"Conventional wisdom says that all you to do to succeed is stay in business and grow your number of clients. However, our research shows that 'conventional wisdom' is in fact the very formula for not making a particularly good living."

Bottom Line: Top Dollar!

By John Bowen

Any advisor considering selling his or her firm should be interested in two key issues: First, exactly what determines the value of the business? Second, how can an advisor maximize that valuation? There are a number of ways that firms are valued, including multiples of revenue or assets under management, free cash flow, or earnings before interest, taxes, depreciation and amortization (EBITDA). At the end of the day, however, your firm's future value will be determined most by a single item: your bottom line. The key to maximizing your firm's valuation, then, is to focus on maximizing your net income.

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While this is an important message for advisors who are thinking about selling, it's equally important for those who intend to remain in business for many years to come. Like the homeowner who waits until just before selling his home to make long-overdue repairs and improvements, many advisors delay instituting the vital changes in their business that will make it attractive to buyers. That's bad, because the value you create in order to make your business worth buying is the same value that drives your current income. So, even if you have no wish to sell your firm, build it as if you were going to sell it. This strategy will maximize its value—and your bottom line.

We at CEG Worldwide undertook a comprehensive study to determine how to increase income by comparing the practices of our industry's top-earning advisors with their less successful peers. Our goal was to determine which practices of the elite advisors have the highest correlation with income generation. By unlocking the top advisors' secrets to success, we would be able to assist all financial advisors in achieving their own success.

We started by settling on a definition of success. Success has different meanings to different advisors—taking good care of clients, supporting their own families well and increasing assets under management are just a few—but at a very basic level, they all boil down to economics. For without a solid financial foundation, it is extremely challenging (if not impossible) to keep your doors open, serve your clients well and, ultimately, sell your business for an amount that fairly rewards the effort you have put into building it.

As empiricists, we need to be able to quantify success. In our research, we chose advisors' net incomes over the last two years as our measure of success. We did not use gross revenue, which is also quantifiable, because what counts is what you are able to bring to the bottom line. We used the last two years in order to normalize any one-year distortions.

Some advisors may debate that net income is a poor metric of success and that we should have determined instead a methodology that would have included those intangible factors, like fun or happiness. But in business, earning a profit is an essential condition of success: Without a profit, it is impossible to achieve any of the things that make you "successful," regardless of your personal definition. So, while we readily recognize these other measures of success, for this project we chose to focus on a financial measure of success.

We made a total of 2,403 phone calls, reaching 716 full-time independent advisors, for a 29.8% response rate. We targeted both fee and commission-based advisors (some RIAs and some not).

By using cluster analysis, we identified segments that were based on income—specifically, average incomes (before taxes but after expenses) over the last two years. We found that 31.1% of advisors made less than $75,000 a year, 53.2% made between $75,000 and $150,000 and 15.7% made over $150,000. Indeed, after almost 20 years of the greatest bull market in history, when advisors should be at their peak earnings, we found that roughly 85% of them earn less than $150,000 a year, with nearly one-third earning less than $75,000. In contrast, the top 15% of advisors—those earning more than $150,000 per year—are successful because they have reacted to the market and been willing to make structural changes to their businesses as events unfold.

Conventional wisdom says that whether you are building your managed assets or building your book, all you need to do is stay in the business and grow your number of clients. However, our research shows that this "conventional wisdom" is in fact the very formula for not making a particularly good living as a financial advisor. Sheer number of years in the business certainly did not help the 30% of advisors who were unable to move up from an average income of $75,000 even after more than 10 years in business. In contrast, a significant group—nearly 26%—was able to reach the higher income level with just five or fewer years in the business.

To maximize your net income, you need a thorough understanding of how the more successful advisors conduct their businesses. In the following sections, I'll illustrate the most significant differences in four of the key areas that our research has shown to be indicators of advisor success.

Number of clients. CEG Worldwide's research has consistently shown that to serve your clients better, and consequently build stronger relationships and a healthier practice, you are likely to need fewer of them. We constantly hear about the need for more clients, but what we really need are the right clients. In our study, the average number of clients increased from 201 for advisors making less than $75,000 to 337 for advisors in the $75,000 to $150,000 range. Many may think that more clients mean more income, but our research shows that the average advisor in the highest income bracket has the smallest number of clients: just 172. That is more than 40% less than advisors in the middle-income group and below even the average for the lowest income group.

Fewer clients allow you the time you need to provide a consistent, high-quality experience, resulting in both better client retention and referrals.

Investment products. The products that high-income advisors recommend differ significantly from those of their lower income peers. Most significantly, as advisor incomes go up, their use of mutual funds goes down. Roughly 78% of advisors in the low-income bracket use funds, compared to just 56% in the $150,000-and-up category—a very meaningful difference.

Instead of relying exclusively on mutual funds, today's successful advisors are using a broader array of products. Separate accounts are dominant, but there are also opportunities for hedge funds and other alternative investments. Mutual funds continue to have an important role, but they increasingly need to be used in conjunction with other investment products.

Our research has shown that to move into higher income brackets, advisors need to offer the kinds of products and services that affluent clients can get from those who traditionally serve that market, especially the boutique private banking operations of the wirehouses. The crucial thing is to design your product offerings around what your clients truly want and need.

Business philosophy. We found telling differences between how advisors in different income groups think about their businesses and the roles that they fill for their clients. Not surprisingly, the business model that an advisor uses has an important impact on his or her level of success. A great deal of your success—and your net income—will be derived from how you position your business. Most significantly, we see that advisors with higher incomes are much more inclined to see themselves as "problem solvers" for their clients (68.8%) compared to the lower income financial advisors, of whom just a few (5.4%) place themselves in this role.

Moreover, what it means to be a problem solver also differs as a function of an advisor's clientele. Still, the distinction is one where the "product" has a very subservient role and the advisory function dominates.

Services of value. The recent trend toward helping people plan and achieve their life goals seems to be popular with only the middle-income group. This finding leads us to question the real contribution of life planning to an advisor's bottom line. Many advisors appear to offer life planning because it is a fad, the latest idea to try to hook clients. And, while there might be meaningful value in life planning, the data tell us that life planning is not a service paradigm that supports greater financial success.

Whenever you consider adding a service to your business, such as life planning, ask yourself: Are my clients actually looking for this service, or am I simply trying to attract additional clients? Will this service contribute to my long-term profit, or will it just be a series of short-term transactions?

Clearly the differences in the way advisors view themselves, their clients and their vendors directly contribute to their success and the success of their firms. As a result of their positioning, these advisors tend to reap tangible benefits that support ever-higher levels of income. For example, each top advisor received an average of 9.6 referrals from their top 50 clients last year, compared to just 1.9 referrals for the average lower income advisor. To help implement the best practices of the top earning advisors into your own business, ask yourself the following questions about how you manage your practice:

• Do I have so many clients that I find it difficult to provide personal service to each one?
• Do I place a higher priority on attracting new clients or on providing the best possible service to my current clients?
• How broad is the range of the investment solutions I offer my clients?
• Does my selection of products meet the unique needs of affluent advisors?
• Do I think of myself as a problem solver for my clients?
• Am I conducting my overall business in a way geared to providing real-life solutions to my clients' real-life problems?
• Do I offer life planning because I believe I will increase my net income or simply because other advisors offer it?
• Do I carefully evaluate any potential new service that I may offer in terms of its impact on my profit?
• Is enhancing my relationships and providing better service to my existing clients a top priority in my practice?
• Do I have processes and structures in place that enable me to efficiently meet my clients' needs?
• How much time do I spend learning more about my clients and how to market to them effectively?

Shape your answers into goals that are specific, measurable, achievable, results-oriented and time-bound. This exercise will help you pinpoint the specific practices that you can change or improve in order to reach your next level of success.