The Five Biggest Ways Your Practice Needs to Change

Building data integrations across your software stack – High priority

Too many advisors are leaving too much efficiency on the table because they’re paralyzed by “overchoice.”  All of a sudden, new mobile technologies, cloud offerings, venture-capital-backed software introductions, gizmos and gadgets are clamoring for your attention, and the easiest thing to do is wait for a sign from God as to what you should buy or replace in your office systems.

There’s no reason to wait.  Younger advisors are using Precise FP to allow clients to enter their own data, and ByAllAccounts, Yodlee  or one of the other account aggregators to pull in all the account information.  You need a CRM system that will tie it all together – Redtail, Junxure or XLR8 are popular and come with all the necessary integrations – and the data will flow, without any need to keystroke, into your planning program and your investment-account management platform.  Then, if you have a paperless system and a forms program like LaserApp  that will automatically pull client data into the proper fields for all your client paperwork, suddenly you are doing very little keystroking, which is a rote chore unworthy of you and your staff.ss will take another step forward with a new program called Genesis Smartware (still about to be rolled out to the general advisor population) from the Fox Financial Planning Network

Going to the cloud – Necessary eventually

Cloud-based software is all the rage and you can see why.  You can work remotely, the updates happen automatically and when was disaster planning ever so easy?  Just find the nearest coffee shop that has WiFi access and you’re back in business.

But if you still have servers, chances are you still have a lot of legacy spreadsheets, quirky software, one-off tools and a lot of data that would have to be migrated to an online system.  There’s no hurry rushing to the cloud just to, well, be on the cloud.

The software products that are not cloud-based either will be soon or they won’t work with some future operating system, so you should ask the vendors hosted on your server what their plans are. 

Meanwhile, this is a good time to start exploring a hosted solution like those provided by ExternalIT  and True North Networks , which will put everything on your servers on their servers and package up all your IT services in one monthly fee.  Presto!  You’re cloud-based, and you can also get some consulting on how to tie all your software together.

Marketing to the next generation – High priority

This is one step below “urgent” only because most practices I’m familiar with can survive on an aging client base for another seven to 10 years without suffering significant diminution of revenues.  But if you want your firm to survive long-term, it will need to have a healthy, diversified portfolio of clients.

When Accredited Investors in Minneapolis recently projected its AUM growth over the next 10 years, the conclusions were disturbing: the client base was aging, and based on who the firm was attracting, a greater percentage of the firm’s clients would be retired each year.  AUM growth would slow, then gradually contract, then contract rather quickly 10 years out.

Of course, the problem is that many established advisors don’t know how to market their services to the Gen X/Y cohort, which to them is an alien species.  Moreover, how many 30-year-olds are able to meet their $2 million minimum?

So how do you need to evolve?  Step one is to hire younger advisors in the firm – and give them meaningful responsibility to market and service their age-group peers.  If you have younger staffers who are mostly pushing paper around, include them in client meetings and turn them loose to bring in new clients.

Step two (actually should be done at the same time as step one) is loosen up your client minimum.  Accredited Investors created spreadsheets which looked at the net present value of that 30-year-old client who was earning $350,000 a year and saving more than half of it, versus the aging decumulator with a $2 million nest egg.  Any reasonable assumptions show that a young high-income saver is worth more, over the life of the relationship, than a retired couple with nothing better to do than stop by your office when they get bored.  If you don’t believe it, look at the clients you initially took on, who built your firm to where it is today.

Creating a more interactive planning experience – Urgent

This is related to the previous item, of course.  I find it interesting that the financial services profession has discovered that women can be clients, but in fact several different trends have conspired to raise the number of women knocking on advisors’ doors.  The Greatest Generation couples, and to some extent the Baby Boom couples, tended to designate the male as the financial/investment decision-maker.  But now those males are dying off and the women are left holding the reins – and looking for a professional to whom they can relate.  At the same time, Generation X and Y women aren’t delegating their decisions to anybody, and they’re starting to reach the stage of their lives where they, too, are looking for a professional with whom they can build a relationship.

And these women have one thing in common: they want an advisor who, instead of telling them what to do, will serve as a thinking partner and co-create their financial plan with them.  They want collaboration, not somebody to handle everything.

Here’s the punchline: this also happens to be what Generation X and Y men want.  The women are teaching us how the next generation wants to be serviced.

What, exactly, is an interactive planning experience?  I recently wrote about one advisor who, I think, has created the friendliest, most enjoyable initial client onboarding experience I’ve ever seen.  Send me an email and I’ll send you the article describing how she does it, but the Cliff Notes version is that she has multiple meetings with clients, pulls in all the financial information through aggregation software (saving a lot of tedious form-filling), she goes through an iterative process where clients articulate what they want to happen in their lives, and then get many chances to refine it, define it, and put a dollar value on it.

Then she pulls up the planning software, with the relevant data already input, and lets them drive it.  They create their financial plan, asking questions, asking for advice, and she becomes their thinking partner as they decide what they can afford and how to improve their chances.

That’s the future of financial planning, and it’s far more fun and interactive for clients than what most advisors do today.  And here’s the bonus: clients are much more likely to refer their friends and neighbors to you when they’ve enjoyed the initial experience, than when the initial experience felt like a root canal.  Your referral rate will skyrocket.

Succession planning – Urgent

Why urgent?  Because it takes a long time to pass the torch from one generation to another.  You will experience would-be successors leaving the firm, and others who are never quite able to handle key functions, or any number of other setbacks along the way.  If you don’t start yesterday, it may not happen.

Why worry about succession planning at all?  The first reason is that you owe it to your clients.  I’ve known a number of situations where the advisor died suddenly, and the clients didn’t find out about it until weeks or months later.  They were literally left in limbo, not knowing who was tending their accounts.

The second reason is more complicated.  You aren’t going to work forever, but there is no good reason you can’t work into your late 70s or, if you’re in very good health, well into your 80s.  But you won’t want to keep up a rapid pace, and you certainly don’t want to be handling a lot of administrative tasks, paperwork and software updates.  You want to interact with clients, period.  That future lifestyle requires you to identify people who will keep the firm alive so it can keep you employed and working with your clients.

This, in turn, requires a tricky negotiation that I haven’t seen handled yet.  How can the advisor let go of the reins, and give up the majority of equity in the firm, and still be sure that the firm won’t immediately terminate his contract or force him out of business before he’s ready?  Effective succession planning has to plan for this contingency, which makes the whole idea more complicated—and will take more time to figure out and negotiate.

On the other side of the succession equation, the younger advisors at your firm know that the firm is going to have to evolve into a very different entity if it’s going to survive this rapid evolutionary change that they see more clearly than you ever will.  They want to make changes and move forward.  But I’ve heard over and over again that when a younger advisor makes suggestions, the first reaction from the older founder is defensive.  What’s wrong with the way we’ve been doing things for the last 25 years?  Are you criticizing the way I’ve built this firm?  (And the unspoken one: Are you really going to make me change this comfortable, familiar way I’m doing things?)

Succession planning is not as complicated as everybody is making it out to be.  You hire young, ambitious planners.  You ask them to come up with a vision for where the firm needs to be in 20 years.  You ask them to outline the careful, well-considered steps that will take the firm where it needs to go without disrupting current operations.  And you let them transform the firm you built into the firm they want to own a few years down the road, when you really don’t want to be running it anymore.

Acquiring scale – Necessary eventually

Admit it; you thought I was going to say this was urgent.  But I don’t think it’s wise to rush into a merger, and that’s the way most advisory firms are going to acquire the scale they need to build a sustainable business that has a chance of lasting forever. 

The advisory firm of the future will have multiple partners, like law firms today.  Some will be large national firms, others will be large regional operations, a larger number will have a significant presence in a single city, and there will be a lot of solo practices, just like there are a lot of solo lawyers.

The important issue to realize is that you want your firm to become large enough that it allows the staff to specialize.  If you’re very good at bringing in business, then you shouldn’t have to also be writing plans or filling out paperwork.  If you’re great at constructing and monitoring investment portfolios, you shouldn’t also be doing planning and downloading portfolio data.  Having everybody on staff do what they’re very good at, and very little more outside that zone of very high competence, provides an energy that you just don’t get when a few people are being asked to be jacks-of-all-trades, responsible for many things, master of none.

Acquiring scale is necessary in the long run because you want somebody to make the day-to-day management decisions undistracted by other roles and functions, and you want the scale to amortize the high and increasing compliance costs among a larger staff and revenue base.  Of course, it also simplifies the succession planning process (you have a diversified portfolio of successors, and professional management that keeps everything running when you’re not around), and it gives you a larger footprint in your community.

I’ve made this prediction before: the planning profession is in a phase transition where practices are evolving, very rapidly, into businesses.  Unless you’re a confirmed lifestyle practitioner, I don’t think you want to get left behind.  I would start, today, looking for a compatible firm and thinking about how to consolidate your operations.

Changing your revenue model – Necessary eventually

The advisory profession encompasses a spectrum of revenue models, and just about everybody will eventually have to change.

If you’re mostly commission-based, or fee-plus-commission, then you should know that fees are the future of the profession.  Not because fee-only means holier-than-thou (you can’t imagine how tired I am of hearing that old chestnut from the BD home offices), but because any true profession charges clients for services rendered, period.  I’ve had people argue that doctors get compensated for referring to their own laboratories, and yes, that is a conflict of interest.  But doctors (other than many oncologists) don’t get a commission from the drugs they recommend for your ailments.  If they did, you wouldn’t trust them to make the right recommendations.

Beyond that, the public is very confused about what, exactly, “fiduciary” means, but there is no confusion at all that a fee-only advisor has voluntarily given up a potentially lucrative business activity in order to avoid conflicts of interest with her clients.  Being fee-only provides a certain comfort, especially to wealthier prospects.

If you’re already fee-only, and your revenue model is assets under management, then you have an evolutionary step to take as well.  AUM comes with its own set of conflicts (everybody who walks in your door needs investment management, right?) and it’s really an artifact of the old sales days when you were paid based on the portfolio, not on the advice you give.  A percentage of the portfolio looks an awful lot like a commission to me.

Retainer fees are the future.  But doesn’t converting from AUM to retainer fees mean you have to lose revenue?  No; in fact, it could do the opposite. 

To make the conversion, boot up your spreadsheet and input the name of each client, and the total revenue you receive from each client.  Then estimate the number of hours a year you spend with each client or on the phone or working on their case (times, say, $400 an hour) and the number of hours they spend with other advisors in the office (times $100 to $300, depending on seniority).  Then amortize all your overhead, divided equally among your clients, and put that in as a cost column.

Add up the internal costs for each of your clients, subtract that from your revenues you receive from them and – whoa!  What’s this?  More than two-thirds of my clients, viewed this way, are unprofitable!  A handful of clients are subsidizing my services for everyone else...

You can fix this.  You might decide to reduce your fees when you covert your highest-revenue clients to retainers, but you absolutely need to raise the fees of those unprofitable clients back up to profitability.  In some cases, you will cut back on the time you spend on them.  But the end result should be a conversion from AUM to retainers, and, at the same time, making all of your clients at least marginally profitable.

Don’t go to hourly.  The CPAs and PFSs in the audience are going to fill up the discussion boards with stinging rebuttals to those four words.  But in my experience, clients hate to have the meter running when they talk to you.

Outsourcing key office tasks – Necessary eventually

I covered a bit of this in the cyborg conversation above; Every advisory firm will eventually follow the cyborg model on the investment side, and outsource providers are the best machines we have right now.

But what about compliance?  Marketing?  IT consulting?  Payroll?  Paying your bills and inputting into Quickbooks?  At one of the sessions at our recent Insider’s Forum conference, two COOs told the audience that interviewing and hiring outsource providers is easier than interviewing and hiring employees, and the relationships are easier to manage on an ongoing basis. 

And they’re cheaper.  One of the panelists, Casey Bear, of Cranbrook Asset Management in Troy, MI, told the story of how he had an excellent all-purpose employee who was costing, when you counted salary, bonus, profit-sharing plan and benefits, around $120,000 a year.  The employee left the firm, and Bear was able to outsource his core function for $1,400 a month.

This is not urgent, but you should make time, soon, to sit down and identify which tasks are not being handled efficiently at your firm, and look at the growing ecosystem of outsource providers who specialize in that task.  It may be the easiest way to raise the overall profitability of your firm.

Creating a flexible incentive compensation plan – Necessary eventually

I didn’t list this as “urgent” because I don’t expect a hideous market downturn for another couple of years at least.  But when it comes, and it will come, the firms that have a flexible incentive plan, where a portion of the fixed costs are transferred over to bonus and profit-sharing, will be best-positioned to handle a sudden drop in revenues.

Think of it as a form of insurance: you pay a little more in the good times, in the form of revenue sharing that probably takes your employees’ compensation higher than it is currently.  But when revenue is down, when profits are scarce or nonexistent, your firm’s fixed costs are lower and everybody has to tighten their belts.  This can save you having to lay off employees as well.

Creating a social media presence – Not necessary any time soon

Wait; did he really say that I don’t have to immediately get on all those social media sites?  I shouldn’t spend my waking hours tweeting?  But I’ve been told that this is the most important way to interact with clients.

Every marketing expert I’ve ever talked with has said that you should play to your strengths, and focus on giving away information.  If you’re a good networker, get out to social events and on the golf course and talk about what you do and show an interest in what other centers of influence are doing these days.  If you’re an entertaining speaker, make presentations whenever you can.  If you like to write, write a regular blog.  If you’re good on radio, get a radio show.

If you like social media, great!  But of all the things I mentioned, I suspect that social media is going to be the least productive in terms of generating business for your firm. 

The advisory firms that do the best job of marketing have hired a marketing major out of college, who coordinates a customized marketing plan for each staff member.  All of your advisors will play to their individual strengths, and there may be a social media maven among them.  If there is, great; let that person be the firm’s Twitter, Facebook and LinkedIn coordinator.  If not, I wouldn’t force it – no matter what you read about how social media is taking over marketing.

The bottom line?  What you hear is true: the profession is traveling through a very complicated multifaceted transition phase.  You’re going to have to change and adapt. 

But you can drive yourself crazy trying to chase in all these directions at once.  The dire warnings, telling that you have to do something yesterday or the day before, are untrue.  Prioritize the urgent issues, start planning for the high priority ones and keep an eye on the eventually necessary transitions, and you’ll evolve faster than most, and plenty fast enough to deal with the changes that are coming at you.

Bob Veres’s Inside Information service is the best practice management, marketing and client resource for investment advisors and financial planners.  To get a free sample issue of Inside Information, send your request to [email protected], or order online at http://www.bobveres.com.

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