WealthManagement Magazine

The Good Problem

This month's Fix My Business column focuses on an industry veteran who faces what many other successful advisory practioners face: a bulging practice in need of a tune-up to increase efficiency and, as a result, profitability. For advice, we turned to one of our experts, Philip Palaveev, senior manager of Moss Adams, a Seattle-based accounting firm specializing in financial services, as well as Julie

This month's “Fix My Business” column focuses on an industry veteran who faces what many other successful advisory practioners face: a bulging practice in need of a tune-up to increase efficiency and, as a result, profitability. For advice, we turned to one of our experts, Philip Palaveev, senior manager of Moss Adams, a Seattle-based accounting firm specializing in financial services, as well as Julie Littlechild, president of Advisor Impact, a training firm with offices in Toronto and New York, and Hellen Davis, president of Indaba, a consulting firm in Tampa, Fla., specializing in coaching top-performing financial advisors.

THE SITUATION:

You might say that Kevin Meehan is a victim of his own success. In five years, Meehan, 48, has built his Itasca, Ill., practice into an approximately $1 million-in-revenue business, serving about 325 clients with $130 million in assets under management. And he also enjoys a steady stream of referrals — making his practice a self-propelled growth machine. But, growth has brought problems: Meehan has too many small clients who hinder his ability to focus on strategy, which hurts the bottom line.

Meehan's firm, CDHM Financial Advisors, is affiliated with Raymond James Financial Services and is in partnership with a 35-person accounting firm, CDH Financial Group, which is the source of the referrals and 20 percent of revenues. (It's not technically a partnership but a revenue-sharing agreement.) Three years after setting up his own practice, business had picked up enough that Meehan, a former special-ed teacher, took in another advisor, giving him a salary and bonus. He also added a second full-time operations person.

It all sounds like a story of healthy, steady growth. But, about a year ago, when he realized he was soon going to reach the $1 million-in-revenues milestone, Meehan decided it was time to take a closer look at the practice. He hired a consultant to help him analyze the business — and what he found was an eye-opener for Meehan. For starters, most of the 100 to 125 referrals a year Meehan was getting didn't fit his target (business owners, self-employed professionals and high-level corporate executives worth $500,000 to $5 million). About 85 percent of revenues came from about 20 percent of his clients — those you'd call A- and B-list accounts. That meant, of course, that a large number of clients accounted for a small part of revenues. Meehan was spending a lot of time serving money-losing accounts, and he was too busy handling all those clients to concentrate on attracting more-lucrative ones.

The recommendation, of course, was to fire all those undesirable C-list clients, either by referring them to another firm, shifting them to a junior associate or, as Meehan says, “just having a mass termination.” But, for Meehan, that's easier said than done. He's afraid that those clients who switch to another advisor in the firm will still end up being a burden on his operations staff. Plus, many have been loyal, longtime clients. “It doesn't seem like a good way to say thanks,” he says.

THE ADVICE:

Philip Palaveev

I think he needs to go through a simple financial analysis to get at the source of his profitability issues. First, he should figure out his direct expenses — that's all professional compensation subtracted from revenues. If it exceeds 40 percent of total revenue, then he has a gross profit problem. That probably means he has productivity issues. For example, maybe his junior associate isn't being fully utilized. Or it may be indicative of incorrect pricing. He may not be charging enough for what he delivers. Then, he should subtract all other expenses — rent, utilities and so on. That number should not equal more than 35 percent of revenue. If it does, that could mean poor cost controls, or that he's not fully using operations. Once he has defined these issues, then he can focus on addressing them.

I understand his reluctance to let go of clients. He's worked hard to get them. But he has to realize that one advisor can handle only so many clients. If he frees himself from 20 to 30 relationships in a year, he will open up a significant amount of capacity. Expenses will not change, but if he replaces those clients with bigger ones, that will make a significant impact on the bottom line.

What I'm talking about is gradually working on the client list from the bottom up, then, in a well-structured and professional manner, meeting with them and informing them that they can probably get better service from someone who will focus on their needs more. And, after that, he can delegate to a junior professional or another firm. Or, he can institute a new minimum fee, then get clients to choose whether they want to pay it or not. If they're reluctant, then he can refer them to another professional.

It sounds like he's generating an outstanding number of referrals. But, if the quality isn't what he really wants, then it may be because the referral sources aren't a good fit for him. The problem with clients who don't fit his target is they will refer clients who don't fit. So, at the same time that he starts winnowing down his client base, he should go to his top referral sources, especially the CPA firm, and make it clear what the perfect client is for him. Tell them exactly what he's looking for.

Julie Littlechild

To maximize profitability, three considerations have to be met. The cost of service delivery has to be in-line with the value of the client; clients need to be loyal and satisfied and all revenue opportunities have to be maximized.

Start with cost. He needs to clearly segment clients based on the total value they bring to the business, going beyond assets, including such factors as potential for referrals. After that, he can define the service offerings for each segment. Only then can he assess the total cost of service delivery.

At that point, some tough decisions have to be made. If clients aren't a fit, then he needs to find another advisor for them. It won't be profitable for junior advisors to take them. What happens when that advisor becomes more senior? He's going to have to find another way to move these clients on, such as raising fees on certain accounts. And his target market is too broad. The most profitable businesses work with a well-defined group and deliver a well-defined service offering.

Hellen Davis

I agree with him that he can't just dump his clients (it also indicates that he has solid ethics). That being said, you have to make a profit, too. My suggestion is to determine exactly how much C clients generate in revenue, then allocate at least 50 percent of that money to serve them. He can mark it down as simply the price of doing business.

Meehan can also figure out how to make firms that have contact with clients, like mutual fund companies, do the work instead of him. And he can charge an extra fee on C clients for services he makes a pittance doing (such as transferring funds from one account to another or on phone consultations). What will happen is, over time, they will stop phoning and he will train them to call the company themselves. He should send a letter to clients introducing the change, so they're not taken by surprise. Then, when they call, his staff will ask what they'd rather do. They can make it look like they're saving the client money.

He also has to put together a marketing strategy with what we call a target 150 — the 150 people in his town he wants to turn into clients in the next two years — and start building a dossier on them. At the same time, he needs to approach clients who fit his ideal demographic with a prepared referral pitch, asking them to refer new accounts that are just like them.

Still, I think Meehan's target market is too broad. Niche marketing is always better. Most successful clients I coach who, say, cater to the doctor market, will become even more specialized — only dealing with surgeons, for example. They have that market locked up. If he's going with closely held business owners, then what kind of business owners are they? A person with five to 10 employees has a completely different mindset from someone with 25 to 50 people. If he works with one executive at a particular company, by the time he gets five more, he'll have already created a template for them, saving him a tremendous amount of money and time.

He has to figure out three to five niches he can get into. Then he'll be able to transform his business into a profit machine.

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