Revenue is sexy. There’s something about seeing revenue numbers grow that makes people’s hearts swell with pride.
But who would you rather be?The financial advisor who runs a firm making $4M in revenue per year and only $500K in profit? Or the financial advisor who runs a lean, mean practice making $800K in revenue and $600K in profit?I’ll take higher profits all day every day.Because more revenue doesn’t always mean more profit. Revenue’s only a small part of the story. Since you likely give financial advice for a living, you’ve probably seen individuals with high incomes squander it all while others with relatively modest means are able to amass a fortune.The same concept applies to business. It’s not how much you make. It’s how much you keep.Here are a few ways to make your financial planning firm more profitable:
1. Fire Your Unprofitable Clients
It’s scary to see how many financial advisors will keep a client even if he or she unprofitable. This happens for a myriad of reasons. Maybe the client was a referral… maybe the advisor is too timid… or maybe the advisor is flying blind and doesn’t even realize the client is unprofitable.If you want to take things to another level, fire the worst 10% of your clients, even if they are profitable.Former CEO of General Electric, Jack Welch, had a policy of getting rid of the bottom 10% of employees every year.Controversial? Yep.Effective? Oh yeah.What’s the bottom 10% of your client base like? They probably complain a lot, waste your time, expect special treatment and don’t respect your boundaries.I’m giving you permission to fire them and get them off your back for good. Because when you get rid of the bottom 10%, you get a lot more time to focus on attracting more of your best clients.If you want a surefire way to increase profitability, you should drop the bottom and add to the top. Speaking of adding to the top…
2. Get More Profitable Clients
This should be obvious. I’ve made an entire business about getting financial advisors more clients because it’s one of the best ways to grow the bottom line. However, you must do it strategically if you want to become more profitable.Imagine that you make an average of $5,000 per year, per client. You can create a rule in your business that you will not accept any new client who doesn’t generate at least $5,000 each year.Assuming your expenses stay the same, you will become significantly more profitable because your average revenue per client will increase.Discussing all of the ways financial advisors can get more clients is beyond the scope of this article. I encourage you to subscribe to my podcast, “Financial Advisor Marketing”, and read the articles on this website, starting with some of the following:
3. Reduce Your Expenses
Another way to make your financial planning firm more profitable is to reduce costs. It’s just like managing a household budget - you can save more money by spending less.In my experience, expenses tend to slowly grow over time. Companies get bigger and more bloated as the years go by. Every few months, you should look at your expenses to see what can be cut. There’s almost always some fat you can trim.However, I must warn you: most financial advisors are way too quick to cut expenses. I would much rather grow the top line first and THEN cut expenses. Also, beware of worsening your client experience. For example, if you send out birthday and anniversary cards to your clients, don’t stop sending them for the sake of cutting expenses because it will worsen your client experience and impact your profitability in other ways.Beware of being penny-wise and pound-foolish. I used to be this way. I remember trying to get whatever I could for free. I would read blog posts, join a bunch of different email lists and try to get as much “education” as I could without spending a single cent.I thought I was being smart. Thrifty. Responsible.But it was just plain dumb.I was focused on getting the biggest bang for my buck when I should’ve been focused on getting the biggest bang.For example, let’s say I spend $10 on a book and make $1,000 as a result. That’s a 100X return on my investment. Pretty cool, right?Now, let’s say I spend $10,000 to work with a private coach and only make a 3X return on my investment. Is that bad? No! Because I would have made tens of thousands of dollars more.In other words, don’t try to squeeze the last drop out juice out of one lemon. Focus on getting more lemons.
4. Make Your Marketing More Efficient
This is similar to reducing your costs with the exception that by making your marketing more efficient, you’re not “cutting” anything. You’re getting the same (or better) results for the same money.Imagine that you’re doing some Facebook marketing and you’re spending $10 to acquire a lead. By split-testing your ad, you could get your cost down to $7.50 per lead. That’s a 25% reduction in costs for the same exact lead. If you’re spending thousands per month, this can make a huge difference.This same concept applies everywhere in your marketing. If you send a direct mail piece out and it has a .5% response rate, you can effectively cut your marketing costs in half by split-testing that piece and getting it to a 1% response rate.Plus, once your marketing is more efficient, it’s easier to scale. If you’re already profitable at a .5% conversion rate, you’re going to be REALLY profitable at a 1% conversion rate and you’ll be able to aggressively expand your efforts.Good marketing is always profitable - that’s the whole point of marketing. You put $1 in and get $2, $3, or even $5 or more back.Another way to make your marketing more efficient is to strengthen the referral marketing side of your business. Growing your business via referral is one of the lowest-cost strategies a financial advisor can employ. The only “cons” are that you can’t necessarily control the referral itself (meaning it may be outside of your niche) and that referral marketing is rarely predictable. Yet, by implementing solid referral strategies, advisors can get clients for free (aside from a thank-you gift, of course).
5. Focus On Client Retention
According to a study done by PriceMetrix, financial advisors lose anywhere from 5 to 10% of their clients each year.Studies by Bain & Company, along with Earl Sasser of the Harvard Business School, have shown that even a 5% increase in retention can lead to an increase in profits between 25 and 95%.So, what’s the action step for financial advisors? It’s simple. Improve your client experience.However, client experience is so much more than how often you contact your clients or how you deliver your products and services. It’s about the entire interaction your client has with your business, from A to Z.One of the best ways to improve your client experience is by identifying and examining some of your OWN favorite experiences. For example, you may have been blown away at a particular hotel. What did that hotel do differently that made it stand out? How can you apply it to your business?In past issues of my Inner Circle newsletter (LINK), I’ve directed financial advisors to examine Ritz-Carlton. They’re long been considered the “gold standard” of customer service. Entire books have been written about them.One of their most famous rules is called “The $2,000 Rule” and it goes like this…Ritz-Carlton empowers its employees to spend up to $2,000 to solve customer problems - per day, per guest - without asking for a manager.Volumes of lessons about trust and employee empowerment could be written about that one rule alone but let’s focus on the “meat” behind this number…Because when most people hear about “The $2,000 Rule”, they’re immediately impressed by the dollar figure. Yet, what they don’t hear about is the fact that the average Ritz-Carlton customer will spend about $250,000 with The Ritz over his or her lifetime.Which means Ritz-Carlton didn’t pull the $2,000 figure out of thin air.They understand the value of the relationship with their customers and have made a decision - in advance - to do whatever it takes to maintain those PROFITABLE relationships.Read the above sentence ten times because it holds one of the major keys to a financial advisor’s success.
6. Become More Productive
I’ve had the pleasure of working with financial advisors from all walks of life - both successful and unsuccessful - and I’ve noticed that the most successful financial advisors are the ones who ruthlessly focus on their personal productivity.As a financial advisor, your profitability is inextricably linked to your productivity. The more time you allocate toward higher-value tasks, the more money you make.As an example, pushing papers and handling administrative tasks may be worth $25 per hour to your business while marketing and prospecting may be worth $300 per hour. Logic dictates that the more time you spend marketing and prospecting, the more money you will make. Unfortunately, that logic skips some advisors and they drown in low-value tasks.At its core, productivity is all about getting more OUTPUT from the same level of INPUT. When you increase your business’s efficiency, you increase its profits.
7. Charge More
One of the best ways to make your firm more profitable is to raise your fees.Now, I understand it can be difficult to raise your fees on managed money. I’m not talking about that. I’m talking about things like:
- Your hourly rate, if you charge hourly for one-offs, consulting, etc.
- Your tax plans, if you do those.
- Your financial plans, if you put those together.
- Price doesn’t get as much attention as it deserves.People set their prices for a wide variety of reasons and rarely think about their prices after they’re set.Most of the time, pricing is psychological. People set their prices based on their own emotional hangups on what they should or shouldn’t charge.I mean, have you ever wondered why different professionals have such a wide range of prices? Why one accountant can charge $400 per hour while another one charges $100 per hour? The $400 per hour accountant isn’t really four times better… right?It’s something to think about.Whenever I see financial advisors who resist raising their prices, I think of this story…There once was a contractor who installed railings on high-rise buildings. Someone asked him about product liability problems due to people falling over the railings. The contractor responded:“What problems? Nobody ever tests the strength of those railings. They are so afraid of going over the edge that the most they’ll do is stand two feet away and give them a little shake with their extended hand.”He went on to explain how a railing only has to be strong to withstand high winds.Why?Because people will never (deliberately) test how strong a balcony railing is with their body.The same is true with financial advisors setting their prices.ESPECIALLY for financial advisors who do financial planning, tax planning, or charge by the hour.They’re typically afraid of raising their prices… and deathly afraid of going over the edge. So, a lot of advisors look around at what others are charging and pick something between the high and the low. The problem with this is that everybody else arrived at their prices by going through the same foolish process.My philosophy is that you should get paid full value for what you do. If you know your value… and you truly believe you’re worth it… why not charge for it?It sounds simple because it is.Besides, most people don’t understand how elastic price is. Only a microscopic percentage of buyers base their decisions solely on getting the cheapest price and - trust me - you do NOT want these people as your clients.I’ve discovered that by charging more, you can provide better service. By providing better service, you attract better clients. By attracting better clients, you can charge more. It’s a self-perpetuating cycle of good business… and it’s darn profitable, too.