My journey to becoming a financial advisor is a little different from most others I know.  I started my practice only after deciding that buying a lampshade manufacturer was too risky.

Fresh from graduate school and ten years of working for Chubb, I committed myself to never having a boss again.

So I began planning out my new business. At first I looked at franchises. Fast food, printing, cleaning services, dry cleaners.  I looked at them all. Then, I worked with a business broker to see what businesses were looking to sell.

You’d be amazed how many bad businesses exist.  And yet they still think someone would want to buy them.

When buying a business, the number one criteria is profit margin (you Shark Tank fans know that).  What’s your cost of goods sold, how much to you sell it for, how much do you take home?

Finally, after a rock hit me on the head, it dawned on me that no business has better margins (potentially) than a financial advisory business.

In my ten years at Chubb, I met some incredibly affluent (but not wealthy) advisors.  So I began interviewing them to learn more.

First stop:  the career producer.  Mass Mutual.  For half of my gross revenue, they offered to give me an office and pay for my supplies. Really?  Fifty percent?  For an office?  And a copier?

Then I visited some independent advisors.  Here it was a little trickier because they weren’t about to open their financials to me.  So I worked backwards. I asked, “What are all of the necessary expenses you must have to operate?”  It seemed obvious to me, but I wanted to be sure I hadn’t missed something.

  • Office Rent
  • E&O Insurance
  • Staff Salary
  • Office Supplies
  • Marketing
  • Phone & Internet

That’s about it. Oh sure, you can spend more, but these are the essentials (I didn’t included income taxes because until you make money, there are no taxes). In fact, you don’t even need any staff until you have a reasonable number of clients.

So let’s assume revenue of $100,000:

  • Office Rent: $6,000
  • E&O: $1,000
  • Office Supplies: $1,000
  • Marketing: $15,000
  • Phone & Internet: $2,000

Total Expenses: $25,000

So, if you do it yourself, you operate with an expense ratio of  25%.  So then why would anyone ever pay the career shop 50% of his revenue?  Sadly, I did meet a lot of independent advisors whose operating expenses exceeded 50%.  Maybe that answers the question.

From this analysis began a series of profit assessments and benchmarks that I would learn to apply every quarter to help me with future decision making.   Today, my numbers look like this:

Today it looks more like this:

  • Profit: 37.8%
  • Owner’s Pay: 11.5%
  • Taxes: 12.3%
  • Operating Expenses: 38.3%


Who knows?

In fact, the only ideal thing about it is that I planned for it to turn out this way.  The profit margin goals guide my decision making process.  When a vendor calls to sell me the next “game changer” or asks me to fly to his city for a meeting, I do it only if it can be achieved within the Operating Expense targets.  If not, the answer is “no.”  Profit must come first.

I didn’t get here overnight, and this continues to be a work in progress.  But wearing the CFO hat for four hours a month keeps my practice focused on it’s primary purpose:  to make a profit.  No Profit, No Freedom.   Isn’t freedom why we chose to be self employed?

One last item: AUM firms are typically valued two ways: a multiple of revenue or a multiple of profit. The typical revenue multiplier is between 2 and 2.5.  For profit, it runs between 4 and 6.  If it wasn’t already obvious, profits has its perks.