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5 mistakes financial advisors must avoid
Charles Paikert

By: Charles Paikert on January 20th, 2021

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5 mistakes financial advisors must avoid

Financial Advisors  |  Wealth Management  |  Investment Advisors  |  RIA

As a fiduciary, nothing is more important to you than helping people with their financial lives. But does your practice need some help too? 

In speaking with several successful advisors and firms, I learned even the best-intentioned investment advice professionals can stumble due to costly mistakes and business oversights.

Out of these conversations, we flagged five critical errors that can hound a wealth management practice, ranging from staffing issues to technology implementation. I’ve also included their tips on how fellow practitioners can best avoid these pitfalls.

Pricing without variation 

Fees are the lifeblood of the advisory business. Accordingly, pricing is an area where advisors can’t afford to make mistakes — but often do.

Maintaining pricing discipline is perhaps the most significant challenge advisors face, according to industry consultant Jamie McLaughlin.

“The tendency to discount to add clients is tempting but wrong-headed and bad for your business,” McLaughlin says. “You don’t want clients buying you on price.”

Financial advisory firms need to be disciplined and not waver from their fee schedules.

“Individuals in the firm motivated by sales pressure will reflexively lower prices, but that just causes the cost-income ratio to deteriorate, resulting in lower profit margins,” McLaughlin notes. “A successful firm must have centralized pricing with no variations.”

Nor should firms stray from charging clients a fee based on a percentage of assets under management. The AUM model provides an unmatched recurring revenue stream.

“Deviating from the AUM model is a big mistake,” says industry consultant Matt Sonnen, CEO of PFI Advisors. “There’s a reason charging a percentage of assets under management is popular. Clients don’t have a problem with it; firms receive a steady cash flow, and more money comes in when markets go up.”

Indeed, a recent study of elite, top-performing firms by E*Trade showed that the AUM pricing model is used by 92% of elite firms.

Using the AUM model means top firms are less likely to lower prices and lower profitability. “In short,” the report concluded, “AUM-based fees work for elite firms, and they’re sticking with it.”

What’s more, the AUM model has been relatively resilient to price pressure.

Firms charging an average rate of around 1% of AUM have held steady since 2015, despite competition from discount robo advisors, according to a study published in December by Evestnet and MoneyGuide.

Another mistake to avoid: if you’re adding additional services, don’t be afraid to raise prices.

Over two-thirds of firms surveyed by research firm Cerulli Associates raised fees for clients — who were willing to pay for additional services.

Conversely, avoid the temptation to add services without raising prices, otherwise known as “service creep.”

Lack of Diversity 

A well-documented industry critique is that women and people of color are underrepresented — often severely — in most financial advisory firms. 

According to a recent Cerulli survey, only about one-third of financial advisors are women, and African-Americans make up less than 5% of advisors.

Forget about being politically correct, industry consultants say; diversifying your workforce isn’t only a good thing to do; it’s a smart thing to do.

“You want your firm to look like the community you serve,” says Kathleen Zemaitis, a certified executive diversity coach who founded ZInclusion and previously headed diversity initiatives at LPL Financial. “They should reflect the population.”

There’s no doubt the country is becoming more diverse. 

Non-whites are expected to account for about 40% of the U.S. population by 2025, according to the U.S. census bureau. Nearly half of millennials identify as non-white right now. And by mid-century, there will be more people of color, including Blacks and Latinx, than whites.

The business case for diversity isn’t just about numbers. People of color are also going to have more wealth.

The African-American market alone has seen its buying power rise from $961 billion in 2010 to an estimated $1.3 trillion in 2018, according to the Selig Center for Economic Growth. The center’s Multicultural Economy Report also found thatLatinx, who are now the country’s largest and fastest-growing minority group, will have even more money to spend.

The biggest mistake advisory firms currently make is not expanding their efforts to hire minority candidates, experts say.

“There are certainly not enough recruiting efforts out there,” Lazetta Braxton, co-CEO of 2050 Wealth Partners and the former president of the Association of African American Financial Advisors, told Financial Planning.

Here are some resources advisory firms can contact:

To help diversity efforts, one suggestion for Advisors is to discuss recruiting minority students with local schools and tap local networks of Black and Hispanic businesses and community leaders — and be willing to listen and learn and have what Z Inclusion’s Zemaitis calls “cultural humility.”

“Don’t assume you know what’s best for an underrepresented community,” she explains. “Ground yourself in understanding another culture by reading books like, How Not to Be a Racist and Between the World and Me. And be authentic and honest. If you don’t understand something, say so. People will appreciate it, and you will make progress.”

Not paying enough attention to tech 

Digital technology is the backbone of an advisory firm’s infrastructure, and too many firms just aren’t keeping up.

Here are some of the biggest mistakes industry experts say they’re making:

  • Lack of education and not asking enough questions: “This is a fast-changing area,” says industry consultant Matt Sonnen, CEO of PFI Advisors. “You need to keep abreast of new developments and ask questions. Read what you can in trade journals and go to conferences like T3. Use consultants. Evaluate the systems you’re using now and ask, ‘Are we using our tech properly and most efficiently?’”
  • Neglecting cybersecurity: “Too many firms weren’t prepared for Covid and its implications for disaster recovery,” says tech consultant Joel Bruckenstein, producer of the annual T3 (Technology Tools for Today) Advisor conference. “Sensitive data needs to be encrypted. If you’re an advisor working from home on a laptop that contains confidential client data, anybody who comes into your house can steal that data.”
  • Not taking advantage of their custodian: “Tech is moving fast, and there are so many vendors out there that it’s hard for firms to stay on top of things,” says practice management consultant John Furey, founder of Advisor Growth Strategies. “Many of them can be leveraging their custodians who have the resources to either provide solutions or help them find the right vendor for their needs.”
  • Spending too much time and money on client portals: “This is one of the biggest mistakes I see advisory firms make,” says PFI’s Sonnen. “There are only two types of clients: do-it-yourselfers or delegators. The DIY types are doing their own research. The delegators who are RIA clients only use the portal to check their numbers. We surveyed our clients and found that delegators spend about 17 seconds on average on the portal, and only about 25% of prospects who become clients log onto the portal. Spend your money elsewhere.”
  • Confusing a chief technology officer with a chief information security officer: “Cybersecurity and IT are not the same thing, just like a treasurer and a comptroller aren’t the same,” Bruckenstein says. “Tech is too important to have one decision center. You need to have checks and balances.”
  • Not having a proprietary onboarding solution: United Capital, now Goldman Sachs Personal Financial Management, developed GuideCenter and Money Mind, critically acclaimed software for onboarding new clients.

“I don’t know why more firms try to copy this,” practice management and tech consultant Craig Iskowitz, CEO of Ezra Group, writes on Michael Kitces’ Nerd’s Eye View blog. “Onboarding is usually the first interaction that clients have with a firm’s technology. Designing an engaging and collaborative experience builds bonds with new clients and creates a solid foundation for future relationship growth.”

Lack of a compelling compensation strategy 

Competition for quality employees, from advisors to research analysts, is fierce. Demand far outstrips supply. If you want to attract the best people, you need a competitive comp package — which too many firms lack.

“Talent is driving compensation,” Lisa Salvi, vice president for Schwab Advisor Services, told Financial Planning magazine. “Nearly three-quarters of the firms we surveyed for our RIA Benchmarking study are trying to hire. They are structuring their incentive compensation to appeal to the available talent pool.”

What’s more, the study found, close to half of advisory firms are recruiting from other RIAs. That stark competitive reality, the report concluded, underscores “the need for a compelling compensation strategy.”

According to a recent Fidelity Benchmarking study, nearly two-thirds of advisory firms now pay employees a fixed salary, and most firms also add bonuses. 

“We found through trial and error that’s what works best,” says Matt Cooper, president of Beacon Pointe Advisors. “A reasonable base salary, based on the employee’s role and a bonus based on outcomes. But the outcomes don’t have to be just financial, such as net new assets. These outcomes can also be tied to client satisfaction, attrition, and retention.”

When it comes to bonuses, firms shouldn’t make the mistake of tying compensation to gross revenue or assets under management, says Brad Bueermann, CEO of consulting firm FP Transitions.

“Revenue and AUM can fluctuate with the market,” Bueermann notes. “It’s better to tie bonus compensation to key performance indicators that result in the growth of the firm, such as new clients and new client assets.”

Nor should advisors make the mistake of skimping on benefits.

Health benefits have become “a key element of a competitive compensation package,” according to Schwab’s Benchmarking study. Nearly all RIAs with more than $250 million in AUM offer medical insurance, and most industry-leading firms also provide dental and vision insurance.

To attract talent, innovative firms are also offering such benefits as gym memberships, happy hours and dinners paid for by the company, and generous vacation policies.

And don’t forget about including equity as part of the compensation plan.

According to Schwab, three-quarters of firms recruiting staff from other RIAs share equity, and nearly half of senior client relationship managers are expecting to receive equity.

“Without a distribution of profits, a firm doesn’t have value,” Bueermann says. “It’s just a book of business, not an enterprise that will attract the best people.”

Not spending enough time and money on marketing 

On average, financial advisory firms spend less than 2% of their operating budget on marketing — and that’s not enough.

“You have to be willing to make the investments that are necessary in marketing,” says Alli Warner, head of marketing for Beacon Pointe Advisors. “It’s too important a part of a firm’s growth strategy to underfund.”

Industry guru Mark Tibergien drives the point home in his book with Kimberly Dellarocca, “The Enduring Advisory Firm:” Marketing is a critical component of a firms’ strategy, which is “the process through which you create the vision for what you want your firm to become.”

One of the biggest mistakes wealth management firms make in marketing is inconsistency, Warner says.

“Too many firms start and stop, and that breaks the trust cycle,” Warner explains. “The market and prospective clients are confused, and it harms brand development.”

Firms that want to grow inorganically through mergers and acquisitions, as Beacon Pointe has with great success, make a mistake by limiting their marketing to consumers.

“We created a brand and a marketing plan just for the B-to-B space,” Warner says. “M&A is a major growth engine for us and we wanted to speak directly to that segment of the market. We created a whole different landing page on our website just for that channel.”

Other marketing missteps to avoid:

  • Not creating enough original content.
  • Not creating podcasts and video blogs. Ignoring YouTube.
  • Not promoting your content — the rule of thumb is to spend 80% of your time promoting your content and just 20% creating it.
  • Not enough differentiation. Make sure your website and branded collateral don’t look like everyone else’s.
  • Not using social media, particularly LinkedIn, effectively. Don’t confuse generating awareness with individual connection requests. If you’re talking to a stranger at a party, you don’t want to hear a sales pitch right after being introduced. The same goes for LinkedIn.

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About Charles Paikert

Charles Paikert has been writing about the financial advisory industry since 2004. Paikert has been an editor for Investment News and Financial Planning and currently contributes to Family Wealth Report, RIABiz and Barron’s. He has also written about the industry for The New York Times and Reuters and has moderated panels at numerous industry conferences, including Schwab IMPACT and Invest. Paikert is the co-author of Madness: The Ten Most Memorable NCAA Basketball Finals.