Originally published in 1989, Stephen Covey’s The 7 Habits of Highly Effective People is widely viewed as one of the most important self-help books of all-time.
Followed by The 8th Habit: From Effectiveness to Greatness in 2004, 7 Habits is regaled, in part, because of its applications in a variety of walks of life, certainly including business. More than 40 million copies sold in 50 languages confirm the book’s utility and wide following.
While the book is relevant to advisors, it’s not dedicated to the financial advisors business. However, as experienced advisors know, there are habits specific to this industry that, when adopted, can pave the way for the growth that so many principals desire. Fortunately, advisors don’t need to read hundreds of pages to latch onto the habits that can take their practices to the next level.
Here are some of the habits advisors can implement today to drive their practices forward.
Focus on the Right Metrics
In the advisory business, it’s easy for principles to be seduced by assets under management (AUM) or assets under advisement (AUA) tallies. That’s to be expected because many advisors are under the impression that the larger their client roles and AUM are, the more money they’ll take home.
That’s not necessarily true. Efficiencies are meaningful. Said another way, it’s possible that practices with $500 million in AUM can be more profitable than counterparts with $1 billion under advisement. Practices in the former camp are focusing on metrics beyond sheer scale, such as revenue per staff member and earnings before owner compensation (EBOC) as a percentage of total revenue.
It should be noted that revenue per staff member is confined to employees in client-facing roles. As such, it’s a gauge of efficiency and productivity.
Regarding EBOC, it “is a similar metric used to evaluate the working earnings of an owner-operated enterprise like an RIA (and of course there may be multiple owners),” according to WisdomTree. “Consider the example of an owner-operated RIA where the owner is considering monetizing the value of their firm three to five years into the future. There is nothing to prevent that owner from cutting or even eliminating their compensation in order to “goose” the net profitability number and increase the perceived value of the enterprise.”
At its core, EBOC is relevant because the owner’s compensation is an expense, but it’s one that falls off the expense ledger when the practice changes hands.
One of the primary, if not the top, reasons why many advisors get into the business is because they’re passionate about investing, including securities selection and portfolio management. However, a firm’s research capabilities usually aren’t revenue generators, meaning there’s something to be said for outsourcing.
“What this means is that if you operate an RIA that has less than $1–$2 billion in assets, and your goal is to maximize your enterprise value for a potential buyer, you are better off driving scale, efficiency and profitability by outsourcing all or some of your portfolio management function (including middle and back-office functions),” added WisdomTree.
Obviously, outsourcing takes on multiple forms, but when it comes to portfolio management and using model portfolios, data confirm clients are largely open to the use of model portfolios with many believing model portfolios boost performance. Conversely, only a small percentage of clients say they would leave their advisors upon learning of the use of model portfolios.