Many registered investment advisors are spending too much and missing out on new business by forgetting to calculate their costs per client, according to Fidelity’s practice management arm.
The median cost to serve clients is $8,000 per year when including everything from the compensation for employees working on the accounts to the software, funds and other products and services needed for planning and portfolio management, Fidelity Institutional’s practice management unit found in surveys among its thousands of RIA clients. Roughly half of the households an RIA serves are not profitable, and their average income per client is only $4,500.
Fidelity didn’t ask the client RIAs that use its custodian to itemize the expenses within their reported totals, but the firm has concluded from other benchmarking studies that payroll is their most significant cost, with real estate and software as the next largest outlays. Those needs — and the time and money they entail — form a crucial part of any
Regardless, many haven’t taken the basic step of dividing their revenue and earnings by their number of clients, according to Anand Sekhar, Fidelity’s vice president of practice management and consulting.
“We've experienced record profits for many of the firms' principals over the last 10 years,” he said. “If you want to evolve, you have to take a pause to be able to do that.”
In an interview with Financial Planning, Sekhar shared some results from Fidelity’s detailed survey conversations over roughly the past decade with more than 70 RIAs that have about 2,000 advisors and 80,000 client households. Operating costs per household ranged from $3,000 to $4,000 at the low end, all the way up to $25,000, with about two-thirds of the firms somewhere between $7,000 and $11,000. Fidelity then breaks down a practice’s revenue by segments grouped according to investable assets, age or even geography.
The data often presents a “wake-up call” for RIAs when they realize that they’re devoting, for instance, 25% of their capacity to clients generating 4% of their revenue, Sekhar said.
“It is so important for them to just take stock of where they are spending their time,” he said.
Although the profit margins of an RIA “are much greater than a restaurant,” they should emulate eateries that pinpoint how much every dish and drink costs in expense and yields in profit, according to Shauna Mace, the head of practice management with Independent Advisor Solutions by SEI. She recommends that practices perform an analysis of their revenue and expenses per client or staff each year, if not every quarter. While her firm is a competitor to Fidelity since SEI is also an investment manager and custodian to RIAs, Mace agreed with the premise of the research.
“Most RIAs really don't understand the dynamics of cost or expense to serve individual clients or all of their clients,” she said.
The findings of those self-audits usually prompt advisors to take actions such as deploying more portfolio modeling software, outsourcing other tasks to external vendors or transferring smaller accounts to junior advisors, Sekhar said. Other potentially fruitful areas could include placing emphasis on engaging with more spouses of existing clients, building ties with younger generations of potential customers or making
One practice raised about $1 million in annual revenue by asking its 82 customers to pay a higher rate, Sekhar said. Only one of the clients left the firm after the re-pricing. He noted that being a fiduciary carries the responsibility to have a sustainable business that charges “a fair and reasonable fee” to its clients.
To relate the approach to another industry outside wealth management, Sekhar brought up his sister, who is a radiologist. She checks every day to ensure that she’s “viewing the most complicated cases” herself and delegating other tasks, he said. In that vein, advisors should think carefully about whether it’s more important to rebalance a client’s portfolio or take a meeting with a customer and multiple generations of their family, he said.
“Advisors are not all that different. They're very credentialed,” Sekhar said, suggesting that practices try to get past whatever barriers may be in their way to examining their own operations in this manner. “Some of it might be fear. Some just don't have time and don't have capacity. In our profession, we have a huge opportunity to flip that on its head.”
