Any smart business owner knows that it’s not enough to generate revenue. You also must generate a comfortable profit in order to offset the risks of being an owner (and be comfortably rewarded for that risk). Many advisors falsely assume that profitability will increase with revenue growth and/or when scaling up a practice. The truth is most larger firms are less profitable, often because as they become larger, they become less efficient. Efficiency is key to being profitable.
Many advisors don’t know that profitability plays a key role in determining the value of a practice. As M&A activity continues, profitability will become an even bigger factor in practice valuations. As with any business, expenses are what determine your profitability, not revenue. To improve profitability, you must control costs. The largest expense in any financial advisor firm is staff. Profitability is negatively impacted when a firm has too many staff members relative to the number of clients and total AUM, or when they employ high-cost staff (such as Junior Advisors) to serve low-end clients.
Other costs can impact profitability as well, including office rent, utilities, leases, client meals and gifts, and advertising, to name a few. It’s important to evaluate expenses on a regular basis to make sure they are necessary and that you are paying a reasonable rate. Long-term obligations such as leases can also affect your ability to sell a practice, so it’s important to be aware of and monitor any expenses that have contractual or timed commitments.
As we mentioned earlier, profitability not only impacts owner return, but it also impacts the overall value of a practice. To help you get a handle on your profitability and improve your margins, we’ve developed a two-page guide that outlines 10 steps to take to increase practice profitability. Download it for free now.
