From the December 2004 issue of Investment Advisor • Subscribe!

Find Your Thundering Herd

There's safety in numbers, but it's also easy to get trampled

There's an old Randolph Scott Western called The Thundering Herd, where one of the characters says, "Being in love ain't going to hurt him. Getting hitched is where the trouble begins."

I had a flashback to this movie recently as I read a column by Bob Veres on practice dysfunction ("On Dysfunction & Org Charts," available to subscribers at www.bobveres.com). It was very compelling. Bob captured the psychology of the entrepreneur quite well by highlighting the conflict between wanting to go it alone and wanting to do it with others: the business owner's version of "getting hitched."

What Bob is talking about is the dilemma of whether to remain solo or commit to growing an ensemble practice, i.e, a firm comprising multiple professionals. Apparently, there are many advisors who feel much guilt about wanting to remain solo practitioners in light of the clamor to get bigger. Those planners' distress is magnified because most humans, like the buffalo, prefer to follow the herd. In a stampede, after all, the view only changes for the lead bull. Following behind is much more comfortable, because we don't know what risks await us up ahead. Moreover, there is safety in numbers. If we can rely on benchmarks, rules of thumb, and best practices to make decisions about our business, surely there is a greater chance of survival.

Fair enough--we're social animals. Once we accept this fact of human psychology in general and admit its application to entrepreneurs in specific, our challenge is to find the right Thundering Herd. Will it be a group that follows the lemmings, swims with the turtles, or runs with buffalos? Will it be groups of advisors who have a sense of purpose and a direction that not only allows us to protect our flanks but also prosper? Or will we fall in with a group that jumps from fad to fad, only to wallow in mediocrity and self-limitation?

In our 2004 FPA Financial Performance Study of Financial Advisory Practices, we found that there were indeed herds of advisors who were flourishing (a feature on the study can be found on page 66). Some were solos, some were ensembles, but all had characteristics that differentiated them from the rest of the pack. Most notable were practices that committed to either niches--a specific client market--or technical superiority--a specific planning specialty. Remarkably, they completely flipped the 80/20 rule.

According to Pareto's Constant translated into the financial planning business, 80% of your business comes from 20% of your clients. It doesn't have to be that way. The better practices have managed to flip-flop it into a 20/80 rule, putting the majority of their client bases in their target markets--their sweet spot, if you will. In fact, according to our 2004 FPA Study, those firms that have 80% of their clients in their target market generate nearly 3 times more annual revenue than those who live by the 80/20 rule (see "Staying on Target" below), or about $1.35 million compared to less than $500,000. Dramatic? Sure. But this makes sense because all advisors have a physical limit on how many clients they can serve, so why not make most of them your optimal clients instead of suboptimal? You'll understand them better, serve them better, and provide that service much more efficiently with less time, effort, and staff involved.

What really caught my attention was that our analysis found that advisors who focused on smaller clients but who had 80% of them in their "sweet spot" still had higher gross margins and greater personal income than those who overdiversified their client base with a handful of larger clients.This was true for solo practitioners as well as ensembles. It seems the theory that the only way to succeed in the advisory business is to attract high-net-worth clients may be more fiction than fact.

My point is that client size is not the most compelling thing advisors should change about their business--client focus is. This appears to be intuitive to most advisors. In this same survey, advisors told us the two biggest things they would change about their practice would be clients and staff (see "What Advisors Wish" chart at right). What inhibits them from changing either is their reluctance to make a commitment to a certain type of client or a certain business model.

What kind of clients did the top firms focus on? When they picked a niche, the most successful practices identified a specific client market like small business owners, professionals like doctors or professors, widows, divorcees, gays and lesbians, or born-again Christians, to name a few.

The key to their success with their "sweet spot" target market was that, within their specialty, they strove to be known as leading experts for issues like estate planning, executive stock option planning, expatriate tax planning, and so on--whatever was peculiar and important to their target clients. They spoke at gatherings of their niche clients, wrote articles in niche trade publications, attended conferences their clients went to, and in general made themselves available and visible to their target market.

Our studies and direct consulting with advisory firms continue to validate the notion that if you can define your optimal client, then you can define not only your client service experience but also your own organization and the type of people needed to support it. Of course, when defining a vision for your business, you must consider more than one perspective, but the kind of clients you want to service is a wonderful place to start. To complete the picture as to how your organizational structure might be defined, redefined, or refined, consider these elements of your strategic plan:

Your current capabilities. Leveraging your existing expertise and experience is much more efficient than starting to build an expertise from scratch. If your background includes some non-financial professional training or experience, your understanding of the issues and challenges those professionals face can provide a great head start. Former engineers, for example, often make great advisors to this typically hard-to-advise group. Having grown up in a family of doctors or college professors can afford insight that other advisors don't have.

Your competition. Who competes for your optimal client, and how do you differentiate your business from theirs? Historically, financial planners haven't had to deal with much competition, particularly in niche practices, but the times are a-changin'. These days, it's likely that other advisors--stockbrokers, insurance agents, or accountants--will be attracted to the affluence of your target market. The comprehensive approach and ethical standards of financial planners still afford considerable competitive advantages. In a more crowded market, however, planners will be called increasingly to clearly establish their unique differences, as well as their personal expertise in a specific niche, to succeed.

Your personal definition of success. How do you define success financially, emotionally, spiritually, and as a business owner? Put another way, are you creating the firm, the business, and serving the target market that will ultimately be fulfilling to you?

This last perspective is non-negotiable. It is not uncommon for us to go through strategic planning with an advisor who recognizes that his personal definition of success is out of whack with what he has been doing in the business. It's best to recognize this earlier rather than after you have created a firm that is taking you in the wrong direction. There are plenty of opportunities in the financial advisory marketplace to create the right situation for you. Life is just too short not to do so.

When you make decisions in a framework that considers these critical perspectives, you will be able to narrow down choices to the vital few you can commit to and execute well. If this means staying small as a business, make sure this is a decision made because it builds on your current capabilities, helps you to respond to your market, allows you to differentiate from the competition, and most important, fulfills your personal definition of success. The powerful combination of these factors is far more important than whether you deal with large or small clients, or build a solo or ensemble firm.

I feel guilty knowing that my comments regarding the optimal practice model often suggest that an ensemble model is preferable--contributing to what apparently is a widespread insecurity among solo practitioners. If it's any consolation, I also know that most advisory practices are solo practices, and that they will likely always be in the majority. In fact, most advisors should take comfort in knowing that they are among the 21 million small business owners in this country who have already made it past the stages of conception and gestation, and are now living, breathing, prospering entities.

Mark Tibergien is a nationally recognized specialist in practice management for financial services firms, and partner-in-charge of the Securities & Insurance Niche for Moss Adams LLP, the 10th largest CPA firm in the U.S. You can reach him at

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