Advisor Forum update: Building a better business model for advisors

(October 20, 2004) Advisors need to make a quantum leap and radically change both the staffing and economic structure of their practices if they want to be successful, according to respected industry consultant Mark Tibergien, a principal at Moss Adams LLP, and a keynote speaker at the Advisor Forum in Halifax on Tuesday.

The traditional practice has one advisor with a number of support people, usually administrative assistants. But Tibergien thinks there are limitations to that model. “You have independence and complete control, but it’s very hard to gain any leverage. Too many advisors are doing things they shouldn’t be doing, they have time demand conflicts and a cap on their ability to grow the practice.”

To illustrate, Tibergien cited studies by Advisor Impact, which show that top clients get an average of 11 proactive (face-to-face or phone) contacts a year with their advisor and that the advisor spends another 11 hours a year doing work for those clients. That means advisors are spending at least 20 hours a year serving each top client. If the average advisor has about 1800 working hours a year, that means they can manage only 90 priority clients, Tibergien concludes. The average Canadian advisor had 255 clients in 2003, according to the Advisor Group’s third Annual Dollars & Sense Survey.

“So you have a production problem,” Tibergien says, “because there’s a physical limit as to how many meaningful active client relationships you can manage.”

The optimal model is the ensemble approach, Tibergien believes, with a senior advisor at the top, working with several junior or associate advisors, along with administrative support. “There are certain things that should be delegated. When we look at practices that do this, they improve their ability to serve more clients in a productive way and generate a better return for the practice.”

“Building this model brings better financial rewards and allows you to attract better clients,” he says. “There’s a big difference between a book of business and a business enterprise.”

U.S. studies have shown that ensemble firms are more productive, and more importantly, attract much higher median revenue per client. “The reasons these firms generate more revenue is that larger firms attract larger clients. There’s something about people, when they get more affluent, they have a higher degree of comfort that if something happens to you, they will still be taken care of.”

“The most compelling reason to change to an ensemble model is to attract wealthy clients,” he asserted, adding that the best advisor practices define their optimal client, say no to unsuitable clients, build leverage and capacity and develop a systematic approach for client feedback.

Tibergien also suggests changing the basic economic structure of the independent advisor business model, traditionally viewed as subtracting expenses from revenue to create profits. Instead, he says advisors should pay themselves and their staff a salary out of revenue, leaving a gross profit, then subtracting overhead expenses to create an operating profit.

That way advisors get paid twice, Tibergien explains, as they are rewarded both for their labour as a professional and their ownership of the business. “If you think of managing your business based on what’s left over, you will get the dregs. When you think of yourself as the key person in the business, how you reward yourself over time will make a difference.”

“I know an advisor who generated $3 million in gross production in a year — his take home pay was $75,000,” Tibergien says. “That’s not an isolated example, it’s common. So the way you manage your business makes a difference.”

Still, the vast majority of advisors are sole practitioners and are likely to remain so, Tibergien concedes. “Only a small percentage of you will opt for the ensemble model. But there’s a consequence to staying small. Size does matter.”

Mark Tibergien is also speaking at the Advisor Forum conferences in Calgary, Vancouver and Toronto. For more information on when Advisor Forum comes to a city near you, please click here.

Filed by Doug Watt, doug.watt@advisor.rogers.com.

10/20/04