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How wealth management firms can cut costs but stay competitive


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In a very public fashion, layoffs and belt-tightening is spreading across corporate America.

Though the U.S. economy hasn’t suffered the harsh recession that many market watchers predicted, big names in tech and finance, including Salesforce, Google and Goldman Sachs, have announced mass layoffs and dozens of other companies expect to follow suit

Meanwhile, the Wall Street Journal reported that capital spending by S&P 500 companies in 2023 will slow to an estimated 6%, compared to a 20% increase in 2022.

In the independent wealth management space, though, RIA firms are bucking these trends. Many are aggressively recruiting and increasing marketing spending while being selective about where and how they cut costs. 

(According to the latest Charles Schwab benchmarking report, most RIA firms will need to add at least six staffers over the next five years, while different studies put the average advisory firm spending anywhere from 1% to 7% of revenue on marketing expenses.) 

“There’s a balance to be struck between spending prudently and cutting back to the point of hurting your competitiveness,” said Mike Wren, CEO of Legacy Financial, an RIA based in Leawood, Kansas.

Wren and others advised that even while being cautious about markets, there are strategies to find that right balance. The greater risk, they said, is missing out on growth opportunities.

“It's a discussion around, is this cost pure overhead or is this an investment? It is hard sometimes to see a difference,” Wren said. “We remind ourselves that we're not G.E., we're not Honeywell, we're not trying to just pay out a big dividend. We're supposed to be growing the company; that's our responsibility.”

Take stock 

Any advisory firm looking for ways to manage costs should first do a detailed assessment of the overall financial health of their business, said Alyssa Phillips, vice president of operations at Centura Wealth Advisory in Los Angeles.

“You need to understand your numbers,” Phillips said. “Having just a basic PnL statement doesn't really give you the insight you need to understand the nuances of your practice.”

While RIAs don't have the cost of goods sold in the same way that a product company would, Phillips said growing advisory firms have fixed and variable expenses, regardless of the economic environment, and they can dive deeper into both.

“If you just have noted your marketing budget as $200,000 last year, that doesn't really help. Break it down by campaign, so you can see the cost and the ROI; it's black and white. The same applies to some of your fixed expenses.

“I'm not going to launch eight initiatives next year because there is a lot going on – I'm going to launch my top two and then see where things are going,” Phillips added. “It's less about cutting the cost for not doing the initiative; it's about when we do the initiative.”

Even advisory firms that aren’t experiencing tightened cash flows will likely want to examine their expense profile as inflation impacts the economy, said James Bogart, CEO of Bogart Wealth in McLean, Va.

“We've seen almost every vendor this year raise their prices by an average of 20-plus percent,” Bogart noted. “So I’m looking at everything and asking myself, is that still something I need as part of my strategic value proposition and growth initiatives? If so, then that quantifies to what I would describe as a meaningful number.”

Create dialogue

With a detailed grasp of your firm's financials, the next step firms should take is to set up a dialogue about operations to arrive at actions to take, Wren said. 

“Anytime you are juggling the question of spending versus ROI, that discussion gets tougher when you go through a tough market,” he said.

At Legacy, Wren explains that dialogue is open to everyone in the firm. “If you see something in terms of a process that you ask yourself, ‘I don't know why we do this, I don't even understand what we’re doing,’ you have to bring it to someone's attention.”

Phillips added questioning processes are a great way to find tweaks that can reduce costs or save time without making drastic cuts, “Can you twist here and change something there so that you're not hemorrhaging anything, you're not cutting something off prematurely?”

Human resource experts agree – adding more employees to this dialogue can bring new ideas to approaching cost saving, and studies show it can also create wider staff buy-in and prevent potential blowback.

Another benefit to that dialogue is that it helps firms sort expenses between temporary and permanent, Phillips said. There will be cases where spending can be paused rather than cut entirely: “Are you thinking about potential cost reductions or savings that can be budgeted for because of the forecast for the market for the next year and beyond?” 

Bogart said that’s currently his approach to new office space. 

“We've outgrown the existing suite that we're in and so now we're looking at getting even a bigger one,” he said. “I'm stalling it a little bit intentionally because I would like to see a bit more clarity before I commit to a new 10-year obligation that obviously carries with it an economic impact.”

Tools that help

Wren said firms looking for savings should also rely on technology tools.

“We think about technology as a cost reduction when it comes to time and efficiency,” he said. “We could spend $5,000, $10,000, or $15,000 on a solution that gives us back office support rather than hiring somebody for the role. That's huge when you don't know where margins are going to be in a market that is in a bad mood.”

A well-built CRM, for instance, can organize and leverage all the data needed to customize and deliver tailored experiences for each client of a firm and help that firm stay on top of client workflow with activity trackers.

Also, a wealth management platform can simplify and eliminate the need for advisors to do tasks such as onboarding, account updates, trades or even simple notifications through automation and data sharing. 

Again, Schwab’s annual RIA Benchmarking Study noted tech-savvy firms reported spending 12.5% less time on operational tasks than their peers, and top-performing firms spent almost 20% less time.

Bogart suggested leadership should take the initiative with firm technology. “I'm always looking for more and more ways to leverage technology to make my staff more efficient,” he said.

One way Bogart’s firm has saved thousands of dollars is by employing more virtual events for clients and prospects. 

“We were spending $150,000 a year pre-pandemic on live events, dinner seminars and lunches. That went away because of the pandemic, and admittedly I'm not willing to bring it back,” he said. “I like the fact that I can scale so much faster, I can do it at a lower cost, but most importantly, I can create the content and get it out to a much larger audience than what I was getting when I was doing the live events.”

Any new technological tool will ultimately mean a new cost and some will be big ticket items – Phillips said it is up to operations and technology-savvy staff inside firms to help skeptical leadership see their benefit.

“Fintech is moving so quickly and the speed of the change is very scary for a lot of folks,” Phillips said. “If a firm principal is more traditional or they haven't experienced the type of movement we see in the technology space, that's where a lot of the hand-holding needs to come in to implement change and to implement new technologies."

“It’s important to understand what their idea of success is and what their goals are and then that's how you can figure out how to frame that conversation with them,” she added. “Emphasize you’re doing it in steps. Garner buy-in early on; make sure you're connecting it to what their definition of success is. Having those individual conversations is really helpful.”

Human capital

Advisory firms should actually increase their budget for staffing and training at this time, the executives said.

A prime recruit will give you the ability to add strategic depth and pad your competitiveness in an uncertain market, noted Robert Steinberg, founder and CEO of Blue Chip Partners in Farmington Hills, Mich. 

“We're trying to hire the super technically proficient people that are going to give great advice,” he said, noting his firm created a deferred compensation plan for one recent hire they felt could one day assume a leadership role. 

Consulting firm Gartner reports top talent can directly impact business outcomes by being 20% faster at successfully performing roles and contributing to the firm. 

To keep existing employees motivated and fulfilled, Steinberg’s budgeting for them to attend training seminars and educational conferences. “You're trying to keep a good culture at the firm, but at the same time, you have to protect your assets in human capital. That's our business. You're only as good as your employees.”

Bogart said he has lowered the number of people his firm will recruit in 2023 from earlier estimates, but his RIA is also spending more on employee retention. In addition to more training, the firm has been offering enhanced compensation programs, adding profit-sharing programs, more paid time off and work-from-home policies. 

“It costs so much to bring on a new hire, so all firms need to focus on retaining what you have because it’s hard to find those key critical employees right now,” he said.

Steinberg added that a recruiting push allows firms to review existing employees and potentially make budget tweaks through either shifting roles or addressing non-performance.

“As revenues are growing, incomes are growing, firms might accommodate certain employees that maybe aren't exactly what they should be,” Steinberg said. “All of a sudden, when you're looking at making cuts, you're really trying to evaluate the employees. Then you might ask, is this the right person for the role? If not, maybe this is the time we need to be looking at making some adjustments.”

Essential outreach

The other area of the business to consider increasing spending when adjusting budgets is marketing and outreach, especially in an uneven economy, said Legacy’s Wren.

“When the market is down like this, this is when you see opportunities because every potential client you meet, they're open to maybe taking a look at something else,” Wren said. 

(One study of 670 wealth management clients by market data firm YCharts found that almost 22% had switched advisors since the pandemic.)

“It's a great time to make sure your proposal software makes sense, that your website and marketing materials look good, and your brand is synced up with everything,” Wren advised. “If you wait until things are good and you have a little bit extra cash flow, you’ll have missed your best opportunities. You almost have to think like Warren Buffett.”

In market uncertainty, both clients and prospects are looking for someone who can provide reassurance and authority, Bogart noted. 

“Investors want that guiding light that generates some level of confidence,” he said. “I personally think these environments create tremendous opportunities for planning and providing understanding that while the markets are not in our control, the actions we take are.”

Steinberg agreed. “The firms that end up emerging out of market turbulence the strongest are the ones that reinvest in marketing during that time. They're doubling down instead of cutting back. There are a lot of firms who might say, 'How can I really define how much I'm getting from this marketing expense?' – while that's an easy one to cut back on, it might be the wrong time.”

Market reminder

Phillips acknowledged it’s easier for firms that operated through previous down markets to take a longer view on cutting costs and spending. But a focus on client service during instability is a good place to build your firm’s approach, she said.

“You're not just putting out fires when they call you with their concerns; you're reaching out to them ahead of time and letting them know, this is our strategy, we're going to remain true to it,” she said. “That proactive outreach to clients before they start freaking out is key and something that a lot of newer firms and newer advisors may not think to do because they're trying to figure things out."

“So you have to pause for a second and understand that your clients, whatever freak out you're feeling, they're probably feeling that ten times as much.”

Wren added that to get through a tough market, young firms have to take a page from the advice they give to clients and make sure a longer perspective is part of their planning.

“When you are building your firm, are you doing it in a way that takes into account five years from now, ten years from now? You can't really plan the next two, three, four or five years if you're worried that you should be bringing in assets all the time. If this is your first time through the cycle, it's a good reminder that you cannot rely on the markets."

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