Most financial advisers do a poor job with their own financial planning.
You'd think that financial advisers who spend their careers advising clients would wise up and learn that one of the best ways to build real wealth is to create a great business.
Yet most advisers ignore long-term enterprise value in order to maximize current net income. In short, they invest little to nothing in their practices.
The irony in all this is that they take their profits, which are taxed at ordinary income rates, use some to fund their current lifestyle and then take the remainder and put it to work in the financial markets, perhaps by investing in an ETF index fund.
Sure, this may be a path to financial security if you have the discipline to save well, but it's not the path to building significant wealth.
What if, instead of maximizing current cash flow, financial advisers focused on building their businesses? How about if instead of giving almost half of the profits they make to taxes prior to investing them in a broad basket of the economy, they invested any profits above what's needed to fund their current lifestyle needs into the business?
By investing in the business, you'll essentially be taking before-tax dollars and putting them to work building your wealth. Your investment in your business will essentially grow tax-deferred as the value of your firm increases. And that means when you decide to monetize some (or all) of your business, you'll receive favorable capital gains tax treatment as a result.
(More: Selling your firm, even if you've never thought about it)
There are a lot of great ways to invest in your business that can help increase enterprise value. Here are three:
People. We are in a professional services business, and having good people on your team can multiply your business in ways you cannot always immediately quantify. Whether it's adept customer service people to free up your time, or skilled technology folks to keep the systems running, great employees add much more value than they cost.
(More: Hire new college grads, and help plan for the future of your firm)
Technology. We are much more productive today than we were five, 10 or 20 years ago because of technology. Whether it's CRMs that help us provide fast, efficient customer service or portfolio systems that make it easy to manage money, continually updating your technology enables you to provide a better customer experience to a larger client base in a shorter amount of time.
Marketing. The typical advisory firm is not growing because people are reluctant to spend money today in pursuit of tomorrow's clients. It's a fact that the fastest-growing firms are the ones that aren't afraid to invest in
marketing.
If you're at a point in your career where you either lack the desire or the expertise to invest for growth, you might want to consider merging or selling to a firm that is growing.
You'll likely give up some extra profits today, but you'll be building wealth for yourself while providing a superior level of service to your clients.
(More: Advisers who pick stocks are hurting clients — and the value of their firms)
Scott Hanson is co-founder of Allworth Financial, formerly Hanson McClain Advisors, a fee-based RIA with over $4 billion in AUM.
