By David J. Drucker and Joel P. Bruckenstein
From "Virtual—Office Tools for a High—Margin Practice: How Client—Centered Financial Advisers Can Cut Paperwork, Overhead, and Wasted Hours," ©2002 by David J. Drucker and Joel P. Bruckenstein. Reprinted with permission from Bloomberg Press. Available at www.virtualofficetools.net.
Read more of David Drucker's thoughts at www.daviddrucker.com. The Virtual Office News monthly newsletter from David Drucker and Joel Bruckenstein available at www.virtualofficenews.com.
Suppose you were in the market for an administrative assistant and were approached by someone who said:.
"I am an expert at what I do. The services I offer include not only secretarial work, but also bookkeeping, airline reservations, meeting scheduling, and other administrative functions. I don't need to be in your office to do my job as long as you're facile with e—mail and the Internet. I have all of my own equipment, software, office space, and access to as much of my own help as I may need. I charge a flat hourly fee for the work I do. And, if you're not satisfied, there are no strings. Because I have competitors, I have to do a good job at a fair price, and I intend to earn your trust. The prices I charge will be negotiated within the context of the free market in which we both compete. I have plenty of choices for employers, and you have plenty of choices of support workers. I am highly self—motivated and rarely seek or need guidance. I may sometimes bring you clients or business ideas that are so good you will want to implement them. In fact, you may sometimes voluntarily give me a generous raise because I've earned it and you are more than happy to compensate me."
What we have just described is the typical virtual firm owner/work partner relationship. A key element in the success of the virtual advisory firm is its reliance on outsourcing and virtual work partners (VWPs) in lieu of traditional employees. Both the superior economics of the virtual firm and its ability to give more time back to its owner depend heavily upon hiring good VWPs and using them properly.
VWPs come in two flavors: independent business entities and independent contractors. An independent business entity is a small business formed specifically to provide a service essential to your advisory practice that you have chosen to outsource, as when Asset Management Solutions of Vista, Calif., does Centerpiece reporting for its advisor clients. An independent contractor is simply an individual who does the same thing. From a tax standpoint, the IRS may view the first as a corporation that will file a Form 1120 tax return each year, while Jane Doe, CPA, who provides accounting services to a few small—business clients, will file a Schedule C with her 1040 at year—end.
The distinction may seem a little vague, but what's important is to understand the difference between independent business entities and independent contractors, on the one hand, and employees on the other. Businesses and independent contractors are both free agents and can deal with the virtual owner at arm's length. Dealings are not tinged with emotion or compromised by personal interaction, but are made with a certain detachment. Like the virtual owner, businesses and independent contractors are entrepreneurial in their thinking.
There's no arm's length when it comes to employees. After they've been around a few months, they begin to get absorbed into the family culture most small planning firms strive to create. At that point, they are telling you their personal problems, asking you for vacation time during your busiest season, and getting upset when you deny their request for a raise that would put their pay scale beyond the market rate for their job description. In short, they need a certain "care and feeding" that an independent business entity doesn't require.
A virtual work partner generally understands the economics of what it's doing. A concept as fundamental as competition may be lost on an employee but is immediately apparent to a business. It knows it must provide a good service at a fair price, or you will find another reporting company or another virtual planner. It also knows that by doing a good job, it can turn its advisor client into a referral source. That's an advantage a business or independent contractor has over an employee. An employee's time generally belongs to one employer, and he or she has no labor left over to give anyone else. A business, though, can have many bosses.
Another huge advantage that virtual work partners have over employees is that they come equipped with their own offices, equipment, and professional skills. We hope an employee will have high—level skills, but if not, we must either find a replacement or draw upon valuable time and money resources for training. If a VWP agrees to take on a job for you that requires training, the VWP will foot the cost.
Do VWPs charge more than their employee counterparts? If they're smart, they will. A VWP has got to take what you pay it and cover its entire overhead. If you pay your administrative assistant $17.50 an hour, you can't equate it to the $30 a virtual assistant might charge. The VWP must pay for office space, a health plan, and a new computer. You pay these costs with an employee, too. They're just not apparent in looking at the employee's hourly rate.
Because a good business will run itself at least as efficiently as a good employee does, these costs are likely to be the same or lower for a business. And then, when you consider the other major advantage of the VWP — scalability — you can understand why the economics usually favor VWPs over employees. The VWP's time can easily be scaled to meet the demands of the job, with no excess, unproductive time left over. With an employee, you're either paying for time not worked, or underpaying for overtime, a condition that will eventually come back to haunt you in the form of a burned—out worker or seemingly excessive pay demands in the future.
Trying to establish a dependable team of employees can be like building a pyramid out of marbles: Just when you think it's stable, one slips away, and in the smaller firm, that can be all it takes to unhinge the whole operation for a while. Turnover costs a lot because retraining new employees costs a lot.
Why do we have so much trouble retaining good employees? First, we're in an entrepreneurial business. We're all individualists, and the people we hire often are, too. Once they reach a certain level of competence and confidence, they judge themselves ready to do it their way. Many staff planners, for example, are destined to start their own planning firms, whether we like it or not. And this was true from the day we hired them.
Many principals bemoan the fact that their gross revenues are growing at 30% to 50% a year, yet their own compensation never changes.
Perhaps they have forgotten an important lesson from Business Administration 101: Don't make something yourself if you can buy it better and cheaper from someone else.
Put it in words that the virtual owner can understand: Don't create a staff function in—house that can be accomplished better and less expensively by an independent businessperson.
David J. Drucker, MBA, CFP, a fee—only financial advisor since 1981, lives in Albuquerque, N.M., and writes on practice management topics for other financial—planning professionals. Contact him at dd@daviddrucker.com or at his Web site.
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Joel Bruckenstein, CFP, is editor of technology for MorningstarAdvisor.com. You may reach him at joel.bruckenstein@morningstar.com
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