A financial advisor at a major wirehouse was extolling the virtues of fee-based money management to a new advisor. She Everyone - from stockbrokers and insurance agents to financial planners, trust officers, and investment advisors - is trying to figure out how to attract and satisfy affluent clients. The rise of online trading and virtually free access to investment products is forcing financial advisors to shape up or ship out: streamline their businesses, or find a new occupation.
Clients are demanding more, but prices are being forced down by the competition. How can advisors provide more for less? Do you concentrate your forces narrowly on one product line and essentially become a product distributor for one investment sponsor? Offer a broad line of investment services, financial and estate planning, insurance sales, and planning for long-term care? Just how broad should your services become? What is the ideal business model of the future?
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To maintain a competitive edge and keep clients happy, it's imperative that you combine services that your clients desire with a streamlined business model. Let's look at a five-step process for doing just that.
Define Your Ideal Clients. In an industry with so many opportunities, it's a prescription for disaster to try to be all things to all people. Choosing a niche - whether it's business owners, widows, or some other group - will enable you to serve your chosen clients in greater depth, while exerting less effort.
If you look at your existing clientele, you'll probably find that 20% of your clients generate close to 80% of your revenue. To increase your profits, design your business to serve this group. Your business will become even more lucrative as the clients refer other people like themselves to you.
Next, decide on your minimum account size. Most fee-based advisors find that $250,000 is about the smallest account size they can take on profitably.
Investors can be divided into three distinct psychological groups: thrill seekers, guru groupies, and prudent investors. As their names imply, thrill seekers think investing is a game. They often seek speculative, high-performance types of investing. Because they themselves want such constant involvement with the investment process - and I use the term "process" loosely - they don't make good clients.
Guru groupies want someone else to make their investment decisions, but they're focused on beating the market. Often, these folks are frustrating clients because they have a tendency to second-guess and devalue an advisor's opinions.
The last group - prudent investors - is my favorite. They find money and investments burdensome. They're looking for a professional who will help them preserve their quality of life and their capital. They're generally older, more conservative, and have many interests other than money. This group is motivated more by fear than by greed, which means that they require more ongoing communication from their advisors. But if you meet their financial and emotional needs, these people are the best clients for building an efficient and profitable business. Prudent investors represent the vast majority of the wealth in America, and they appreciate fee-based money management services the most of any of the three groups.
Determine What They Value. Once you define your ideal clients, you need to discover what they value. So ask them. Conduct face-to-face interviews with your best clients, and ask them questions that will reveal exactly what is important to them, why they're working with you, and what other products or services they'd like you to offer. I highly recommend that you interview people in your target niches who aren't current clients, too. You can also study secondary research, such as The Millionaire Next Door, by Thomas Stanley, and Cultivating the Affluent, by Russ Prince and Karen Maru File.
The latter book describes a survey of almost 900 clients with a million dollars or more being handled by money managers. Respondents were asked what services they wanted from a money manager. Asset allocation was first, with a rating of 57%. Financial and estate planning was second, with a rating of 41%. Tax planning clocked in at 24%. Acting as a manager of managers was only 1.5%. At the bottom of the list was philanthropic advisory, at 0.1%. This information tells us the basic products and services you must offer, if you want to satisfy wealthy clients.
Design Your Business to Give Clients What They're Looking For. It's helpful to conceptualize your business in terms of the benefits you provide to your clients rather than the products you sell. In addition to financial products and services, your clients want peace of mind, a sense of control, and a feeling of financial security. They want simplicity, convenience, coaching, guidance, education, and relief from responsibility.
Once you know both the tangible and intangible needs of your clients, create business systems and processes that consistently meet them. Regardless of your background, if you design your business around your client, you'll come to the same conclusions about how to structure your business. I would suggest that what's needed is a blend between institutional money management and personal financial planning, combined with coaching, mentoring, and leadership. It's a mixture of skills commonly exhibited by different professionals and requires a higher level of competency than is commonly found in a business culture devoted strictly to sales. However, if you have a business that is designed to meet the needs of your ideal clients, and if you can effectively communicate to those clients that you can meet their needs, you'll be overwhelmed with opportunities.
It's not uncommon for client-centered fee-based money management businesses to grow at a rate of 30% to 50% a year with very little marketing. Meeting and exceeding your client's expectations is one of the most powerful marketing strategies available.
Build a Client-Centered Team. A typical team will consist of three to six people. The team's focus is on serving the total needs of individual clients. Each individual specializes in areas that match their personality and training.
A team of three people might include a financial advisor, an office manager/customer service person, and an administrative assistant. As the business grows, the next position to be added is usually a marketing person to organize special events, public relations, and referral-generating processes.
Typically, the next position to be added is an account executive. This individual typically takes over many of the smaller accounts from the financial advisor, who is now filling the role of chief executive officer. The account executive is usually a seasoned professional, often a CFP. This person should prefer customer service to marketing and sales.
In growing companies, the office manager eventually advances to the position of chief operating officer. The ideal person for this role is a former accountant who possesses strong organizational, systems, processes, and computer skills. If you're planning on offering in-house money management, this position is a particularly important part of your team.
Finally, the sixth position to be added is typically an additional administrative assistant who works solely on customer service details. The first administrative assistant can then focus on supporting the operations manager.
One of the most profitable teams I've heard of is a four-person team at Merrill Lynch that generates more than $2.5 million in annual revenue. That's about $625,000 per person per year. In contrast, I've seen teams with seven people that generate only $500,000 a year. Business models make a huge difference. Targeting specific markets and identifying ideal clients will help you build an organization that is highly profitable and efficient.
Develop Processes. As you build your team and your business, you'll need to systemize your business. An example is the initial interview process. By keeping this interview highly organized, you can help your clients identify important issues and make crucial decisions in a one-hour or 90-minute interview. Systemizing marketing, money management, estate planning, and customer service will free up time and allow you and your staff to concentrate on interacting with clients.
Clients want and need a series of systematic processes to help them organize their financial lives, create an action plan, and then systematically implement it. Processes, forms, procedures, call-back times, letter templates, and step-by-step implementation processes help to organize your clients' scattered financial affairs and brings everything into focus for them.
If a particular service is going to be part of your core income structure, systemize it and bring it in-house. However, if your clients need services that you don't want to offer or that you will not sell a lot of, I recommend that you outsource those services to a third party. One of the best strategies I know is to work in a strategic alliance with other professionals either on a shared revenue basis or a more informal referral basis.
To summarize: Identify your ideal clients and conduct research interviews to determine what they value. Then create a quality team of professionals that will deliver it. Work with your team to develop and implement systematic processes, and focus on high touch services and events that create an emotional bond between you and your clients. By doing these things, you can design a profitable and efficient business that meets your needs and the needs of your best clients. As our industry continues to change, your ability to adapt will determine your survival.