Margins in pay are an interesting thing in the wealth management and financial planning industries. If you are not “in the know”, it may come as a surprise that margins can vary wildly. For larger wirehouse firm advisors, profit (take home pay) margins can range from 37% on the low end, to as high as ~50% for top performers. When you shift to mid-size firms and RIAs you can see greater efficiencies, where profit margins for advisors can escalate upwards to 70%. Solo RIA practitioners can finely tune their practices and streamline processes while keeping costs low and ascertain margins of close to 90% in some cases however.
When you first read this it seems like I’ve mixed up my numbers right? Shouldn’t margins increase as businesses scale up? In such a complex landscape wouldn’t it make more sense that advisors and partners at larger firms would have higher payouts because of said scale? Nope. Insert FinTech. This stands for financial technology for those unfamiliar with all of our industries cool abbreviated terms. Technology, along with outsourcing and automation, have led the way for smaller practices to create far more efficient margins than their larger counterparts. Cloud based software services and custodians like Fidelity, Schwab, & TD Ameritrade have enabled smaller practices to scale in a way only recently recognized. Accessibility was difficult to come by at one point, but not anymore.
There are a variety of reasons as to why margins don’t scale for advisors as they find themselves in larger and larger firms. Probably the greatest reason is that advisors are told from an early onset that as they build their practices up, they must increase their leverage by hiring staff. Perhaps this is poor advice. Naval Ravikant discusses how labor and capital are old forms of leverage. Labor is very expensive and can result in messy situations for firm owners and management. Instead, what if utilizing technology and outsourcing resources is a better form of leverage for financial practices?
Advisors are faced with a dilemma as they become more successful. They can either hire someone else to perform administrative tasks for them, or they can maintain these responsibilities and leverage technology to become as efficient as possible. Sure, you might free up some capacity by hiring staff, but at what cost? You’re sacrificing your margins because you’ve been told someone else should perform less profitable tasks. This assumes however that revenues will of course outpace the variety of costs associated with this staff person upon hiring. There are also the hours spent training this individual. There are the various associated benefits any valuable employee will require. What if this person you trained to perform exactly how you’d like then leaves? There is an excessive amount of risk and liability associated with hiring someone.
Our frame of mind needs to shift when it comes to performing these mundane administrative tasks. Instead of viewing them as unproductive, they should be looked at as areas of opportunity. Opportunities to showcase that you were the right hire for your client. Willingness to perform these jobs and to do them efficiently will only increase your value.
I’m going to tell you a story now. This story is about my father…a man who worked for Enterprise Rent-A-Car (now Enterprise Holdings) for many years. I spent some time at this company earlier in my career as well. Something that always stuck with me were the stories of a practice my father had when he would visit branches. You see, my father was a Regional Vice President. He oversaw hundreds of employees. Yet when he would visit these offices under his management, he would immediately walk to the bathroom and start cleaning them. He had no business doing this, surely this should be delegated to a cleaning company, or at least the employees of this branch. There was of course a message here. That message was that no job should ever be beneath you. He viewed this task as an opportunity to train and motivate his employees.
This story correlates with how I think about administrative work. It is an opportunity. In this case however it is an opportunity with your clients. Turns out that it also makes for far more efficient margins. My point is this…stop buying into the idea that you have to delegate using an outdated and poorly levered resource such as human capital and labor. Instead focus on increasing efficiencies through readily available technology and outsourcing projects on a case by case basis. Step up to the plate when a client requests that wire transfer. Do it so well that they would never think of leaving you.
This topic of margin is something I plan on writing about considerably more in the future. It is an area of my industry that is still highly untapped in my opinion. Eventually, by increasing efficiencies and broadening margins by scaling in a different fashion, I feel consumers will only continue to benefit. I look forward to discussing more.
