Leadership Perspectives: Managing a Successful Firm

Number of financial advisors & number of support employees

For my fellow nerds, let’s refer to the financial advisors as “direct labor” and the support personnel as “indirect labor.” When I track how many employees our firm has, I want to carefully monitor where we have bloat.

Everyone is busy – everyone feels busy. But when is “busy” not productive? Tracking the number of people we have in our organization allows me to solve for several key factors, such as if the growth directly correlates with onboarding new employees.

In the last four years we have doubled our team members. Although we are clearly growing rapidly, we still must ask if that growth is proportionate to the number of employees we have.

In the next few weeks, I will be meeting with my leads to discuss “Price’s Law.” Price's Square Root Law is a mathematical principle that describes how productivity and success are unevenly distributed. It is perhaps more simply exemplified by every group project in school.

If you have ever been assigned middle school or high school group project, you know that bringing more people into a project does not necessarily yield proportionately better results. The involvement of more participants doesn’t make the project move any faster either, because the people who were always doing the bulk of the work are still going to be doing the bulk of the work.

Are our financial advisory practices any different from a middle school group project? Are we kidding ourselves by thinking otherwise?

I will be asking my leads to come with a list of what people are doing that is generating little to no results. Often, we find ourselves feeling busy but not making any traction. This is the right time of year to sit down and start slashing through things that just aren’t adding the value you thought they would.

Here is a little one we are going to be changing: I normally have a new client welcome basket sent to clients from a local bakery. In the last four years, we’ve received little to no gratitude for the gift. Given the changing environment of food allergies, diabetes, and healthier active lifestyles, this just doesn’t land like it used to with clients.

The coordination of working with a small bakery also takes effort. It’s a lot of one-on-one time coordinating these details with our relationship managers, getting them notecards, following up on addresses, returns, etc.

Instead, I am going to look at outsourcing this through a company like Happy Box, which is already set up to do this on a mass distribution basis. (What am I going to put in my box? A good book like Don't Get Killed on Taxes: 20 of the Most Common Reasons You're Sending Too Much Money to the IRS by P.J. DiNuzzo, CPA, PFS™, MBA, MSTx and Steven Jarvis, CPA, MBA, with a foreword by Russ Alan Prince.)

Marketing metrics: Prospects, clients, and new AUM

I track, weekly throughout the year (not monthly, not quarterly, and sure as heck not annually), the new leads who come in at the top of our funnel.

Our RIA is on a mission to help one million federal employees learn about their retirement. That’s a big goal, and not one about which we are dismissive. We are a meaningful content-producing machine. I want to make sure that I constantly deliver content around topics that federal employees want and need to know more about.

That means that, every single week, I check on the execution, delivery, and impact. The next metric that I track is appointments and conversions to clients. We don’t do this just because we are philanthropic in nature. This is a business, and our number one responsibility is to stay in business. That means we have to get hired. I can’t help all of those people if I can’t pay my own bills.

Profitability is an area that most financial advisors like us struggle with. We need to feel more secure about the work we are doing and the fees that we charge for that work. We need to help as many people as possible, and to do that, we have to stay in business.

I want to make sure that the content I send out not only helps people but leads to appointments and new clients. Working with someone one-on-one is where we deliver the real value – it’s so impactful! We can make measurably positive changes in someone's life if we are able to help guide them through some of the more complex financial topics that they will face in their lifetime.

AUM and fees

If you are prone to enjoying the taste of “Hater-Aid,” then pour yourself a glass; this part of the conversation can be controversial.

We charge premium fees. We believe that we are a premium service, and there is a solid fee to work with us. However, like every single planner out there, we can sometimes become enchanted by our own brilliance.

Financial advisors socialize their book of business. Here is what I mean: We charge people we think can pay more … more. We charge people we think don’t have enough less. And all the while we gripe about a progressive tax system.

Shilanski & Associates Inc., does not have a minimum AUM account size. We don’t like it. It just doesn’t suit us, because we believe it rules out all the youngsters, coming up and trying to make the right decisions, who could use advice. However, we do have a minimum fee. If the client can pay that fee, then great – we can work together.

I watch new money coming in every year and then also categorize it into three categories: those paying above our minimum fee, those at the minimum fee, and those paying below the minimum fee – for which we allow some exceptions.

Every financial advisor gets five exceptions a year. They are each allowed five households to bring on that can’t afford our minimum fee. The rest we need to have a conversation about.

The reason we limit this number isn’t because we are money-hungry capitalists, though I have been called worse. The reason is that we know we won’t service them the way that we should or, in fairness to our clients, if we are servicing them the same as other clients, we need to lower our fees for those others.

If everyone is eating a ribeye but some are paying for chuck and others tomahawks, that doesn’t sit well with me. It doesn’t mean that it doesn’t happen, but it does mean we have to be mindful and have tough conversations.

What is a client worth?

We look at the total client acquisition cost as well as the lifetime value of a client which is – as we all know – a hard number to make static. Money is fluid, but I still need to be able to document if we are on track or off.

To simplify this, I use the following formulas:

Lifetime value (LTV) formula: LTV = (average annual revenue per client × client retention period) - acquisition cost

Client acquisition cost (CAC) formula: CAC = total acquisition costs / number of new clients acquired

Estimate of reputation damage (RD) from loss of client formula: RD = revenue loss (R) + referral loss (RF) + market impact (MI) + brand damage cost (BD)

How to calculate client acquisition cost

Marketing: The firm spends $XX.XX a year on marketing. With a total of XX clients in 2023, the marketing acquisition cost per client was $XX.XX.

Relationship managers: Paid $XX.XX per hour, with a load factor of XX. Effective hourly rate = $XX.XX. It takes 8 hours for new clients, totaling $XX.XX per new client.

Operational support: Paid $XX.XX per hour with a load factor of XX. Effective hourly rate = $XX.XX. It takes 16 hours for new clients, totaling $XX.XX per new client.

Metrics:

• Average annual revenue per client: $XX.XX
• Client retention period in years: XX
• Client acquisition cost: $XX.XX
• Total lifetime value of a client: $XX.XX

I used this recently to help a financial advisor understand that each client relationship has a value beyond the next quarter. I need them to see that, in our practice, we build lifelong relationships. There is a lot that goes into getting someone to trust you with their entire life savings. You must honor that trust and know it has value.

Jamie Shilanski is a Registered Financial Consultant® for Shilanski & Associates, Inc. As an RFC® she helps clients understand the various options and nuances of financial services so they can make informed decisions. In this discipline, she customizes a financial plan that fits their unique set of circumstances.

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