Financial Advisor Blog

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For most financial advisors, they got into the business because they liked helping people figure out how to spend and save their money. Because so much of this work is about building relationships with clients, so many advisors are really great about the sales aspect of running or managing their own practice.

Unfortunately, however, being great with clients is only one aspect of the business. On the other side of things, independent practices also need to make sure that their books are organized and managed well, lest they start losing money in the process.

It’s a bit like the cobbler’s kids having no shoes. Some financial advisors are so great about helping out their clients that they forget that they need to apply that same kind of methodology for their own business.

Fortunately, we have some advice if you’re one of those people. You’ve already got the client relationships and retention down, so now let’s get into the details of making sure that your practice is in the black. Yes, it’s nowhere near as engaging or as exciting, but it’s a necessary part of running your own business.

Look at Your Cash Flow

You may have talked to some of your customers about how to manage their money, more specifically, how much is coming in versus how much is going out. While this can be easy to do with personal finances, when it comes to running a financial practice, it can be a little more of a challenge.

Part of the reason establishing a cash flow assessment is difficult is because you may not have that much consistency in both expenses and earnings. Thus, you want to break things down into several categories.

  • Fixed Expenses – these are bills that are constant, such as rent, utilities, and salaries (payroll).
  • Variable Expenses – these costs can change over time. They can be on-time expenses (i.e., renovating the office) or they can shift depending on your needs (i.e., marketing).

Overall, you want to analyze all of your money and categorize it as much as possible. Once you’ve figured out your expenses, then you can determine a minimum amount that you have to earn to break even, and the rest is profit.

Until you establish this baseline, trying to tackle your business finances will be all but impossible.

Determine the Cost Value for Each Client

Building relationships with your customers is the easy part, and you will get to know each one of them personally as you advise them on the right way to handle their money. However, you have to take a step back and look at each client as a number, not necessarily as an individual. We’re not suggesting that you take that approach at all times, but only when talking about how to correct any fiscal imbalances in your cash flow.

When considering the cost value of a client, you’ll need to figure out three things:

  • Cost of Acquisition – how much does it take to get a new client to sign up for your services?
  • Average Client Earnings – how much money do you receive from each client? Coming up with an average helps you determine if your marketing is adding value or costing money overall.
  • Lifetime Client Earnings – too often, financial advisors (and most business owners) only calculate the amount a client brings in at once, rather than for the long term.
  • Ongoing Client Costs – how much money do you spend to retain the customers you already have?

For example, if a customer has a net worth of one million and gives you 1% annually, then that’s $10,000 per year. Over the course of 10 years, that totals to $100,000.

Let’s say that the cost to acquire this client was $500, based on the marketing tactics used to bring the person into your office, where you closed the deal. Overall, the margin of profitability is relatively high, but you need to consider how much money you’re willing to spend to keep that client.

When you break down these costs and earnings for each customer in your roster, then it helps you determine how optimal your profit margin will be. If it costs you too much to get clients that don’t bring in a lot of money, then you’re investing too much time, effort, and money into unprofitable customers.

Recommended Article: Building a Strategic Referral Process in Your Financial Advisor Practice

Why it Matters

As good as you may be at advising your clients on how to manage their money, it’s all for naught if you can’t do the same for your own practice. Not only will it impair your ability to be an authority to customers, but it will inhibit your ability to do so for very long. A financial practice that loses money year after year won’t stay open, which means that your clients will have to go elsewhere.

Another reason why locking down your business finances is crucial is because there is some volatility in this kind of market. Because you never know what the future holds, and because financial matters can shift dramatically without warning, you need to establish a strong foundation so that your practice can withstand this volatility without collapsing.

The bottom line is – practice what you preach. If necessary, treat your business as a client. Build a financial strategy as if you came into your office looking for help. This kind of insight can be difficult at first, but it will serve you well.

Opinions expressed are those of Signature Wealth Group and not necessarily those of RJFS or Raymond James. All opinions are as of this date and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.

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