account for the way increased service demands could strain the existing staff or client service delivery model. 

“As your revenue doubles, is the answer here going to be to double your staff? Or double the work you give to your staff?” Ushio asks. “Another way to say to frame the problem: advisers have a tendency to anchor to a recipe for success that has worked out for them in the past—but they don’t necessarily account for the fact that a growing business is a changing business. Will the old recipe of success be efficient enough as more and more clients pile in? Usually the answer is no.”

The client service model efficiency question is an incredibly important one for growing firms to ask, Ushio continues. When he talks to advisers, he can see they often have a vague sense that their business is changing as it grows, “but they don’t really dive deeply into what growth is doing to their firm, or where the client service pressure points are arising.”

“This is a dangerous recipe, because very quickly an adviser’s service model can fall apart,” Ushio says. “He will find the firm struggling to fill service agreements and he’ll start to wonder—when did the advice business get so stressful? Why can’t we keep up anymore?”

Based on his experience supporting the Russell adviser coaching program, Ushio suggests the first serious stress point for growing advisory firms often comes around the $20 million mark in assets under management.

“Once you reach this point, just hitting the service delivery demands with a small startup staff will really start to become difficult,” Ushio says. “Time will be very tight and there will be much more difficulty finding time to focus on sales and expanding the firm, rather than servicing and maintaining the current book of business.”

The response to this will vary from firm to firm, depending on things like the personality of the firm owner and what vision he or she has for the future. New staff may need to be on boarded, for example, but the core service model could remain in place. Other advisers may choose to create an affiliation or partnership with a larger advisory network to get the back-office support they need to keep growing.

“The next inflection point comes around $50 to $60 million in AUM, depending on how the firm is built,” Ushio continues. “At this point the adviser is making pretty good money, most likely. They’ll be able to pay their bills and be comfortable financially—so we see a lot of advisers have a tendency to plateau around this point.”

What also prevents a lot of advisers from pushing beyond $50 million or $60 million in assets, Ushio says, is that doing so “requires a pretty fundamental shift in mindset, from that of the adviser to that of the CEO of an advisory business.”

“Managing an advisory business of this size will be a full-time job, and you’ll probably no longer be able to service clients directly,” Ushio says. “That jump isn’t always appealing for an adviser—especially if they’re in the older set of advisers already starting to think about their own retirement.”

Ushio warns he “doesn’t really see too many firms approaching or breaking the $100 million asset level until they have fully embraced this more corporatized thinking—they’ll have to implement more alignment of service models and they’ll likely have a formal client segmentation strategy in place.”

Ushio is far from the the only expert making this assessment. According to new research from financial research and analytics firm Cerulli Associates, client segmentation has long been a key element of improving productivity and profitability for advisers.

“Segmentation is at the heart of an adviser's growth, productivity, and ultimate profitability,” says Kenton Shirk, an associate director at Cerulli. “The process of segmenting prospects and clients allows advisers to make critical trade-offs between resource allotment and opportunity potential. An adviser's time is his or her most valuable and perishable resource.” 

Shirk points to findings from the June 2015 issue of The Cerulli Edge – U.S. Edition, an edition of the recurring research report dedicated to themes in investment client segmentation. Similar to Ushio, the report argues effective segmentation tends to be difficult for advisers to establish and implement, especially as growing advisory firms “struggle to prune clients who are now outside their ideal profile.”

Advisers often feel an obligation to continue servicing one legacy client or another, Cerulli finds, not because of good profitability, but because of a sense of obligation and worry that turning down these non-ideal clients will strain their reputation or other relationships. Despite these worries, Cerulli asserts there are many benefits to segmentation, and that advisers must be selective about their clients—and careful about the level of services they agree to deliver. 

“It helps an adviser focus time and resources on the highest priority clients and prospects, ensuring a high-touch, positive experience for top clients, while providing a reasonable yet proportionate level of service to non-ideal clients when necessary,” Shirk concludes. “The segmentation strategy for an adviser practice lays the foundation for its service model and pricing structure, and these intertwined decisions have significant ramifications for a practice's productivity and profit output.”