Scaling Financial Advice: What Actually Drives Efficiency And Advisor Productivity

Scaling Financial Advice: What Actually Drives Efficiency And Advisor Productivity

Improvements in worker productivity over time are one of the biggest drivers for increasing an entire country’s standard of living. In the context of an individual business, productivity becomes the driver for growing revenue faster than the associated costs to support that revenue – otherwise known as “scaling” the business. For most businesses, investments in technology are one of the factors – if not the single greatest factor – that brings productivity improvements.

Except, perhaps, when it comes to the business of financial advice. As despite an incredible boom in advisor technology over the past decade, advisor productivity – whether measured by the average number of clients served by each professional in the firm, or the average revenue generated by each professional – has remained entirely flat for nearly 10 years. Instead, technology improvements have shown up in the back-office efficiency of advisory firms – where productivity ratios have improved significantly.

Yet in practice, the stagnation of advisor productivity – or at least, the apparent inability of technology improvements to have measurable increases in advisor productivity – isn’t entirely surprising, once it’s recognized that clients ultimately hire a (human) financial advisor precisely to gain expertise and support beyond what technology alone can provide. (Or else the client would simply solve their challenges themselves using the internet!)

Fortunately, though, this doesn’t mean that advisor productivity cannot be improved. Instead, recent Kitces Research into “How Financial Advisors Actually Do Financial Planning” finds that enhancements in advisor productivity are driven by three (non-technology) factors: client variability, advisor expertise, and (professional) staff support.

When it comes to client variability, the challenging reality is that because most financial advisors build their businesses in the early years by taking nearly anyone who will just agree to be a client (and compensate the advisor for their advice), the typical advisory firm ends out with an extremely wide range of clientele. Yet in practice, when advisors get more focused into a particular niche or specialization, enabling them to develop more ‘repeatable expertise’ simply by targeting a more consistent group of clients who have more consistent needs to be serviced in the first place, the average advisor ends out spending 13% less time doing middle- and back-office support work, can service 14% more clients, and is able to attract more affluent clients (who pay higher fees), such that the top 10% niche/specialized advisors earn nearly 67% more than the top 10% non-niche advisors (earning $660,000 versus $395,000, respectively).

Similarly, because of the complexities involved in giving advice to clients (who almost by definition tend to have more complex issues and needs… or else they wouldn’t be seeking out and willing to pay a professional financial advisor for support), advisors who invest in their own expertise are able to complete the financial planning process with clients in significantly less time. Specifically, CFP professionals complete the financial planning process in nearly 22% less time on average than non-CFP advisors. And for experienced advisors – who tend to attract even more complex clients – the differences expand further, with experienced non-CFP advisors averaging 52 hours in the first year to complete the financial planning process, compared to only 29 hours for CFP professionals (a 44% improvement in time efficiency!).

And because of the time-intensiveness of client meetings themselves – where advisors typically spend at least as much time preparing for and following up after the client meeting as the time in the meeting itself – one of the greatest improvements in advisor efficiency comes from leveraging professional support staff (i.e., paraplanners and associate advisors) to aid in the planning process. In fact, the cumulative difference in how the top 25% of advisors spend their time compared to the bottom 25% advisors amounts to as little as 1 hour per day in additional client meetings by leveraging paraplanners to aid in the meeting preparation… which results in a 64% increase in the average number of clients serviced, and a whopping 80% increase in advisor take-home pay!

Ultimately, technology may still provide incremental improvements in advisor efficiency along the way as well, especially as more technology tools arrive specifically to aid in the efficiency of the most time-consuming areas of the advisor’s day like meeting preparation and follow-up time. Nonetheless, the research shows that in the end, the greatest differences in advisor productivity are not actually driven by their technology adoption, but instead by the variability of their clientele, the expertise of the advisor themselves, and how the firm leverages professional (not ‘just’ administrative) staff support to focus the advisor’s time where it has the most impact: in meetings with clients!

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