From the July 2008 issue of Investment Advisor • Subscribe!

Learning to Listen

Like many of their clients, it usually takes a few hard knocks for financial advisors to take advice

A couple of years ago, my partner Bob Clark told me about an advisor he knows in Columbia, South Carolina, named James Wilson. A past chair of the National Association of Personal Financial Advisors (NAPFA), Wilson has been one of the leaders of the financial planning profession for many years. Yet, probably the most notable fact about him is his approach to taking new clients: He doesn't take (or rarely takes) on clients who are under the age of 50. His reasoning, as I understand it, is that until most people reach about that age, they just aren't ready to take advice--they haven't been burned by a stockbroker, lost money on a tip from a golfing buddy, taken a flyer on a disastrous business venture, been over-insured by an agent-in-law, over-reacted to something they heard on the evening news, or suffered from any of the other myriad mistakes that teach otherwise competent people they are not qualified to manage their own financial affairs.

Wilson's story has always stuck in my mind as the kind of wisdom one can only get through experience. And my years of consulting with independent advisors have led me to realize a similar rule for advisors themselves; regardless of whether they can afford it or not, until advisory practices reach about $700,000 in annual revenues, their principal(s) usually aren't ready to listen to what a consultant has to say. Occasionally, I'll come across an exceptionally business-oriented advisor who's ready to start thinking strategically before they actually have a "business," say at around $450,000 in revenues: these are the practices that can be positioned for amazing growth. In any event, until an advisor is ready to start thinking like a business owner, hiring a consultant to help them build a business is just a waste of everyone's time--and the advisor's money. But once you and your practice are ready to act like a business, a good business consultant can help you build a very successful firm, however you define success.

Stop Thinking It's a Conflict

Many independent advisors are acutely sensitive to the conflicts between being a professional and running a business. And that's perfectly understandable: the financial services industry abounds with examples of "businesses" that routinely make decisions that are in their own best interest, and which benefit their "clients" largely by accident, if at all. But it doesn't have to be that way. A sound business strategy doesn't have to be based on misleading or over-hyped marketing, or even keeping the cost of services as low as possible. There are many very good businesses that focus on delivering high-quality products and services: FedEx isn't the low-cost delivery service, Disney World is no financial bargain, and Apple iPods, iPhones, and Macs compete with better features, not smaller price tags. In our world, Schwab gave up it's "discount" moniker years ago in favor of offering better and more desirable services, Advent has always been the Mercedes of advisor technology solutions, and there's usually nothing cheap about the best performing mutual funds. So, there's no reason why advisors can't build successful practices around high-quality client services (and we all know many examples of advisors who have done so).

Yet, coming to this realization--that sound business strategies can enhance rather than detract from client service--is one big step along the learning curve for most advisors. The fact is that financially robust advisory practices have many more options for enhancing the experience of their clients, should they decided to use their economic muscle in that way: broader and more complex services, more experienced advisors, more staff support, lower client/advisor ratios, better in-house (and outside) training, and better client communications are all ways that the more successful firms maintain, and indeed, increase their service gap with their peers. Yet, because advisors are trained as professionals with a focus on client service rather than practice management, it usually takes years, and more than a little pain for most advisors to understand that well-managed firms are a win/win for clients and advisors alike.

Tips for a Successful Business

Think about the practice you want. I know, I know, just trying to service the clients you have and bring in some new ones is more than a full time job. Yet, I can't tell you how many times I've had advisors with "successful" firms tell me how unhappy they are. The reason: they don't really like the practice they've ended up with, and/or the job they have to do, day in and day out. The solution of course is to take some time as soon as possible (it doesn't have to be more than a few hours on a Sunday afternoon) to consider what you want your ideal firm to look like, and what do you really want to be doing in it? How much do you want to make? Do you want to have partners? Employees? And how do you want to retire when the time comes? All that may change later, but it's still easier to change directions when you're already working toward a goal, than to redirect chaos.

Consider the clients you want to work with, and what they'll need. Most successful firms have a pretty specific niche, but it seems fair to say that most of them stumbled on that niche by accident: one day they just realize that most of their clients are chiropractors or car wash owners. Still, that doesn't mean you can't have some degree of control over your niche. If you have an affinity for one group or another that would benefit from financial advice, take steps to attract them as clients. The most useful strategy I've found is to start monitoring your clients almost from the beginning of your practice. The goal is to recognize emerging trends and then make a conscious decision to attract more clients like them. Not only is it easier to market to a specific group, particularly if you can establish yourself as an expert in advising them, but working with clients who all have similar challenges and need similar services can streamline a practice. Client focus is a big step toward creating a sound business.

Create a plan before you need one. Once a picture of your ideal firm and your target client starts to come into focus, it's time to think about who and what you'll need to service them, and when you'll need to make those additions. If you want to add other professionals, you need to think about what skills they'll need, how you'll train them further, when you'll need to hire them, and what staff support you'll need to maximize their, and your, contributions to the firm. If you don't plan on hiring other professionals, then leveraging your own productivity becomes even more crucial. That means you'll need a detailed organizational chart, showing the positions you have now, and all the positions you'll need to fill, including a timeline for when you'll need to fill them. I've found the best way to make that projection is to quantify how many clients each professional can handle, how much revenue that will generate, and then setting revenue mile marks for hiring. Again, all this can, and probably will, change but the time you get there. But you'll be surprised at how accurate your original estimates will prove to be.

Get some help. If all this sounds like a lot of work, it is. And chances are, you're not really trained in business management to begin with. You certainly can try to do it all yourself, and most advisors try to. That's usually the second-to-last lesson on the learning curve. When that fails, due to any number of predictable issues (you didn't have enough time, you skipped some steps, you couldn't break you're old habits, you couldn't be objective enough, etc.), chances are you'll come to realize that working with someone who's seen these challenges in hundreds of practices, and can apply some business training and experience to solve them is a good idea. And if you--and your consultant--are lucky, you'll have learned enough to actually listen to them. But before you do, you might have to go through a consultant or two, which is the last lesson. But the important thing is that you eventually get to where you can think like a business owner, and actually listen to people who can help you make your business more successful. As James Wilson will tell you: becoming a good client isn't easy.


Angela Herbers is a virtual business manager and consultant for independent financial planning firms. She can be reached at angieherbers@cox.net

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