Maintaining Certainty in Uncertain Seasons:
Aligning Business Practices with Strategic Plans
Paul R. Brown, Principal
BROWNSTONE Capital Advisors LLC
The other day I received a call from the Marketing Director of a small cap investment firm. At the end of our
conversation he made what was then – and remains – a troubling comment. “I just heard that over 80% of
investors are losing money in today’s market and that as a result, most of them are getting ready to ‘fire’
their financial advisor.”
Initially, I thought his figures were high. In fact he was even more optimistic than usual.
Earlier this year Hannah Shaw Grove and Russ Alan Prince surveyed 400 investors. As reported in Financial
Advisor magazine (May 2008), 97% of those interviewed said their portfolios had lost value since the
beginning of the year. Furthermore, 71% are now taking some of their investments away from their primary
advisors and 65% intend to terminate their advisor and find another one.
If investors start doing what they say they will do, we can all agree that this is probably not the best time to
be managing someone’s retirement.
While considering the implications of the survey, I started thinking about some of the whitewater rafting trips
I’d taken. Early on, the guide is careful to keep the raft away from anything that looks remotely dangerous.
He wants to use the slow moving waters to calm nerves and give instruction. Knowing that he’s not able to
control the river, he does what he can to keep everyone dry.
In the same way, despite her years of experience the most seasoned advisor is incapable of controlling the
markets or circumstances impacting investor returns. She can, however, create a practice model that
minimizes the risk to the firm and its clients, essentially keeping them from danger.
Where Do You Want to Go?
The whitewater analogy fits the discussion of strategic planning. With Class 1 or Class 2 rapids, the raft –
and those in it – drifts safely downstream. But when the conditions change for the worse and the rapids
become more dangerous, everyone in the raft has to coordinate their efforts or risk getting wet.
In the same way, when operating in unstable economic conditions a financial practice can have a tough time
making progress. Frequently those “on board” end up paddling against each other as they aim for different
shorelines. Lacking clear direction these firms risk losing clients, income, personnel and opportunity as they
struggle to stay afloat.
In their book, Practice Made Perfect (Bloomberg Press) Mark Tibergien and Rebecca Pomering build the case
for a comprehensive firm-wide strategy. Once it is in place partners, staff and even clients are given a clear
understanding of the strategic direction driving the firm’s activities. (Disclosure: When working as a Senior
Manager at Moss Adams I was a member of a practice group led by Mark Tibergien that performed strategic
planning).
But Then What?
Guided by its well defined strategy the firm will usually take a more disciplined (and cost effective) approach
when considering new opportunities. Even so, the benefits of knowing where you want to go (Strategic
Goal), how you intend to get there (Strategic Direction), what makes you unique (Strategic Differentiation)
and with whom you will travel (Strategic Partners) are diluted when they are not deliberately supported by
the firm’s Core Strategic Practices.
These Core Practices, there are six of them, must be aligned with your larger strategy. Otherwise in
uncertain times your firm, like our proverbial raft, can quickly drift out of control.
Practice #1: People and Leadership
I’m working with a large company that continues to successfully link its people strategy with its strategic
plan. After yet another year of record growth and profits the owner made this interesting comment. “We’ve
been able to do this without any ‘superstars.’ I mean, we have good people, but I can’t really say that we
have ‘Great!’ people.”
“Then why have you been so successful?” I asked.
“Because these good people have learned how to work really well together.”
This “team” concept is a critical piece of his strategic puzzle. In his industry, “super-stars” usually leave to
start their own business. My client has minimized this risk by hiring “good” people who are staying with the
company. Each year they become more experienced, more efficient, and more capable of working together
while performing their jobs. His “good” people have become – over time – a “great” team.
Compare this to the more common “reactionary” approach. At times someone is hired as a reaction to a
perceived opportunity (“I had to make them an offer today or they wouldn’t have been available”); a
reaction to work (“We need to hire two more processors today!”); or even – I’m sorry to say – a reaction to
ego.
Having worked with a number of companies in a variety of industries I can confidently say that most of the
frustrations caused by employees can be avoided if the hiring decisions are made from a strategic point of
view, starting with the question, “How will she help us move closer to our larger goals?”
What’s the first step? When designing a strategy for people and leadership we usually start by creating an
organizational chart in which the key positions of the fully mature practice have been identified. We then list
the benefits each position brings to the firm; the performance standards; the reporting relationships; the
salary range; and the circumstances from which the hiring process will begin.
If someone is already in the position, we try to determine whether or not it is a good fit for both the
employee and the firm. If so, we structure a development process leading to excellent performance. If not,
we move them to another position and create a similar development plan.
As we proceed we make certain the entire discussion of positions, people and training supports the larger
context of the firm’s stated goals.
Practice #2: Client Acquisition
When you started your practice you should have asked yourself two important questions. First;
What type of customers do I need to build the business that I desire?
And second;
How will I get them?
I’ve been working with a young advisor after she left her national firm to join the ranks of independents.
Since losing the benefit of a recognizable “brand” she has become effective in asking for and receiving
referrals. Unfortunately, the profile of her current clients – the ones bringing her new business – differs from
that of her preferred clients. Although she wants to build a practice that meets the investment needs of the
small business owner, her current clients – those with a $10,000 IRA – are introducing her to their friends.
These friends also have a $10,000 IRA.
If the trend continues, she will soon become known as the “$10,000 IRA Advisor”. Which is great if – and this
is a huge qualifier – this is her overall strategy.
Since it isn’t, she needs to become more intentional (i.e. strategic) in her business development.
She also needs to create a budget to support her efforts.
When assessing a firm, we usually calculate its Average Client Acquisition Cost (ACAC); that is, the dollar
amount – on average – the firm is spending to acquire clients, generate revenue and capture assets. For
some, this can be disheartening. Revealing, but disheartening nonetheless.
While working with a large firm in the Midwest we realized the business development department had taken
on a life of its own. Situations likes this nearly always produce unnecessary costs. Consequently we started
digging.
Working with the firm’s controller we reviewed the department’s expenses over the previous two years
including dedicated personnel, printing, events, etc. We then took a census of the clients added to the firm
during this period and calculated the revenues they generated. We were intentionally conservative and did
not, for example, include any of the pro-rated expenses for rent, the use of firm-wide resources (such as
copies and paper), or salaries of those who worked with the group on a limited basis.
Even with these limitations the Average Client Acquisition Cost was more than $5,000. Per client.
Granted, this could have been a bargain. If the new clients were generating revenues of $10,000 we would
have felt pretty good about the results. Here, however, the revenue generated during the first year
averaged less than $3,000.
Lacking a clearly defined strategy and review process, the firm’s client acquisition efforts were out of control.
Practice #3: Client Services
I was coaching a few of the top producers for a national firm. During the first call I asked each the same
question, “What can you tell me about your Client Service process and how does this support the larger
strategy of your firm?”
While most tried to “bluff” their way to a passing grade, only one had a quick and enthusiastic response. His
well-designed client service model began with the first contact. Each mailing, phone call, and appointment
was thought out and carefully executed. As a result, he had one of the lowest client attrition rates and the
highest “wallet share” (as a percentage of investable assets) that I’ve seen!
Today, most agree, the customer is no longer king but tyrant, demanding a level of service that few deliver.
And when (not necessarily “if”) he is disappointed he will be quick to find another advisor (see the opening
comments of this paper).
How, then, should a firm respond?
Lacking a client service strategy, advisors spend a lot of time reacting to the demands and expectations of a
small percentage of clients. Like smoking, this is a tough habit to break. Tough, but not impossible.
Start by defining your client’s expectations. You will need to take an outside-in perspective; that is, you have
to put yourself your client’s shoes and carefully list everything she expects each time she contacts you or
your firm. For example, if she calls because of an error on her statement, what does she want? Initially you
might say, “She expects us to solve the problem.” While that’s true she may also want:
• Assurance that her retirement funds are being carefully managed;
• Affirmation of her importance to you and your firm;
• An explanation of how this could have happened;
• An honest expectation of when the correction will be made;
• A promise that you’ll follow-up when the problem is solved;
• Comfort.
You can probably add to this list. The point is: each encounter becomes a moment of truth that either
strengthens your relationship with your client or gives them a reason to leave.
Let’s take this a step further. What are your client’s expectations when coming for a scheduled meeting?
Going through a similar thought process as before, you should be able to create a list of six or eight or even
more bullet points. In fact, you might even conclude that it impossible to meet each of these expectations.
What then?
By now most advisors understand the importance of segmenting clients. If done from a strategic perspective,
the results should support your firm’s strategic goals. As a result of this exercise some firms have segmented
their clients by assets, others by income. We worked with one firm who segmented clients on the basis of
the assets the firm could still potentially manage.
When you’ve completed your list you need to ask, “What is the appropriate level of client service for each
segment?” Here’s a hint: it is probably not the same for each client. The appropriate level is the one that
meets your client’s expectations in a manner that supports your firm’s larger strategy.
Once these expectations have been defined, you can create the processes that will enable to meet these,
flawlessly. Though process design and implementation will eventually be done in each practice area (since
this brings your strategy down to the one-foot level), most of the advisors we work with prefer to start in
the area of Client Services. Especially in today’s challenging market.
Practice #4: Goal Setting (Financial Planning)
We were working with a select group of advisors from national firm, helping them increase their financial
planning revenues. “Tell me,” I asked, “How important do you believe financial planning is to your practice
and, if it is important, how many of your clients have completed a comprehensive plan?”
Nearly everyone agreed financial planning is important. And nearly everyone admitted they did not have
many completed plans in their files.
“Without a completed plan,” I asked, “how do you know whether or not you are adequately serving your
client and how are you benchmarking your performance against their expectations?”
Financial planning – or some other goal setting exercise – benefits the client and advisor. Done correctly, the
process helps clients consider a number of important issues including lifetime goals, personal dreams and
family wealth matters – topics that are more qualitative than quantitative. When the advisor knows this, he
can plan each meeting around the discussion of the client’s goals and the progress made in reaching them.
The portfolio is reviewed and adjustments are made to further support these goals.
Absent a personal financial plan, the advisor is left to talk about – or defend – the performance of the client’s
portfolio. Doing so reduces the depth of the client-advisor relationship and strains the firm’s ability to grow.
After all, it’s tough to get “up” to talk to a new prospect when your best client is threatening to leave.
Does this mean that a results-driven financial planning process should be avoided? It depends. Some firms
differentiate themselves on the basis of their ability to produce higher than average returns. For them it
makes sense to take a quantitative approach since doing so supports the firm’s larger objectives. For most,
however, a financial plan that first addresses the qualitative concerns will be more appropriate since it
provides an opportunity to strengthen the personal connection the client has with the advisor and the firm.
I’m not really arguing for one approach over another. I’m arguing for a consistently applied procedure that
fits your larger strategy. .
Practice #5: Work Plan Strategy (Investment Planning)
Understanding your client’s goals is important. Creating a strategy to meet them is more so.
For a financial firm, an investment strategy naturally follows financial planning. Once again the processes in
this area should be carefully designed and flawlessly executed. They should also support the larger strategic
imperatives of your practice. Looking at the statements made at the start of this paper, it is easy to conclude
that client defection will usually follow losses.
Or will they?
In his book, The Art of Selling to the Affluent, Matt Oechsli writes of an investor who changed financial
advisors after losing one-half of her $5 million investment. During the due diligence her new advisor
concluded that some of the funds chosen by her former advisor were done so on the basis of their higher
commissions rather than to support her objectives. Even so, she did not appear to be as upset about her
losses (a quantitative issue) as she was in how she felt when a junior advisor took over her account (a
qualitative issue).
For her, the returns were important. But not as important as the relationship she had built with the senior
advisor. Still, it seems as though the firm’s Investment Strategy was a reflection of its Client Service
strategy; i.e. making firm-first rather than client-first decisions. While producing short-term profits, this
strategy will usually cripple the long-term health of the practice.
In his book, The Toyota Way: 14 Management Principles from the World’s Greatest Manufacturer, Jeffrey
Liker writes of the need to make “management decisions on a long-term philosophy, even at the expense of
short-term financial goals.” Holding to this principle can be a challenge for even the most conscientious
professional. After giving a practice-management presentation to a group of financial advisors in Honolulu, I
spent time with one of the participants. A former commercial banker with the Bank of Hawaii, he decided to
change careers. “My biggest challenge,” he told me, “is when the firm offers a bonus for selling specific
products. Then I’m torn between my need to pay my mortgage and my desire to do what I really believe is
best for my client.”
Without a clear Investment Strategy, this tension increases. Even with one in place it becomes ineffective if it
is not clearly understood and evenly applied throughout the practice. When I work with firms with multiple
advisors I’ll initiate a discussion on this topic by asking, “Beyond risk, what are the criteria used to create an
investment plan for your client?” “If I asked this same question to your staff, how many of them would give
the same answer?” “What quality assurance processes are in place to make certain everyone follows the
same investment strategy?” “Does the investment strategy differ from one professional to the next? If so, is
this acceptable?”
And finally, “How do you share this strategy with your clients?”
Practice #6: Business Operations
“My strategy for business operations? You’re kidding, right?”
I get this reaction from most professionals, including financial advisors, when talking about the need to
create a strategy for the firm’s business operations. Viewed as a tactical rather than strategic part of the
practice, business operations are frequently tolerated, seldom reviewed and rarely improved. Yet every part
of the organization is impacted by its performance.
A couple of weeks ago I was speaking with the CFO of a large independent firm in the Midwest. We had
worked with them in the past and I called to get his reaction to the Advisor Twenty Groups we are getting
ready to launch. As we talked he became increasingly interested in the contents of the monthly composite
(or management) report participants will receive. “We need something more,” he said. “A financial statement
helps us see an important but limited part of our operation. It does not provide the insight we need to
monitor and improve our performance.”
He’s right, of course.
With a strategic commitment, the business operations are adjusted to support the firm’s larger purposes. For
these changes to take hold, a series of processes, systems and reporting features are implemented so that
the improvements can be measured. In this instance the financial statements will become a part of a more
comprehensive management report that includes the firm’s key performance indicators. Together the firm will
be able to monitor performance, identify waste and improve its overall alignment. The results are nearly
always exceptional.
What else should be considered? More importantly, how should they be considered? Start with the following
questions:
• Does the firm reward its professionals and staff for results contributing to its larger success? What are
they? How are they measured? How do they contribute to the type of practice being built? (Compensation
issues);
• Is the firm hiring the employees needed to reach its goals? When hired, does the firm provide the
support needed for its employees to excel at their jobs? Do employees believe the firm is consistent and fair?
(Policy handbooks);
• Is the firm handling its finances in a manner that instills confidence? What is the firm’s reputation in the
community? (Payables and receivables policies);
• Does the content and appearance of the firm’s newsletters support its larger goals? How frequently
does the newsletter go out? Is this a priority? What is the purpose of the newsletter? How do you measure
whether or not this purpose is being obtained? (Communication strategies);
• Before making an investment in its technology (CRM, paperless, etc.) does the firm assess the benefits
and features within the context of its larger goals? Is there a budget for new technology? How was it set?
How does the firm integrate and use technology throughout its practice areas? (Technology strategy).
By now you should be able to agree that your firm’s business operations are having an impact on your
practice. The question, of course, is whether or not this is the impact you want.
Summary
The conditions created by today’s economy are difficult, but not unique. Markets will adjust. When they do,
clients become concerned about the performance of their investments. Together, these two factors can make
it difficult to build a successful practice. Lacking a clearly defined strategy – one that incorporates and aligns
the firm’s key practices with its long-term goals – advisors will frequently drift from one crisis (or call) to the
next; hoping to ride out the proverbial storm.
Unfortunately, many will find they are unable to do so. Like those in our whitewater raft, they’ll more than
likely get wet.
Paul R. Brown
PO Box 141527 • Spokane, WA 99214
Phone: 509-926-6922 (direct)
Email: paul.brown@brownstonecap.com
©2008 and following Paul Brown