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Healthy profit margins matter for your practice and your clients. Here are tips you can use to boost your profitability.
I’m preparing for a “mastermind” peer-learning session, so I’ve been getting my P&L report ready. Even though I’ve done this dozens of times, it’s still uncomfortable to financially undress in this way in front of my peers.
My good buddy, Micah Shilanski, and the rest of my friends will see this report. I have to stand in front of them and account for my spending. I know it's super easy to get defensive about spending in our practices – we could argue for our expenses all day long. It's just human nature.
When we, as an advisory practice, spend money, we justify it. When we charge a fee – even a discount – we justify it. We could give reasons or excuses all the way down our P&L reports because it’s our practice, after all, and we can do what we want. We’re not hurting clients.
Or are we?
Have you ever stopped to consider that by handing out discounts and leaving our business credit cards unchecked, you’re doing a disservice to yourself and your clients?
Have you ever thought that having too many team members could stunt your growth?
Let’s dig into ways that advisors unintentionally hinder growth and sink practices.
The trap of slim profit margins
I am focused on delivering as much value as possible in a highly profitable, highly efficient way.
My podcast talks about our value “sledgehammers,” our “delivering massive value” slogan, and our quarterly value-adds. All these things are very subjective. So, what’s objective about value?
Well, when a client hires me at a premium fee to deliver a service they could have gotten online or from practically any other advisor for a fraction of the cost, they are saying that clearly, I am delivering more value than those people.
You may not like that; it may not sit well with you. That’s too bad.
Because, despite how you feel, money is how we measure value.
Delivering massive value matters for a couple of reasons:
You can afford the best professional development when you maintain healthy profit margins. High-profit margins will help you weather any storm.
You can’t level up as an advisor without professional development. A growing business constantly demands you to be your best self – and you can’t get there without outside help.
And for the second, if you run an AUM or fee model, you will see volatility in the market where your fees, a.k.a. your revenue, will go down.
If you recall the 2008 financial crisis, or more recently, the COVID-19 pandemic, we saw massive market losses that significantly impaired practices.
When the markets take a tremendous downturn, are you willing to go without a paycheck? Will your team members get a paycheck or be laid off?
If you’re running on 20-30% profit margins, it’ll be hard to survive any significant storm when (not if) they come.
Many advisors don’t consider how hard it is to talk clients off the cliff when their own toes are on the ledge.
Profit margin benchmarks
You need a forcing mechanism to keep your profit margins high. It’s easy to get distracted by many things, from purported silver bullets to feeling at capacity. It often feels easiest to throw money at a problem and pray it goes away.
To keep your revenue on target, here are some benchmarks to use:
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Solo advisors should aim for 50% profit margins.
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Enterprise practices can aim for 40-50% profit margins.
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Up-and-coming advisors should still pay themselves out of the business and then put everything they can back into making their practice grow.
When we talk about profits, we mean earnings before owners compensation (EBOC), which means you take the value on your tax return divided by the amount of money taken as fees out of client accounts.
The only thing you can add back into that value is your 401(k) contributions. Nothing else, not the “company” car, “company” airplane, or even your assistant, can be added back.
Your largest expense
Employees are probably your top expense. You don’t need to go out and fire all of your employees today to boost your profit margins, but you do need a hiring plan.
Hire your first person as soon as you can. This person could be part-time, or you could hire two fractional employees with different skill sets to meet your needs.
You and your assistant should be able to serve a client base of up to 150 to 200 households. You should keep that one person (or a couple of fractional people) until you reach $3 million in revenue.
After that, you must pivot and decide the trajectory you want your practice to follow. Do you want to build an enterprise? Or do you want to squeeze as much juice out of a lifestyle practice as you can?
Don’t hire a junior advisor until you decide what direction you want to take.
How to raise profit margins today
To give your profit margins a relatively easy bump, consider doing these things:
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Conduct a quarterly review of all expenses on business credit cards to identify unnecessary charges. Look for anything pulling from your account that isn’t absolutely necessary. You may find that you’re spending hundreds on a marketing service you no longer use or even a few bucks on an app subscription.
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Change your business credit card number annually to cancel any forgotten subscriptions. This is a great way to clean house and identify which services you use and those you can live without.
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Have someone you trust review your financials in detail to call out any areas where you may be blind to expenses. We’re all guilty of drinking our own Kool-Aid. You need someone in your corner to help you see places you would rather not take accountability for.
You need healthy profit margins for your financial planning practice's long-term stability and growth. Doing the hard work to cut unnecessary costs while investing strategically in professional development will allow you to provide the best possible value – outcome – for your clients.
Action Item
Focus on your benchmarks:
If you’re a solo advisor with 50 or more clients, your profitability should be north of 50%.
Enterprise advisors should shoot for 40-50% profitability.
If you’re just starting in your first few years in the business, you don’t have 50% profit margins. That’s your goal for where you want to be. But you’re flatlining because you should put everything back into practice to grow.
Matthew Jarvis, CFP®, ChFC, is the co-founder of The Perfect RIA, one of the industry's most recognized advisor training platforms. Just 10 years prior, Jarvis was buried in debt, with a badly struggling practice and a morning routine of trying to figure out how to quit the industry without looking like a failure. Through several turns of fate, Jarvis clawed from near failure to the top of the industry. Today, alongside running his incredibly profitable and successful practice, Jarvis guides other advisors on duplicating his success in their practice.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.