Why Breakaway Advisors Need Outsourced Support

By Pamela Stross

Some type of turmoil always seems to be occurring within the financial investment industry. Bank of America is dropping the Merrill Lynch brand name from some of its businesses, while BB&T has announced their plan to purchase Sun Trust Banks and rebrand as Trust Financial Corp. in the largest bank merger since the financial crisis.

This and other turmoil in the industry are creating a heightened environment where financial advisors may be considering a breakaway to start their own firms. However, transitioning to independence can bring about uncertainties regarding administrative tasks and costs that were previously handled by their brokerage or wirehouse.

To manage these additional responsibilities, breakaway financial advisors starting their business should consolidate outsourced support such as back-office support, marketing and technology services so they can better serve their clients and build a profitable business.

The Benefits Of Outsourcing Services

Financial advisors might initially be apprehensive about outsourcing to third-party vendors, especially if the advisors came from large brokerages that provided support structures. Often, advisors have an unfounded fear that outsourcing will result in higher costs and a loss of control over their practice.

Despite these fears, in reality, the outsourcing of non-client-facing responsibilities is typically cost effective while leaving the advisor in total control of their practice. Fidelity performed an outsourcing study that found 43% of advisors currently leverage external providers for select business functions.

Of those in favor of outsourcing, 77% found outsourcing saved time while 66% found outsourcing increased productivity. An additional 57% believed outsourcing optimized efficiencies for their practice.

According to a report by the Financial Planning Association, 33% of advisors believed administrative burden was the greatest obstacle in increasing productivity. In addition to being more productive business owners, smaller registered investment advisories can save money by outsourcing professional support.

It is less expensive for a firm with between $100 million and $700 million in assets under management to outsource a number of non-client-facing tasks. It puts a great deal more pressure on the bottom line of a smaller firm to take on the salaries and benefit packages for these roles. A growing in-house staff increases overhead costs and requires employee management that takes time away from building a profitable business.

Services That Can Be Outsourced

Successful advisors know what they are good at, and they know their limits. Some aspects of running an independent business do not align with advisors’ natural abilities, and sometimes those same aspects can put advisors into the weeds of working in the business instead of working on the business.

Independent financial advisors best serve their clients and their businesses by focusing on what they do well, including working with current clients and finding prospective clients. The most convenient roles for outsourcing include anything that does not directly touch the client: marketing, accounting, information technology support, human resources, compliance support and back-office support for client billing. Anything that does not serve the purpose of increasing the business or serving the client can be outsourced.

Any team members who are client-facing, such as financial planners, advisors and sales assistants, are best to keep in-house. Ultimately, your practice’s full-time staff should focus on client support.

Consolidating Is The Efficient Approach

Focusing on clients is the key factor in building a successful independent practice. Fidelity found financial advisors who use outsourcing services managed about $145 million in assets compared with $110 million for advisors who handled administration in-house. Advisors who outsourced also had greater compensation at approximately $365,000 annually compared with $335,000 for financial advisors who kept tasks in-house.

Consolidating all outsource needs with one service firm can further maximize revenue per employee. Instead of spending time managing multiple vendors, using one partner who can handle multiple tasks will increase cost efficiency while decreasing time spent on vendor management.

Financial advisors who outsource non-client-facing services can increase their firm's profits and better serve their clients. The benefits of outsourcing include increased productivity while decreasing overhead costs and burden. By building a firm where the in-house staff focuses on serving the client, an independent financial advisor can stay focused on what they do best, which is serve and grow their client base.

Pamela Stross is CEO of TruClarity Management Solutions. Pamela may be contacted at [email protected].