Such leverage is part of the difference between running a book of business and running the business itself. Within a financial advisory firm, managing operations is often the most complex part of the practice; it is also one of the most important.
Practice Made Perfect
Managing a financial advisory firm can be particularly complicated because the business is so dependent on people and, over time, at the mercy of events—from regulation to market fluctuations—that cannot be controlled.
Slower Rate of Growth
THE FINANCIAL ADVISORY
The View from Here
Many advisors have already reached their capacity in terms of the number of new clients they can add. But it's impossible – and imprudent – to ignore the weight the market can exert on top-line performance and organic growth rates.
Clients Demanding More
There is no longer an internet bubble to give an artificial lift to the markets - and consequently to fees. Others kept the clients but felt the impact on their bottom line because they had to provide more services for the same fee.
Difficulty in Recruiting and Retaining People
Aversion to Management
The dilemma is that the more customers they add, the more staff they have to add; the more staff they add, the more technology they have to add; the more the company grows, the more their scope of control expands beyond their reach. Successful advisors realize that their company is their primary client: it is the generator of wealth and the foundation of their assets.
Margin Squeeze
Time Squeeze
With his highly successful Strategic Coach process, Dan Sullivan has introduced many advisors to the concept of focusing on their unique skills. But if time isn't managed properly, it's like watching your inventory walk out the door.
The Top Ten Challenges of Advisory Firms
But it is difficult for anyone to give up what is comfortable and familiar and delegate appropriate work to others. So as an advisory firm begins to think strategically about its future, it is useful to understand where it is in its life cycle.
The Practice Life Cycle
Although revenues are increasing, cash flow is decreasing as they continually reinvest in the business with technology, office space, equipment and, in many cases, people. For many, this is the time to reap everything they have sown in nature over the years.
Where Are You in the Practice Life Cycle?
Consulting firm owners will be more effective in helping their clients if they can transform their business into a client-centric organization that is not dysfunctionally dependent on the owner. It is the most important tool you have in your business; Indeed, developing and maintaining a strategy are the most important responsibilities for anyone running or managing a business.
What Is Strategic Planning?
IN THE MOVIE IE City Slickers, the character played by Jack Palance asks Billy Crystal's character, "Do you know the secret of life?". For advisors, it is also your quest: What is the one thing that is the secret to the life of your company.
STRATEGIC BUSINESS
At the heart of every decision you make in your business, every dollar you spend, every client you take on, every person you hire is your strategic plan. For most financial advisors, however, strategic planning is such a comprehensive process that it is often ignored.
PLANNING
Defining the Direction
You have limited resources—time, money, management, and energy—to devote to building your business. A strategic plan focuses on strategy – what differentiates your business from others – and vision – where you want your business to be.
The Strategic-Planning Process
And every year, you should track whether you are getting closer and closer to the goal. That way, the next time you think about the future of the firm, you'll have a better understanding of what you're up against.
KNOWING YOUR
We've found customer surveys to be invaluable to consulting firms developing and refining their business strategy, helping firms align with their market and the services they expect optimal clients to provide. For years, we were skeptical of the value of customer surveys because we didn't believe that obtaining customer satisfaction scores would yield anything particularly insightful.
CLIENTS
AS ADVISORS STRIVE to build closer relationships with their clients and improve the quality of their services, and several companies have begun to formalize their approach to collecting feedback from clients. Counselors who participated in such studies were generally surprised by the results, because in many cases they believed they had raised these issues with their clients, but the indictment was not always recorded.
The Value of Surveys
It seemed unlikely that clients who disliked an advisor would respond, and those who had “warm and fuzzy” feelings about their advisors were likely to sugar-coat their responses. Our results were positive, but some specific points were surprising,” he says.
Hear No Evil
Clearly, a client survey can provide insight beyond what can be gained from regular client contact, as it allows the person to respond without being confronted or looking the advisor in the eye. A comprehensive study published in the Harvard Business Review1 in 2002 has some strong conclusions in favor of survey-.
CLIENT PROFITABILITY
The study found that surveyed customers for a large financial institution were more than three times more likely to have opened new accounts, half as likely to have defected and were more profitable to the firm than non-surveyed customers. In general, customers are unlikely to have spontaneous positive thoughts about you unless you are explicitly reminded or asked.
How to Elicit Constructive Responses
For example, if you have no control over customer statements within your office, do not ask about customer satisfaction in the survey. In addition to the insight, the fascinating thing about this process is the action plan that emerges from the survey.
Proceed with Caution
Client Surveys and the Bottom Line
In reality, many of these financial advisors are not entrepreneurs; they are simply independent. Independent advisors, on the other hand, consider themselves employees of their own business, not investors in that business.
BUILDING LEVERAGE
This is not to say that one approach is better than the other; it's a fork in the road. That said, the solo practitioner, simply operating as a sole trader, is hardly a dead concept.
The Challenge of Growth
SINCE THE CREATION OF THE INDEPENDENT FINANCIAL ADVISOR IN THE 1970s, many practitioners in this industry have characterized themselves as entrepreneurs. Whether operating out of a large brokerage house or bank or out of a guest room or garage, many people in this business prefer to work alone rather than be part of a team.
The Entrepreneurial Crossroads
But advisors typically don't realize they are drowning in opportunity until they are overwhelmed. So if you're addicted to growth, is there a more practical way to become an elite practice?
Cornerstones of the Professional Practice
And without excellent staff, it is nearly impossible to build capacity and create operating leverage in a practice. Ensemble models provide an opportunity to do it all: handle growth, provide career development, and create leverage—the cornerstones of every professional practice.
Models That Work
In the leverage model, the senior financial advisors play a strategic role in client service, while the associates (or junior advisors) play a role. Compensation for team members – especially professional staff – should be a combination of base salary plus bonuses.
Leveraging Your Affiliations
After all, I liked people, I had spent many years learning to be a follower, and I certainly knew the shortcomings of the current leadership. Reality hit a short time later when all employees turned out to be subversive enemies of the company, committed to undermining authority, profits and the company's stated commitment to customer service.
THE FULCRUM OF STRATEGY
What if we got rid of these employees and all this management drudgery,” I asked in a moment of inspiration, “so we can focus on customers.
Human Capital
I thought of a question asked by a motivational speaker I once heard, "How many of you dreamed of owning a boat?". How many of you remember if the dream involved cleaning the boat?” That said it all.
The Problem You Can’t Do Without
Whether they intend to or not, most financial advisory firms grow their business to the point where they need additional staff to adequately respond to clients. Financial consulting companies are like small test laboratories where common problems and solutions arise every day.
Aligning Human Capital with Strategy
GLEN AND LAUREL assess these characteristics and trends to determine the nature of work in their organization and what skills they need to employ. By studying these needs, they can now define the nature of the workers they need.
The Nature of the Work
Human Resources Director: Primarily responsible for staffing, recruiting, training, determining compensation strategy, policies and procedures. Investment Adviser: Primarily responsible for the delivery of investment advice, with extensive client contact and client relationship management.
Defining Performance Expectations
The Nature of the Worker
Once the job is defined, the employer (often with the help of an external expert) can design a benchmark for the position. The benchmark you create for the position allows you to match the person to the job.
THE CARE AND PREENING
STAFF FDEV ELOPM EN T BEGINS by defining the performance expectations for the specific job, as discussed in Chapter 5. The discussion should then go beyond the specific measurable values for the job and articulate the behaviors and values that employees must demonstrate.
Professional Development
To create a culture that embraces this concept, every element must be incorporated into the performance review process and into how we go about selecting new partners or shareholders for the firm. Your firm's value statement should be similarly integrated into your approach to human capital development.
The Appraisal Process
In the late 1990s, we were invited by a prominent financial advisor to act as an intermediary. To help him, we created a preliminary evaluation process that applied not only to him, but also to everyone in the company to whom employees reported.
Coaching and Development
Oddly enough, this improvement is not due to a greater emphasis on sales; this happened because there was a greater emphasis on the company's mission and culture, and a unified commitment to the company's goals. Determine the training and education necessary to acquire this person's skills and your own confidence, then assign them work that meets the new standard.
IIII
But more likely, the practice leader is reluctant to delegate challenging work because he or she lacks confidence in the staff's ability to perform.
The Workplace
As an owner and manager, it's your job to create a work environment in which motivated people can thrive. It has been estimated - in The War for Talent (Harvard Business School Press, 2001) - that about 15 percent of the workforce within any company is dysfunctional (failing to meet critical success initiatives).
Hiring Your Boss: Do You Need a CEO?
Although some of these observations are likely to be true, the core of the problem is an employment issue. Is it any wonder that these CEOs fail to meet the expectations of the owners who hired them.
THE PAYOFF FOR THE
A purposefully developed compensation plan can be a recruitment tool, a retention tool, a driver of behavior and, most importantly, a communication tool to express what is important to the organization. A compensation plan defines the behavior the company values and will pay for—and the behavior it values enough to pay extra for.
Compensation Planning
They pay as if rewarding production as they try to create a fixed culture. They focus too much on the total dollars to be paid - what - and not enough on how that compensation will be structured -.
Developing a Plan
- Team performance should be emphasized over individual performance
- Incentives should work to build and support a team approach and a team environment
- Compensation should be externally competitive and internally equitable
- The compensation strategy should be aligned with the business strategy and support the firm’s strategic initiatives
- The compensation system should be as simple to understand as possible
- The compensation program should not promote game playing or manipu- lation
- Compensation should be viewed as fair by the participants
- The compensation system should be affordable
- The compensation system should value group harmony more than the recognition of individual efforts
- The compensation system should value business development with exist- ing clients and community/industry involvement as much as new client
- The compensation system should promote camaraderie over internal competition
- The compensation system should recognize that we value a work/life balance
- The compensation system should value passive business development as much as active business development
However, the firm's incentive program was tied to the number of new clients each advisor received, regardless of client profile. The compensation structure—the manner—can also be the source of a potential disconnect between employer and employee.
The Components of Compensation
This kind of calm isn't necessarily a bad idea; in fact, it is the core of the culture in some firms. Equity-type offerings should be reserved for individuals who act as owners and whose contributions to the business result in added value.
Establishing Base Compensation
Market-rate compensation adjustments based on the individual's experience, tenure and designations, as well as the firm's affordability. Changes in inflation or the cost of living will be reflected in changes to the range; changes in performance expectations will be reflected by a change in the individual's position within the interval.
Establishing an Incentive Compensation Plan
Ensure plan participants have ongoing access to performance results and feedback on how they are doing. What kind of partners will create value in the organization instead of diluting it.
Owner’s Compensation
The result is dilution of shares (i.e. after execution there are more shares that "share" the same total value). Pursuant to its ISO Plan, BLT Financial LLC grants Steve the option to purchase 10,000 BLT membership units at a price of $1.50/unit (the exercise price) – the fair market value of the units at the time of grant as determined by an independent appraisal.
Fundamentals of Accounting
AT TR ACTI NG CLIENTS, adding assets and generating income is how most financial advisors measure their financial success as practitioners. This is because the process that so many financial advisory firms have in place for accounting is inadequate, and most practitioners are not trained to use their financial data to effectively run their businesses.
THE TOOLS THAT
In reality, financial success is defined by profitability, strong cash flow, a healthy balance sheet, reasonable returns to the owner and transferable value. But used correctly, financial information can help owners and managers identify problems more quickly, recognize trends and take action that will transform their practices into top-tier financial advisory firms.
COUNT
Financial Management
Without a clear understanding of your practice's unique financial dynamics, there's no way to know if you're doing things right. If you were him, wouldn't you want to know how to evaluate your results before proceeding with such a growth plan.
Constructing a Financial Statement
In accounting parlance, WIP represents unbilled revenue and is carried as a current asset on the balance sheet. In fact, when the asset side of the balance sheet grows, the funding side must also grow.
Tying the Financials Together
Only by looking at trends in your financial performance can you uncover the specific questions you need to answer. The process for analyzing financial statements in a way that helps you assess what's really going on in your business is not mysterious.
INCOME, PROFIT,
By observing how these factors affect your profitability, you can better judge which clients to serve, which products and services to offer, what to charge, if you have control over fees, and who in your organization needs coaching to become better. efficient and successful in their work. Owners of financial advisory practices – like owners of most businesses – tend to speak in financial terms when describing what's going wrong with their business.
CASH FLOW
For a typical firm, this growth places numerous demands on professional staff time, puts more pressure on fees, and strains owner-consultants to their limits.
By calculating the financial impact of negative variances, you can measure the extent of the problem. This chapter explains a thoughtful, structured, analytical process you can use to perform triage on an ailing business.
Analyzing the Income Statement
Put another way, for every dollar of revenue, you're generating 60 cents in gross profit. If you are an employee of the business, you should be paid market rate compensation for doing the work - back wages.
Analyzing the Balance Sheet
The principle of leverage is that you use debt to finance assets, which then translates into greater profitability. Use debt to finance the balance sheet, not cover losses on the income statement.
Analyzing the Statement of Cash Flow
Typically, you will not find a large amount of equity in a financial advisory business, but to the extent that it exists, it should, like any investment, generate a positive and increasing cash flow return on equity. But it's even more important to establish a baseline number for your practice and observe whether those cash flow returns improve year over year.
Financial-Impact Analysis
Now that you've uncovered the extent of the problem, you can go back to your analysis and focus on the causes of low profitability—namely, a low gross profit margin, poor expense control, or insufficient revenue volume to support your overhead costs. But let's put things in perspective: if you're not earning enough to get the firm on the road to financial independence – and provide a sufficient return to invest in your practice so you can better serve clients – then you've already start to damage your business.
Productivity Analysis
One of the other factors that determine this decision is of course the way in which the staff additions are paid: variable amounts (commission) or fixed amounts (salary). Let's look at some of the most common strategies advisors use to create business: referral agreements and joint ventures, practicing acquisitions, and investing in new initiatives.
Referral Agreements and Joint Ventures
REFERRALS AND JOINT
The Search for Solutions
Direct sales and professional services outside the joint venture or referral agreement are also direct expenses. Ultimately, this outcome is not in the best interest of the customer or the company.
Practice Acquisitions
