If running a business were easy, everybody would be doing it. Managing a financial advisory firm can be especially complex because the business depends so much on people and, over time, is at the mercy of events that can't be controlled. When these businesses start up, advisers are focused on their own survival and can battle most of these challenges. But as the financial advisory business in general, as well as the individual practices, becomes more complex, advisers must anticipate and respond to a myriad of challenges.
SLOWER RATE OF GROWTH
The late 1990s created an illusion for a lot of people who invested in the markets, including financial advisers, who witnessed extraordinary rates of revenue growth tied to investible assets. This bonanza made many of them feel brilliant, especially those who had the wisdom to convert to a fee-based or fee-only model. However, the market correction at the turn of the century and the modest returns projected for the foreseeable future have made revenue growth more of a challenge.
Several conditions are conspiring against advisers who still hope for rapid revenue growth:
• Most experts predict long-term market rates of return of below 8%.
• Inflation remains at very low rates (although that could change).
• There is no longer an Internet bubble to give an artificial lift to the markets — and fees.
Many advisers have already reached their capacity in terms of the number of new clients they can add.
More pressure is likely on pricing, with new competition and more-demanding clients.
If a firm's service offering is one-dimensional, justifying higher fees is hard.
Many advisers lack a well-developed, systematic process for marketing.
The illusion that dazzled many advisers in the late 1990s afflicted their clients, as well. Clients grew confident of double-digit returns and early retirement; they thought they had become risk-tolerant (in fact, they were only return-tolerant), and their feedback to their advisers was positive and glowing. As the markets corrected, though, many clients reacted with more needs, demands and requests, and they required significantly more hand-holding. For advisers charging fees based on assets under management, fees declined at exactly the same time that clients' demands increased.
(Watch Mark Tibergien on INTV talking about how RIAs can get the most out of their human capital.)
RECRUITING, RETAINING WOES
One of the most underdeveloped management muscles advisers have is the one for managing and developing staff. Some love the task, but most have neither the know-how nor the patience to do it well. Given a choice of where to spend their time, advisers will universally choose to be with clients rather than with staff.
Part of the problem may lie in a perception that staff is a cost to be managed and controlled, rather than an asset that can generate a return. When the perception shifts from a cost-based view to an asset-based one, advisers begin treating their staff as one of their top clients, which has the potential to create substantial income and value for the practice.
AVERSION TO MANAGEMENT
The joy of business ownership does not always come from building something but rather from owning something independent of any boss. For many, the desire is to keep all elements of a practice within arm's reach. So although their sandbox may be small, the point is, it's their sandbox. Adding people, processes, protocols and other disciplines to the management of this enterprise takes all the fun out of being independent.
Successful advisers recognize that their business is their primary client: It's the generator of wealth and the cornerstone of their estate. Although the aversion to management may be natural, an attraction may grow if advisers look at it from that perspective.
(Watch Rebecca Pomering on INTV discussing recruiting and retention strategies.)
MARGIN SQUEEZE
During the market downturn, speculation was afoot that fees for asset management would be under severe pressure, with projected reductions of as much as 25 to 40 basis points. Some advisers have adjusted their fees because they lack the confidence to ask a fair price for the services they provide to their clients, but the reality is that few advisory firms have had to adjust their fees much. More typical of what's happening is that advisers are providing more services to clients for the same fees they charged several years ago. So although margins are not necessarily getting squeezed from the top as a result of fee pressure, they're typically getting squeezed from the bottom as a result of the increase in expenses required to generate the same level of fees.
Management of gross margin is probably the single-most-important discipline that an adviser can apply to his or her practice. Not only is it important to manage costs, it's also important to know when pricing, productivity and client mix are dragging down the enterprise.
TIME SQUEEZE
Advisor Impact, a practice management consulting firm in Toronto, did a study of the practice management behaviors of financial advisers. It found that just 39% of advisers' time is spent on client service. The rest of their time is spent on other tasks, like business processing and administration.
One reason time is so elusive for many advisers is that they're doing things they shouldn't be doing. and have no one to whom to delegate work. Even those who put adequate staff in place may maintain a death grip on the processes and on the client relationships because they're not comfortable relinquishing control.
The combination of client selection, process improvement and effective delegation will mitigate the time squeeze problem, but having the courage to live by such discipline is another matter.
TOP 10 CHALLENGES
To validate these assumptions about advisory firms, each year, we ask advisers to tell us their top challenges as business owners. The top 10 haven't changed for 10 years, although the order in which they appear changes from year to year:
- Lack of capacity to serve clients
- Building value in the practice
- Improving efficiency
- Getting better clients
- Managing growth
- Offering value-added services
- Keeping pace with technology
- Developing specific expertise internally
- Maintaining a life outside the business
- Time management
As consultants, whenever we observe a chronic problem, we try to find a permanent solution. But such solutions can work only when the owners of practices are willing to commit to changing their behavior. The longer the practice takes to invest in processes, protocols and people, the greater the likelihood that it will not flourish. So as an advisory firm begins thinking strategically about its future, it's helpful to understand where it is in its life cycle.
PRACTICE LIFE CYCLE
Financial advisory firms — like people — go through a life cycle.
They are born, they grow, they mature and they pass on.
We jokingly refer to these stages of the life cycle as “wonder, blunder, thunder and plunder.”
Wonder. In this phase, practitioners are usually brimming with optimism, although some proceed with trepidation. Their practice management style is seat-of-the-pants; they have no profits, no cash, and their clients look pretty much like they do. Anyone who can fog a mirror is a prospect.
Blunder. In the blunder phase, business prospects are looking up. But this is a time of rapid growth, so the ability to manage is tested severely. Advisers in this phase come into the office early in the morning and leave late at night, continually operating in crisis mode, perpetually reacting to events around them. They're seeing an inflow of referrals and an increase in clients, but they lose the ability to pay much attention to either. Although income is increasing, cash flow is decreasing because they're continually reinvesting in the business.
Thunder. This is the phase of the “harmonic convergence,” when all the stars are aligned. Emotionally, advisers are more confident; managerially, they're more structured; financially, they're producing income for themselves at higher and higher levels, and their client base looks more like the optimal prospects they envisioned when they started.
Plunder. Although some advisers are fulfilled by the time they reach the plunder phase, our experience tells us that most practitioners are tired, burned out, bored and indifferent. Some look to sell; others look to just maintain the status quo. For many, this is the time to harvest all that they've sown throughout their years in the practice. Revenue and profits will begin to decline as they slow down and as their clients die, retire or begin withdrawing principal.
WHERE ARE YOU?
Some practitioners go from thunder to plunder in a short time, and some remain in the wonder phase for their entire career.
It's helpful to recognize where you are in your life cycle, because it helps you to frame your priorities better.
In the first phase, the watchword is “survival.” Everything you do in this phase is geared toward enhancing your personal reputation, building up your referral sources and serving your clients well.
In the second phase — the blunder phase — the watchwords are “managed growth.”
Oddly, most advisory firms experience stress fractures in this phase because they outrun their span of control and, in many cases, their financial ability to manage growth.
The watchword in the third phase — the thunder phase — is “complacency.” Advisers at this point are typically brimming with confidence. But the seeds of destruction are sown in good times.
During this interval, inefficient business practices take root. Client service can deteriorate.
Staff development can be ignored.
Often, advisers in this phase let their marketing muscle atrophy, because they have so many opportunities coming in from their referral sources.
But as many realized after the millennium market bust, when assets shrunk and clients left, they did not have what it took to regenerate themselves.
In the final phase — the plunder phase — the watchwords are “renewal” or “decline.” Usually, by the time a firm is in this stage, the conditions of shrinking client list, shrinking profitability and diminishing client service have been in place for a long time.
The question for the owner is: Are you willing to reinvest the time, money and energy to revitalize the practice?
We find the resolution of business practices in the plunder phase to be more of a moral question than a financial one. Many advisers are reluctant to involve others with their clients. Is this fair to your clients?
They've become dependent on your guidance. But as they get older and more vulnerable, to whom will they turn if you die or become disabled?
Excerpted from “Practice Made (More) Perfect: Transforming a Financial Advisory Practice into a Business” by Mark C. Tibergien and Rebecca Pomering (John Wiley & Sons Inc., 2011).
