Boosting revenue drives profitability better than decreasing expense.
Financial advisers are always thinking of new and different ways to save money. They counsel clients and apply the same principles to their businesses. After all, if expenses can be cut, profit increases, right?
At the most basic level, yes. Unfortunately, this kind of thinking has been proven counterproductive.
In reality, boosting revenue drives profitability better than decreasing expenses. This concept, once internalized, can make a huge impact on a firm's bottom line.
In short, generating 10% in additional revenue in a profitable business will prove more beneficial than cutting expenses by 10%.
If focusing on revenue is key, why are advisers still concerned about controlling overhead? In fact, rather than reducing expenses, spending more in the right places has shown to be successful in producing exponentially greater net earnings.
Because this is a technology column, of course, I am advocating increasing tech expenditures.
Boost to bottom line
According to recent studies by Dimensional Fund Advisors LP and The Charles Schwab Corp., most firms spend 3% or less on technology and their net operating income is about 25%. The firms most successful at taking advantage of technology increase their bottom lines exponentially.
This isn't hype.
In my firm, we automate almost everything, spending nearly twice as much on technology as the average firm. Our profitability is also twice as much.
Adding ByAllAccounts has boosted our assets under management by more than 10%. Using Trumpet Inc.'s Assemblage allows us to get quarterly reports out in less than a day.
Automating re-balancing has completely taken this burden off of me. We have more time to spend in front of clients and more time to bring in new clients.
Spending $5,000
For example, if spending $5,000 per year on a software program can:
• Free up 500 professional hours per year.
• Allow for more marketing activities.
• Bring in additional assets under management of $20 million.
• Produce additional revenue of $200,000 in Year One.
• Repeat that profit on an continuing basis each year.
Shouldn't every adviser do this?
Statistics aside, most advisers opt for free or cheaper tech solutions or even insist on continued manual processes.
How can advisers be convinced to embrace technology? How can they be trained to view these expenditures as investments rather than expenses?
Without a change in mindset, advisers will never reap the true economic potential in their businesses.
Sheryl Rowling is chief executive of Total Rebalance Expert and principal at Rowling & Associates LLP.
