From the June 2006 issue of Wealth Manager Web • Subscribe!

Persistence of Memory

It's a new era for your business. The firm's founder and its operations manager, who started the company together almost 20 years ago, retired last week and turned over the reins to you and the junior staff. You're excited at the prospect of managing and growing the business, but you wonder about the potential impact of losing a combined 40 years of experience and insight with their departures.

Younger staff often welcome retirements because they create openings for advancement, but losing seasoned employees can impair a firm's accumulated knowledge and skills--its "institutional memory." Should a manager or staff member who has critical knowledge leave unexpectedly--an accidental death, for instance--the loss can be devastating to a business. And succession plans address only part of the challenge, according to Dr. David DeLong, a consultant with David DeLong & Associates in Concord, Mass. and author of Lost Knowledge: Confronting the Threat of an Aging Workforce (Oxford University Press, 2004). "Succession planning means identifying candidates likely to take over certain roles," says DeLong. "But what is often overlooked is the knowledge that goes with the departing person. Managers don't spend enough time thinking through which knowledge must be transferred if the succession is to be effective."

Joel Shaps, CFP and president of Bedrock Capital Management, Inc. in Los Altos, Calif., experienced firsthand the difference between transferring ownership and knowledge. Shaps bought the firm in 2001 from a sole proprietor who had run the company for 15 years and had grown assets under management to approximately $35 million. "All the information needed to run the business was in the previous owner's head," Shaps says. "It was sink or swim for me, and it became very clear that we needed documentation to manage the firm. I started making copious notes so I wouldn't have to keep asking him how to do things."

Financial advisory firms have survived management and staff changes in the past, and many have prospered in spite of the transitions. The stakes are higher today, however, DeLong says, because the business has become much more complex. The knowledge that a senior advisor has today must be much greater than that of 10 or 20 years ago in order to serve clients effectively. "Consider the increased complexity of tax laws, investment products and the knowledge needed for financial planning and investment management," DeLong says. "When senior partners or principals leave, they take with them knowledge that didn't exist 20 years ago. That means the potential for reducing the level of quality of service to clients is much greater."

Implementing a knowledge management (KM) process can reduce a firm's exposure to retirements and personnel turnover. Eric Lesser, an associate partner in IBM's Business Consulting Services in Cambridge, Mass., defines KM as a company's ability to create knowledge; share that knowledge within the organization; and use that knowledge in a new context. The first step in designing a KM system is to understand what knowledge is critical to the firm, Lesser says. For example, is it knowledge about customers or operations? He asks clients, if there were a fire in the building, what would be the first thing they would grab: the Rolodex or the operations manual?

DeLong asks clients to identify critical staff members by what he calls the "bus test": If a bus hits a colleague tomorrow, how seriously would that loss hurt the firm?

In Shaps' case, he needed operations details and realized that relying solely on the previous owner's recall was too risky. You don't need a crisis to start designing a KM system, however. Legend Financial Advisors in Pittsburgh, Pa. is implementing KM because they want to share knowledge more efficiently among the firm's staff, says Michael Krol, CPA and assistant financial advisor. The firm's goal is to develop an indexed, searchable database of the planning-related strategies that staff collects from sources like research, conferences and so on. "We've always been able to accumulate analyses and industry knowledge, but it's scattered throughout our computer system," Krol says. "We initially wrote memos, but there's obviously not much efficiency in creating memos. It's also an administrative nightmare trying to store those memos where they can be used, so they wind up all over your servers."

Technology can be an important part of KM because it facilitates information storage in and retrieval from a "knowledge base." IBM's Lesser observes that even in small companies there are opportunities to use technology for sharing content knowledge and relationship knowledge, provided others in the firm can access the information from the knowledge base. "Typically, in a small firm people have things on their hard drives or in their filing cabinets, and when one person leaves--planned or unplanned--then the other employees are left scrambling to re-create what's been done," he says. "That can be difficult in a small firm if one person is a central node, say, an operations manager who knows all the vendor and supplier relationships. If something unexpected happens to that person, it can be very difficult to scramble and recreate what they know."

The advisors interviewed for this article have adopted a variety of software programs to support their KM efforts, although none had purchased a KM-specific application. Legend Financial considered developing an intranet and storing information in searchable HTML documents but decided instead to use IBM's Lotus Notes. Krol was familiar with Notes from his experience at a "Big Four" accounting firm that used the program as its KM platform. Additionally, Legend Financial recently started using CATS (Client Activity Tracking System), a Notes-based CRM designed for investment advisors and financial planners, and the common platform will enhance data integration between applications. Installation costs also favored Notes. "The Notes Small Business Enterprise version is very inexpensive for the licenses," Krol says. "We had already decided to set up a Notes server for the CRM, so the only additional cost for the KM systems is to develop the database. We may do that in-house, depending on the complexity, but even if we hire a developer we don't anticipate a significant cost to that."

At Bristlecone Advisors, a multi-family office in Seattle, Wash., the firm's knowledge management software supports every aspect of the business. The customized database, called Aristata, expanded from a task manager to a comprehensive system that tracks the details of clients' finances and supports the firm's internal operations. (Bristlecone's technology was profiled in the September 2005 Wealth Manager.) According to Keith Vernon, CFA and principal, the goal of "institutionalizing" processes and information-tracking for clients has been a major motivation behind Aristata. He points to the monitoring of clients' charitable giving as an example. "We developed a system in Aristata that allows us to track all of our clients' giving in the application the same way," he says. "Different client advisors don't have different spreadsheets and different information that they gather. Everyone in the firm performs that task the same way across all clients. That's a process that has become institutionalized."

While a sophisticated database can enhance KM, it's not always necessary to have specialized software. Bedrock Capital Management has tripled in size to $100 million AUM over the past five years while creating three additional full-time employee positions. During that time Shaps and the staff have continued to document every procedure they follow so other employees can replicate their work. The documentation focuses on processes: How the firm opens accounts for clients, updates performance reports, and pays its bills, among others. "If our client support manager left tomorrow, we'd know how to set up a new client with Fidelity and in ProTracker," Shaps says. "We also test the documentation. For example, our chief portfolio strategist is my backup for trading. Periodically we'll have him take the documentation and do the trading for a day to see if the instructions are accurate. I know how to do the trading, but what if I left out a step that wouldn't be obvious to the person who is trying to duplicate my efforts?"

Bedrock uses a Word document that Shaps refers to as the master journal to hold the documentation. Each staff member has access to the journal and is responsible for updating the contents if their work processes change in any way. The journal is organized by sections that match functions: Client forms, working with custodians, etc. and is searchable by key terms. It has a table of contents that Shaps updates periodically, and the firm stores the document on its server and backs it up nightly.

Firms still face the risk that staff members won't use a KM system or will use it improperly. At Bristlecone, the system and the firm have grown simultaneously, says Matt Talbot, a principal with the firm. "For us, the process and the application are integrated--Aristata is part of our culture. At first it requires a conscious effort from staff to use the program, but that effort pays huge dividends. Now it has its own momentum--it's second nature."

Legend Financial Advisors has planned the training for its Notes-based KM system, Krol says. The firm follows clearly defined and documented processes for much of its work, and it is implementing an online training program for those processes. Part of the online training will show staff how to make submissions to and retrieve information from the knowledge base. Krol acknowledges that it will be a "work in process," but he believes it's just a matter of communicating the KM procedures.

Capturing knowledge and transferring it to a user-friendly format takes time. If your firm faces imminent departures by senior staff, perhaps you can gain time by asking them to delay their retirements. That solution will probably require flexibility on your part, however. "Hang onto older senior employees or develop creative options for them," Lesser suggests. "Perhaps they don't want to work full-time anymore, but they might consider part-time or alternative work arrangements. That would allow the firm to tap into their experience. It also can create a draw for older clients who often relate better to advisors with similar life experiences."

If you want to start a KM process but are concerned about the task's scope, consider starting slowly. "It's a big challenge if a firm decides that tomorrow they will start a full-scale KM system," Vernon says. "If the project is too big and you don't get started for two years, you're actually further behind than you were when you first considered it. If you start with some small steps, though, you'll get real progress over time. Just get started."

Ed McCarthy, CFP, is a freelance writer in Pascoag, R.I.



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