Previous equity markets allowed many advisors to be lulled into complacency when it came to focusing on building a solid business and, unfortunately, they are paying the price today."

Profitable on Purpose

By John Bowen

As I travel the country meeting with many financial advisors, I am troubled by the sense of a loss of direction that I see, combined with a significant reduction in the profitability of most advisory practices. Many financial advisors have shared with me that they are no longer as excited about the business as they once were. They often get up each morning feeling overwhelmed by the number of challenges they face every day. Even worse, they are not confident in their ability to meet these challenges.

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Several have shared with me that they are beginning to wonder if they are in the right business when they could be much better compensated doing something else with a lot less risk. Our own research supports this anecdotal evidence. Last year our Maximize the Bottom Line study found that 84.3 percent of advisors had made less than $150,000 net income over the last two years. Many advisory firms' profit and loss statements, after normalizing for the compensation that the owners would have to pay for someone else performing the same services (if they were no longer in the business), would put them at a loss.

Previous equity markets allowed many advisors to be lulled into complacency when it came to focusing on building a solid business and, unfortunately, they are paying the price today. But you don't need to suffer from either a loss of direction or reduced profitability during this market downturn if you focus on what is important.

We find that elite financial advisors are providing the leadership that many advisors need. By focusing on five essential strategies for success, these advisors are enjoying substantial net incomes and are continuing to grow their practices, despite the downward turn in the market.

1. Focus on affluent private clients. Your clients are what's important. They need you more than ever to help them through this confusing financial environment. They still have the same dreams, but often with fewer assets (and less confidence) to achieve their goals. In a recent study of affluent investors, more than 90.2 percent reported a desire to work with a financial advisor. To the extent that you have the right clients who have financial challenges you can solve and who are willing to pay you to maximize the probability of achieving their dreams, you can build a great business.

Many of the most successful independent financial advisors set high minimum asset requirements in order to fully focus on affluent clients. They do not accept clients who do not meet these requirements unless there is a potential for future business development that warrants it. Elite financial advisors only take clients that they can serve profitably by adding significant value.

Questions to ask:

• What type of clients do you have today?
• Are they suitable for your services?
• How would you qualify affluent clients?
• How would you approach them and position yourself as an expert?
• How would you communicate with them?
• How would you delight them in order for them to become your marketing apostles?

2. Use the investment consulting process to differentiate yourself from the competition. In every segment of the marketplace, we consistently see that those advisors who employ a consultative approach enjoy significantly higher long-term profitability than those whose focus is transactional, or geared to simply selling products. Your investment consulting process should be based on a series of scheduled meetings that are designed to intentionally build trust and impress clients from the very first meeting.

Even among registered investment advisors, we find that only 18.7 percent are consultative in their orientation. However, these 18.7 percent represent a substantial percentage of those advisors who have assets under management greater than $100 million. Making the transition from pushing products to taking on a more consultative role with your clients is essential.

Questions to ask:

• How do affluent clients buy financial services?
• What can you do to eliminate client turnover?
• How do elite advisors use diagnostic reports to open the door for millions of dollars in additional revenue?
• What should your investment policy statement look like?
• How can you best demonstrate to your clients the value you bring?
• How do elite advisors develop an endless stream of pre-qualified, pre-endorsed prospects?

3. Manage your practice as a business. One of the big mistakes financial advisors make in trying to build great businesses is focusing on the top line of assets under management, gross revenue, or both. But in today's market environment, more and more advisors are finding out that the only thing that counts is cash flow. You have to design your business as if you were going to sell it tomorrow, even if you plan never to sell. This focus will ensure that you never lose sight of maximizing free cash flow.

Successful independent advisors structure their practices as businesses that consistently provide superior client service while benchmarking their business success according to free cash flows. They incorporate processes that keep them focused on the affluent client market and that yield significant returns in revenue, and increased assets under management and net profitability.

Elite financial advisors leave nothing to chance as they plan for their success. Unfortunately, most advisors don't plan. When we asked financial advisors whether they had a business or marketing plan in a recent study, only 17.4 percent were able to respond affirmatively.

Questions to ask:

• Which financial services are affluent clients looking for?
• How do you spend all your time on revenue-generating activities?
• What are top advisors doing to continually increase their average revenue per client?
• Where can you grow income, even with the downward pressure on fees?
• What do you need to do to sell your practice for significant value?
• How do you find the right balance in your personal and professional life?

4. Partner with financial institutions. Elite financial advisors focus on their core competency of investment client relationship management and outsource areas outside of their proficiency. Partnerships with financial institutions enable them to do this in a cost-effective way. Unfortunately, 67.8 percent of advisors believe it's a challenge to get the type of support from financial institutions that will make a difference.

Elite advisors choose their financial institutional partners well to make sure they get the support that they need to serve their clients well.

Questions to ask:

• Where can you get extensive practice management support from financial institutions?
• How can you leverage the technical support available to advisors?
• Where can you get advanced sales and marketing training?
• How do you find a talented, knowledgeable financial services wholesaler who will help you grow your practice?

5. Make a lifelong commitment to learning. A constant theme in our research findings is that the more successful advisors tend to focus less on income and more on understanding their clients and how to serve them better. There's no doubt that keeping up with ever-changing regulations, new technologies and investment products and strategies are a substantial challenge. But to provide the level of service your clients need and expect, you must make it one of your priorities.

Unfortunately, the majority of advisors (65.9 percent) believe it's a challenge to find high-quality mentors, and consultants. Elite financial advisors do not lose sight of the importance of education, particularly about clients.

Questions to ask:

• How do you find a study group of your successful peers?
• Where do you find a coach or consultant to help you achieve all you are capable of achieving, much like an elite athlete has a coach?
• What specific educational avenues will you pursue that will be most productive and effective?

Over my next five columns, I will examine in detail each of the elite advisors' five essential strategies for success to help you meet our current business challenges head-on.