Independent Financial Advisors: Unlocking Success as Firm Owners
May 9, 2023
Are you tired of feeling broke as a financial advisor? Now, when you hear the term, “broke,” your mind probably immediately goes to the financial meaning. However, there are many forms of brokenness that you could experience as the owner of an RIA. From financial brokenness to being psychologically or spiritually broke, I believe this stems from a lack of pure data that we, as business owners need to remain self aware and aligned with reality. In today’s entry, I’m going to explore one element of this brokenness. Join me as I talk you through the first step of your eight figure exit.. moving from brokenness to contentment.
Follow Along With The Financially Simple Podcast!
This week on The Financially Simple Podcast:
(0:45) The “Eight Figure” Exit
(2:30) Are You Tired of Feeling Broke As a Financial Advisor?
(5:03) A Byproduct of a Lack of Pure Data
(7:35) Moving Away From Brokenness/Facing Contentment
(8:51) Industry Averages
(12:14) How Do You Relate to the Industry Revenue Averages?
(16:25) Identify the Problem
(17:26) Financial Controls
(19:41) At Least, Be Average
(20:43) Monthly Expense Review
(23:48) Get True Data By Outsourcing Accounting & Fee Billing
(24:59) Defined Process/Procedures
(26:25) Begin Forecasting
(28:35) The Results of Implementing Financial Controls
Industry Averages: Defining the Need for Financial Controls
The 2022 Fidelity RIA Benchmarking Study revealed that independent RIAs with AUM between $250K and $499K reported median annual revenues of just over $1.8MM. These firms spent an average of 30% on indirect expenses and 49% on direct expenses (those which are directly tied to the delivery of your service) in 2021. Similarly, they reported mean Earnings Before Owners’ Compensation (EBOC) of just over $1.1MM. That means, in most of these firms, there is a 61% profit margin. You might be saying, “Justin, wait a minute. How do they have a 61% profit margin when they’re spending 79% in expenses?” Well, some of those indirect expenses are, no doubt, owner compensation.
The same study noted that firms who identify as “tech embracers” spent 3.3% of revenue on Technology in 2021. This shows that technology is becoming an increasingly important expense for RIAs as it helps us to remain competitive and provide better services to clients.
Other traditionally large expense groups for RIAs include staff/personnel, TAMP, compliance, insurance, and office space. Folks, I’m sure you’ve felt the sting, and understand how these expenses can eat into your profits. That’s why financial controls are so important. They enable you to keep a close eye on your expenses and ensure that you’re moving toward the eight-figure exit.
Interesting still, is that according to a report by Investment News in 2022, many RIAs consistently under-invest in marketing, allocating just 1.2-1.9% of revenues. This means they are missing out on the potential benefits of strategic marketing, such as increased client acquisition and revenue growth. On the other hand, the ideal marketing budget for a typical firm with $500 million in AUM would represent 3% to 4% of firm revenue.
Identifying the Problem
The main problem facing many financial advisors is that they don’t have the right financial controls in place to manage their expenses effectively. This can lead to overspending, underspending, and a lack of visibility into where their money is going. If you took an honest and objective look at your firm’s finances, what would they tell you? Do you have robust systems and processes to measure and control spending, or would you find that a lack of oversight has led to money “slipping through the cracks?”
I’m often amazed at how many financial advisors I speak with that don’t have proper financial controls in place. They struggle to even answer the simple questions about their firm’s financial health.
As W. Clement Stone once said, “You can’t expect what you don’t inspect.” This is particularly true when it comes to financial controls. If you’re not keeping a close eye on your expenses, you won’t be able to make informed decisions about where to allocate your resources. So, you’ve got to create a plan to align you with the rest of the industry.
Now, many of you just stiffened up as you read that last line. As I write this, I can hear you saying, “Justin, I don’t want to be like the rest of the industry. I don’t want to merely be average.” I understand that. But here’s the thing… before you can begin customizing, before you can say, “Hey, I want an eight-figure exit,” or “Hey, I want this lifestyle practice where I only have to work 20 or 30 hours per week and receive $XXX,” before you can do any of that, you have to at least be average. You can’t be best-in-class until you’re in the class. So, what do you do?
Implementing Controls to Know Where Your Money Is
Friends, the key to effective financial controls is to have a defined process and procedures in place. Here are a few steps you can take to implement financial controls in your business:
- Forecast Budget Planning: Utilize pro forma and industry research to develop a strategic spending plan. Connect to the planning department of your business to ensure that your budget is interconnected with your overall business goals.
- Monthly Expense Review: Dedicate trained personnel to provide objectivity when reviewing your monthly expenses. Consider outsourcing your accounting and fee billing to ensure accuracy and higher growth. According to the 2021 Fidelity RIA Benchmarking Study, 40% of advisors outsource their Accounting & Fee Billing (firm types included a mix of banks, IBDs, insurance, RBDs, RIAs, and wire-house firms).
- Defined Process & Procedures: By having clear processes in place, you can identify which expenses are providing the best returns and adjust your spending accordingly. It’s crucial to connect with your Chief Operating Officer (COO) to ensure that these processes are integrated with your overall business operations.
- Timely Updates to Tracking & Reporting: By connecting your tracking and reporting systems to your operations, you can ensure that your financial data is up to date and accessible when you need it.
The Benefits of Implementing Financial Controls
Now that you’ve identified areas where you can immediately impact your business, let’s look at some of the benefits that can come with taking these steps:
- Cash Flow Maintenance: When an effective control mechanism is in place, the overall cash inflows and outflows are monitored and planned, which results in efficient operations.
- Profitability: Establishing effective financial control measures ensures improved profitability and/or revenue.
- Fraud Prevention: Proper financial controls can prevent any undesirable activities such as employee fraud, online theft, and many others by monitoring the inflow and outflow of financial resources.
- Increased Owner’s Compensation: By implementing effective financial controls, you can keep more of the money your firm generates. Keeping more of the money you make, you can give yourself a raise in the years to come.
- Greater Resource Allocation to Strategic Growth Initiatives: When you identify your most critical expenses and prioritize them, you can ensure that you’re allocating your resources efficiently and investing in the growth of your business.
Friends, implementing financial controls as an independent RIA is essential for maintaining accurate financial records, preventing fraud, and improving cash flow management. By connecting these initiatives with your planning and operations, you can establish processes and procedures that ensure effective, results-driven financial controls. This can lead to improved profitability, increased compensation, and allocation of more resources to strategic growth initiatives.
I hope you’ll use this as a starting point to take a closer look at your firm and realize that you have an asset in which you can directly influence growth. As we continue this series, I’ll point to even more of the most common blind spots you’ll face. Look, I know life is hard. But life is good. Growing your firm can be frustrating, but it doesn’t have to be. By taking a closer look at your financial controls, you can make it at least financially simple. Let’s go out and make it a great day!
Do you have a trusted advisor to walk with you through this journey? Don’t try to do this alone. Reach out to our team to learn how we could help you take your firm where you desire it to be.