There’s something about the word “free” that grabs our attention, even when an underlying instinct takes us back to that basic economic lesson we learned in school—TANSTAAFL (There ain't no such thing as a free lunch). Let’s apply this simple principle as we explore some of the hidden costs advisors might overlook while in the process of selecting a partner.
If your priority is cost containment, it’s important to consider what you are willing to compromise.
Take the example of an RIA that, in an attempt to increase their profit margin, switched to a lower cost platform partner but didn’t achieve the anticipated results. Their initial satisfaction quickly turned to regret as they adjusted to subpar service with clunky technology applications, compliance friction and staffing challenges. Their high expectations slowly faded, as they found themselves spending more of their valuable time running their business instead of growing it. The culmination of their ill-considered trade-offs for a lower price tag adversely affected their growth.
At face value, purchasing a bargain-priced platform seemed like a smart choice. The included services–technology solutions, financial planning, compliance support, CRM, marketing and AI offerings all appeared comparable to premium options. The numbers they plugged into their proforma looked solid. So, with full faith in their Excel spreadsheet, they eagerly anticipated the payoff.
But when they looked at their firm’s enterprise value, they were dismayed, as their numbers fell short of expectations. Their annual organic growth plateaued at just above three percent. Although that was consistent with industry trends outlined in Fidelity’s 2023 Benchmarking Study, some of their peers saw upwards of 19 percent growth. So, the firm’s leadership scoured their financials looking for answers, comparing inputs to outcomes, wondering what happened to their ROI.
As they reflected on their year, the answer became crystal clear. They failed to factor in the cost of their most valuable resource—time. They overlooked the significant opportunity cost of the hours they and their team spent tending to non-revenue generating activities. The culprits were that new, “value-priced” technology stack, non-supported marketing tools and cumbersome compliance support, all of which were included “at no extra cost,” but weren’t packaged for success. So, instead of pursuing meaningful growth opportunities, the firm’s leadership and client service team got stuck on the dreaded “operational hamster wheel.”
One way to avoid a costly miscalculation is to apply a 15 percent mark-up to your cost analysis when vetting potential partners. This can help offset the anchor bias of bargain quotes for services that are not fully supported and account for the extra time it could cost you or your team to support the change.
I suggest allocating a minimum of 50 percent of time to revenue-generating activities. That includes implementing strategy, prospecting leads and aligning the team to focus on driving growth. Selecting a partner with a fully supported platform can make that possible. While the initial financial commitment might cost more, it’s the return that truly matters.
Here’s how one advisor reaped the rewards of investing their time wisely. With their partner diligently working in the background to support their operations, they strategically reorganized to serve three distinct niche markets, effectively doubling in size. Their journey involved flipping from a brokerage to an advisory, successfully transitioning their business to G2 advisors and enhancing their client experience through outsourced investment management. It also included deploying efficient tech solutions, tapping into staffing expertise to place team members in the right roles and executing a succession plan. They did all this over the course of five years, while maintaining the same size team.
To quantify the importance of allocating time to growing your business, let’s evaluate the financial impact of organic growth at different rates based on today’s multiples. A $200 million RIA that grows at three percent in seven years will grow by $7 million. If the same advisor grows at 10 percent, they will realize a $12.6 million gain. If they can grow at a rate of 20 percent, their growth increases by $23 million.
The bottom line is that when comparing potential advisory partners, it’s important to consider the big picture of what exactly is included in the pricing. In the end, it comes back to that distant voice of your high school economics teacher, reminding you of that important lesson on TANSTAAFL. If you over-index to a low-fee, low-service model, you should expect that you will likely grow more slowly, which comes at a significant price. So, before you invest your time in trying to save money in the short term, consider the real cost.
- Shannon Spotswood is chief executive officer at RFG Advisory, an innovator in the wealth management industry committed to serving independent financial advisors and their clients
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