Fighting Inflation

Times are tight. Earlier this year, Gregory Gambone looked at his rising costs and realized something had to give. With big increases in the price of everything from gas to postage, Gambone's expenses had spiked about 25 percent versus 2006. He decided it was time to get serious about cutting back.

But how? Salaries and rent — his biggest items of expense — were locked in. So, Gambone, senior vice president at Anything Needed Financial, a Cherry Hill, N.J., practice with about $37 million in assets, launched a painstaking effort to analyze the rest of his costs, and find ways to start trimming. There was, for example, the issue of telemarketers, who tended to schedule meetings with prospects without making sure they would actually show up. Instead of paying them $12 to $15 an hour, he began compensating them $25 for each meeting they successfully booked. Then, he stopped leasing a postage meter. He also bought a laser printer to produce the hundreds of employee benefits booklets the company generated each month in house rather than using an outside printer. The upshot: Gambone has brought his costs down “significantly,” he says, without hurting operations.

As you've undoubtedly noticed, inflation is scaling new heights. In June, the Consumer Price Index rose 1.2 percent, the largest monthly advance in more than 25 years, according to the Labor Department, thanks largely to soaring energy costs. Like most other businesses in the country, advisory practices are affected by those runaway increases, too. After all, overhead costs for advisory firms range from 30 percent to 50 percent of revenue, according to Marcy Burton, a partner with Partnervest Group, a financial services consulting firm in Santa Barbara, Calif. Similarly, a recent survey by Moss Adams found average expenses are close to 40 percent of revenues. (See table on page 98.)

Keeping these costs in check can take a little bit of creativity. Fact is, for most advisors, salaries, benefits and other related items typically account for as much as 75 percent of total expenses, according to Moss Adams. If you want to cut back, your only choice is to evaluate the other 25 percent. Gambone, for example, says he spent close to a year crunching the numbers and determining where to trim without hurting the business.

One obvious way to reduce costs is to simply slash your spending on gas. For Gambone, that has meant holding more client meetings at his office — as opposed to his clients' homes. Charles Massimo, president of CJM Financial Management, a Melville, N.Y., firm with about $180 million in assets, on the other hand, recently started holding webinars for groups of clients, as well as one-on-one meetings online. He simply puts the client's portfolios on his website and gives the client a conference call number to use.

PUTTING TECHNOLOGY TO WORK

In fact, for many advisors, the real key to cutting costs is investing in new technology. In some cases, the goal is simply to reduce the costs associated with the technology tools you use. For example, George Van Dyke, a financial consultant with Synergy Financial Group in Towson, Md., who has about $65 million in assets, hopes to save as much as $2,000 a year by, among other things, switching to a less-expensive asset allocation program than the one he currently uses from his broker/dealer.

In other cases, new technology can reap much bigger savings. Take Edward Collins who, in July, finalized a merger between his Collins Wealth Management and the Lambert Financial Group to form Artisan Wealth Management in Lebanon, N.J. Since the firm had to move into a different space, he decided to add new equipment that, ultimately, would allow the firm to use smaller digs. Specifically, he decided to create a paperless system, thereby reducing the need for filing cabinets, storage space — and square footage. In fact, by scanning all their documents and storing them electronically, he was able to move into a 4,000-square-foot office, compared to a 5,700-square-foot location he'd originally planned to use. Although Collins spent around $10,000 on hardware and software, that one-time expense was peanuts compared to the $30,000 a year he would have had to pay in added rent.

The goal also may be to introduce systems with which you can save time and streamline operations. “We're seeing advisors increasingly leverage technology,” says Brian Stimpl, managing director of business solutions for TD Ameritrade Institutional. Collins recently started using a new CRM system, which handles all systems and procedures for managing new client accounts — including when to send out handwritten welcome letters or call a client to discuss her first statement. “We don't have to reinvent the wheel every time,” he says. But the system has also allowed him to introduce what he calls a “model work week.” That means a process in which employees determine when they perform certain tasks most efficiently and devote specific parts of the day to just those duties. Collins, for example, conducts media interviews in the late morning and client meetings in the early afternoon. Then, those schedules are put on the CRM system, along with each person's weekly calendar so that, says Collins, “Everyone is predictable.”

New technology has also allowed Collins to do something else: Reduce the number of full-time staff on his payroll. For example, thanks to an internet-based phone system, the office doesn't need a full-time receptionist to answer calls. Meanwhile, the firm's new document-scanning system has eliminated the need to hire someone to do filing. As a result, when two employees left soon before a merger, he didn't need to replace them.

Other advisors have been able to keep their headcount down by reorganizing workflow. Consider Carl Reinhardt, an investment advisor with RNP Advisory Services, a Morgan Hill, Calif., firm with around $270 million in assets. When a clerical employee recently left the firm, for example, Reinhardt took the opportunity to evaluate the individual's former tasks, as well as those of three other administrative employees to see whether the duties could be redistributed among the remaining staff. That included such tasks as calling clients for appointments and producing client statements. To get employees to buy into the new arrangement — and create a more cohesive team approach — he involved them in the process of figuring out how best to reorganize the work. They also agreed to meet weekly to discuss any problems that came up.

After a three-week trial, they decided the new system was working and Reinhardt made it permanent. Reinhardt says his employees work more cooperatively than before and frequently pinch hit for one another. He's also considering creating a new revenue-sharing system for the team.

Of course, outsourcing is another increasingly popular solution, according to Burton — hiring a third party to do everything from client reporting to compliance or even to provide office space. Burton points to one advisor who, six months ago, gave up her digs in San Diego and, instead, started renting virtual office space near her clients, many of whom are in Los Angeles and Orange County. She makes sure to coordinate her meetings with clients so that she can focus on one geographical area at a time without too much travel. She then leases space from a virtual office facility for that period. Savings, according to Burton, are as much as 70 percent.

THE SHEKL SHUFFLE

Reducing inflation's drag on your business can also be a matter of charging for your services differently, bringing certain operations in house or re-jiggering the perks you offer to clients. According to Jonathan Scheid, vice president of strategy for Bellatore, a San Jose-based management consulting firm for financial advisors, a larger number of advisors he works with are unbundling their fees, charging separately for investment management and financial planning. In fact, he estimates that around 25 percent of advisors are using this strategy today, up from 5 percent a year ago. In a completely different vein, Van Dyke asked an associate in the firm who owns high-end digital equipment to take new pictures for their revamped website, instead of hiring a pricey professional photographer to do it. And Reinhardt has switched from offering regular dinners for 80 to 100 people — costing $10,000 a pop — to hosting smaller, more cost-effective gatherings of 20.

But, for the most part, advisors say they're not skimping on their marketing budgets. Jennifer Hatch, a managing partner with Christopher Street Financial, a New York City firm with $150 million in assets, saw her rent double in November, a move that, she says, “has had a significant impact on my monthly cash flow.” To compensate for the change, she's raised the rent she charges an attorney and accountant who sub-lease space from her by 50 percent. But, she has also made a point of actually increasing her marketing expenses. In particular, she's spending more for advertising in a handful of key publications. “We continue to focus on bringing in new clients,” she says. Similarly, Donna La Scala, an advisor with AXA Advisors in Lake Success, N.Y., with about $15 million in assets, has increased the frequency of her mailings to clients from quarterly to once a month. She is also putting more information about the market and products up on her website.

Ultimately, these moves can do a lot more than cut costs — they can even help your business. According to Reinhardt, for example, after he started holding smaller, more intimate dinners for key clients and their friends, referrals skyrocketed. Fact is, running a tighter ship is almost always a good idea. And, when today's high inflation is nothing more than a bad memory, you'll be in great shape to take advantage of the recovering economy.