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3 Ways to Improve Advisory Practice Margins

Today most plan advisors are experiencing margin pressure.

Short-term measures to deal with this problem include selling more plans without increasing overhead. But that means service will suffer. Alternatively, an advisor may be tempted to sell for less to get more plans and assets under management — in other words, “We’re losing money but we’ll make it up in volume.” But that strategy will only exacerbate the problem.

There are other ways to improve margins. Here are a few suggested long-term fixes.

Focus on Plan Outcomes

Most experienced plan advisors say they focus on improving outcomes. But is that just a sales pitch to distinguish themselves? The proof may be whether they are going back to current clients to install the “ideal plan,” incorporating auto features at a reasonable price point — which eventually boosts assets without having to acquire new plans. If they’re not, why should a prospect believe that the advisor is truly focused on plan success?

Consolidate Record Keeper Partners

Since most advisors have taken the path of least resistance, going for Advisor-of-Record change rather than record keeper change, most find themselves working with 10 or 20 record keeper partners. When taking over a plan, it might not have been the right decision to immediately change record keepers. And changing providers for the benefit of the advisor may not be best for all clients. But if plan sponsors are demanding lower pricing or more service for the same fee, something has to give.

If there are only nine potential survivors in the advisor-sold market (not counting micro plan providers), record keeper change is bound to happen anyway. Managing relationships with more than three to five record keepers is an unsustainable business model and does not allow an advisor to negotiate better pricing and service on behalf of clients.

Walking Away from Business

Advisors should be evaluating all of their clients annually based on profitability and firing the ones that demand too much, are not willing to pay, or were not priced right from the beginning. Some clients are disruptive to staff, meaning they are not the right cultural fit. Walking away from current clients or prospects that don’t make sense is a healthy and necessary exercise. This means that advisors need a mechanism to determine the profitability of each client and prospect. Without one, the business is unsustainable in an industry with declining margins.

Ultimately, advisors need to transition from salesperson or technician to business person. Admittedly, that can be difficult if not impossible, especially for advisors who are unwilling or unable to change. Some of the successful advisors have hired a business manager regardless of whether they have industry knowledge. Then there are the rare examples of advisors who have taken the time and made the effort to really learn how to run a business while continuing to sell and service clients. The bottom line: To turn a DC practice into a business, an advisor needs a business plan and the right resources to execute that plan — including professionally trained leaders to run the business.

Opinions expressed are those of the author, and do not necessarily reflect the views of NAPA or its members.

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