September 14, 2010
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About 20 years ago, the financial advisory industry began a mass exodus to what it believed was a promised land. Thousands of advisors from coast to coast switched from commissions to fee-based planning, aiming to gain $100 million of assets under management. With such aspirations in mind, abiding advisors set forth what was to be a fail-safe plan to bring them freedom, fat pockets and absolute leverage over their lives and their businesses.
Offering fee-based planning had visible advantages, and this supposed fail-safe plan had many professionals believing that with fee-based planning they stand apart from the advisor down the street. Planners grew confident this would grow their book of business by attracting affluent clients – who were tired of the sales approach – and increase profit margins.
Unfortunately, this was not an exclusive club, and thousands of advisors fled to this strategy only to find all of their competitors were now in the same boat. Commoditization began to weaken business models in the financial advisory business, turning this stately plan into an endless nightmare. Every shop in town was a commodity – offering the same “perks” as the next – and the $100 million plateau was now even further away. Soon, downward pressure lowered management fees and plagued businesses attempting to compete with the rest of the financial advisory world. Like a small crack in a dam, this problem became a disaster soon enough.
This downward pressure showed up in many studies. A 2009 study performed by Moss Adams, which evaluated advisor staffing, compensation and costs, highlighted the operating profit margins for wealth management firms. It indicated that the operating profit margin – or take-home pay on average – was only 14.7 percent of a $1.3 million advisor’s revenue, totaling a miserable $955 per client. While wealth management practices fled to fee-based planning, advisors soon learned it wasn’t greener on this pasture.
Advisors’ workloads quickly snowballed out of control. Regrettably, there was no disclaimer that every new wealthy client brought an unmanageable amount of caring and handholding. In essence, million-dollar clients turned out to be more work than they were worth. Advisors fortunate enough to actually have $100 million of assets under management fell into the category of “most time spent per $1 million of assets under management,” according to the 2009 RIA Benchmarking Study from Charles Schwab.
The cost of that time: a whopping $3,000!
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