Richard Brothers Financial is in full growth mode. The firm plans to jack up the number of advisors from four to 100 over the next 10 years, says co-owner Neal Richard. But while revenue and assets at the Portland, Maine-based firm are rising again, Richard continues to keep a hawk’s eye on expenses, cutting costs mostly through outsourcing and smart use of technology. “We’re watching our costs, but with an eye on expansion,” he says.
Richard is typical of many advisors these days. Even as they position themselves to grow, they remain highly cost-conscious. On the one hand, business has picked up since 2008. Average RIA revenue grew 6 percent from 2008 to 2009 while average assets rose from $136 million to $174 million, according to recent AdvisorBenchmarking research. Average profit margins haven’t climbed with them, however. They have held steady for the past year at 19 percent, and they’re well below the average margins of 28 percent in 2006, according to the AdvisorBenchmarking study. “One of the biggest challenges advisors face in growing their practices is addressing their expenses,” says Maya Ivanova, senior market research manager at AdvisorBenchmarking.
Figuring out just how to grow while cutting costs involves a sleight-of-hand. For many advisors, it means keeping a lid on such non-revenue generating items as bonuses, salaries and travel. For others, watching costs and managing growth is more a matter of taking steps to boost efficiency: outsourcing more work, of course, but investing in technology and reorganizing work processes as well. Plus, it means introducing a system for regular reviews of spending and brainstorming about productivity, making these strategic parts of running the business.
Certainly, there’s still a focus on keeping certain costs down and, especially, on finding creative ways to address them. Eliott Weissberg, who heads The Investors Center in Avon, Ct., and is an OSJ (Office of Supervisory Jurisdiction) branch manager for Raymond James Financial Services, is a case in point. Two years ago, he stopped giving raises to his six-person staff to lower fixed costs, while providing more generous bonuses based on firm profits. Although branch assets of $270 million and revenues are up, he’s still doing that.
But, the norm among many advisors seems to be something else: investing in new technology—in effect, spending money in order, ultimately, to save. The idea, of course, is that the right software and hardware can make you more efficient, boosting productivity, freeing up staff to work on more profitable activities and perhaps allowing you to operate with a smaller staff or office space. “No question, we’re seeing a big focus on technology,” says Bill Winterberg who heads FP Pad, a technology consulting firm specializing in financial advisors. “You can’t control the market, but you can control how efficiently you deliver services to clients.” Winterberg sees the biggest technology demand in the areas of account aggregation, rebalancing, and customer relationship management software.
Rose Price is typical of such an approach. In April, Price, branch manager of Financial Network Investment Corp in Vienna, Va., with assets of about $350 million, started using a program called Tamerec for portfolio rebalancing. According to Price, it does everything from showing when portfolios are out of alignment or cash levels have dropped too low to running account reports and doing trades. While the software cost Price $15,000, it saved her from hiring an additional staff person at a cost of perhaps $60,000, including pay and benefits. At the same time, she also added account aggregation software called Cash Edge, with which she can automatically update client accounts. As a result: Her client service managers have been able to spend more time on research and less time building portfolios and preparing for client reviews. And she bought a new CRM system, Junxure, built specifically for financial advisory firms. Price says revenues in 2010 will be the highest she’s ever had, thanks in part to the various technology purchases.
Using new back-office technology to address costs has another advantage: It doesn’t require buy-in from clients. That’s very different from what happens when you introduce such innovations as electronic reporting. Consider Dave Huber of Huber Financial Group in Buffalo Grove, Ill., an 11-employee firm with close to $500 million in assets. About a year ago, he started emailing his 700 clients their reports, which average about 15 pages, thereby drastically reducing printing and postage costs. But Huber knew he couldn’t introduce the change without testing the waters first. So, before making the move, he mailed a letter to all his clients informing them of the change and asking them to let him know if they preferred to continue receiving reports the old-fashioned way. Now, about 60 percent of his clients receive their reports electronically by logging onto a password-protected web site, a percentage that he figures will rise to 80 percent by the end of next year.
You also can’t expect to just turn the technology on without making other changes internally. For one thing, you might actually need to hire new staff to handle the new systems. And, that can lead to other cost concerns. Weissberg, for example, installed a new CRM system recently and hired an operations manager who knew how to use the program. According to Weissberg, those moves helped to increase assets by $20 million. Trouble was, during a slow period over the summer, it also became clear that the operations staff didn’t have enough work to do. Weissberg ended up offering employees unpaid vacation time, which boosted morale, while not adding to costs. He says that the staff now has its hands full, thanks to a new marketing campaign.
Another way to address costs and efficiencies is by introducing more streamlined procedures, and new technology also can help make that happen. To that end, two years ago, Huber’s office started developing new standardized work systems for everything from producing materials needed for client reviews to scheduling those meetings. What made that possible, however, were his new CRM and contact management systems, which helped to automate those processes. Richard, on the other hand, launched a project about six months ago to write and computerize procedures for every process in the office. Managers document processes with the aid of an administrator, who helps them to input the information in a standard format. He expects the project to take another 18 months before it’s completed.
In some cases, however, the introduction of new software creates the need for new work processes—with the potential for snafus. Staying on top of them requires regular forums through which you can discuss problems. Shortly after installing CRM software, for example, Price discovered that the system involved changing the steps required to complete client paperwork and a number of other tasks. But it quickly became clear one of the three advisors on staff wasn’t comfortable with some of those new steps. As a result, says Price, “The staff started to get very frustrated with the software.” So, she introduced a Friday morning staff meeting specifically to focus on snags. Now, they’re able to discuss problems before they undermine the efficiencies that motivated Price to introduce the technology in the first place.
For many advisors, the key isn’t so much what to cut or which technology or outsourcer to choose, but how to go about making these decisions. That means having a process for pinpointing areas to eliminate or investments aimed at reaping savings. Of course, at a minimum, it requires reviewing your financials at least every month. But, some advisors also run regular meetings focused on cost-cutting and boosting efficiencies. Take Richard of Richard Brothers. He holds monthly meetings with an outside IT consultant to analyze both ways to boost productivity and cut costs. “The point is to weigh our expenses against productivity gains and see what’s working and what else we should consider doing,” he says. Example: At a recent meeting, they analyzed ways to speed up the flow of real-time data from the firm’s custodian, the better to reduce the time it takes to create financial planning updates for clients.
It’s also best to take steps that are tied to a larger strategy. Consider Elliott Cove Capital Management in Seattle. In addition to working with individuals, the firm primarily helps banks provide investment portfolios and 401(k)s to their customers. According to Ralph Chiocco Jr., chief operating officer, assets have started to climb again from $77 million a year ago to $90 million today, though they are not yet back to pre-crash levels of $135 million three years ago. His firm decided the best approach was not to cut costs per se, but to be more strategic. That meant examining what services it should either eliminate or provide more efficiently, focusing on areas likely to increase revenues. To that end, Chiocco decided to switch from using their custodian to administer 401(k)s to a third-party company offering such services as back office, educational and technology support. As a result, the firm has the option of handing over a host of tasks, from enrolling employees to conducting seminars, freeing up staff to conduct other activities.