Paths to Profitability

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Kevin Beard, Chief Growth Officer and Founding Partner

January 28, 2022

So many independent financial professionals have experienced significant growth over the last decade—and those who have already established a presence and practice in the independent community are on the verge of benefitting from another boost to their businesses.

But as the industry evolves and financial professionals transform their practices into established businesses, the most disciplined firms will be the ones that experience the most sustainable and substantial growth. Not all growth is good growth, and those who define and align themselves with the “right” clients will emerge as the industry’s elite.

At the macro level, the business environment for the independent financial professional could not be better. But going forward, these new opportunities will present financial professionals and firm owners with perhaps the most difficult task they have ever faced: Aligning themselves with the right clients.

Those who have already established their practices are perhaps in the best position to capitalize on the growing demand for independent advice. In many cases, they have established reputations, well-defined value propositions, deeply rooted client relationships and track records that will draw new clients through both direct and indirect marketing strategies.

Not all growth is good growth

The potential for growth is clear; however, not all growth is good growth. For those who are looking to develop their practices and effectively transform their businesses into mature enterprises, discipline will be a key determinant for their long-term success.

A financial professional’s clients are, and will always be, its lifeline. But for those who are focused on building a business and not just a practice, the selection and on-boarding of the right clients will facilitate faster, higher-quality growth rates, and ultimately more significant profit margins and greater enterprise values.

Defining the right — and wrong — clients

There are quantitative and qualitative ways to define the “right” client for your practice. You should consider both when working with existing and new clients.

Quantitatively, many financial professionals often focus on their overall revenues and profitability. For those who are truly approaching their businesses with a “CEO state of mind,” however, every individual client should be viewed as having its own, independent profit-and-loss statement to help evaluate the viability and potential of each relationship.

Having even just a handful of unprofitable, or barely profitable, client relationships can distort your rate of growth and impede your ability to generate new business. If clients are your lifeline, bad clients can be your downfall, eroding current levels of profitability in the short-term and handicapping your ability to add new streams of revenue over the long-term.

For established independent financial professionals, defining and finding the right clients will not simply be a forward-looking exercise. It’s important to evaluate the quality of new and current client relationships. It is equally as important to address and correct problems within an existing client base as it is to avoid adding problematic relationships in the future. The same process and criterion for grading clients should be applied, universally, across all of your relationships.

Understanding and employing benchmarks

Using industry benchmarks, you should first measure the baseline “cost” of each client. On an individual level, the typical client at an independent practice carries an expense of $5,847 to support per year, according to a recent InvestmentNews/Moss Adams Staffing & Compensation Study. This expense includes the cost of all of a practice’s professionals, employees, overhead and operations, divided across its entire client base.

The baseline client cost is well established and can be used as a benchmark for measuring the most important metric in determining, quantitatively speaking, if a client is “right” for the firm: Individual client profitability. 

On the other side of the ledger, the typical independent practice generates $7,404 in revenue per client, according to InvestmentNews Research. Given the expenses above, this translated into a median profit per client of $1,101 last year, or a profit margin of roughly 19% for all participants in the study.

The client equator

This margin should be considered the “equator” for any financial professional who is assessing the quality and profitability of an individual relationship. For a firm to be successful and grow efficiently, it is not enough for a client relationship to simply be profitable. The relationship should be on par with, or better than, this 19% margin in order for an adviser’s practice to be able to make continuous investments in its business, weather fluctuations in the markets that will impact asset levels, and maintain the long-term sustainability of a firm’s enterprise value.

Using these benchmarks as “balance sheet beta,” you can define the framework of the ideal client relationship and then begin to identify true paths to superior profitability and outperformance.

The next step

What’s your next step in finding the ideal client relationship? Read Bob Holcomb’s article First Thing First to pin point your niche and begin articulating your story.