From the August 2008 issue of Investment Advisor • Subscribe!

Where to From Here?

Processes and protocols must keep pace with growth

As advisory firms grow, so too does the need for more structure in how they do business. Yet for the entrepreneurs who created these enterprises, the notion of adding layers and approvals and mechanisms insults their sense of independence. In fact, for many firm owners, such bureaucracy is why they either left or decided not to join a large company.

I recall the time when my partners and I made the decision to merge our small consulting and valuation business into a much larger CPA firm. There's nothing quite like an auditor's oversight to add annoyance to one's quotidian duties. The greatest adjustment for most of my associates was our new parent's insistence on certain rules:

  • Before rendering a recommendation to clients, have another set of eyes in the firm do a double check.
  • Make sure agreements are signed before beginning an engagement.
  • Verify or refute any potential conflicts or appearances of conflicts before accepting a client.
  • Document any criticism of staff performance in case you need a strong foundation for firing them later.

The list of rules was actually much longer, but you get the idea. What we thought we heard was "Never assume that clients or staff will deal with you in an honorable way lest you be burned." This sad introduction to the reality of contemporary business caused many of my associates to leave before the merger was consummated. The maddening part of being forced to adopt these new protocols is that they turned out to be very good business practices that freed us to grow in a more managed way.

While many investment advisors never experience the change in culture and approach that accompanies a merger into a larger organization, most will experience stress that comes from growth. Assets under management and revenue do not create this stress--but rather the number of clients served and the number of staff hired.

In spite of the current unfortunate period of misery delivered by the markets that advisors and their clients are undergoing, the average advisory practice has doubled in size over the past five years and many have quadrupled.

What catches most small business owners by surprise is that firm growth often outstrips their ability to manage. What worked as a five-person firm won't work as a 10-person firm. What worked in serving 75 clients won't work in serving 150 clients.

Inefficiency's Sources

Pain points in an advisor's practice are easier to identify than to resolve, but problems consistently pop up when processes fail to create the client service experience that was promised. When firms grow quickly, people and systems often struggle to perform required tasks. Often these shortcomings point to the lack of a gap analysis or confusion as to what capabilities and steps are needed to do the work.

In planning each discrete activity like prospecting, or delivering quarterly reports, or preparing for a client meeting, it's a good idea to map out what's involved in each step and identify where and when the handoffs should occur.

Many firms have a "push process'' for moving from one step to another, meaning that when a task is completed, the accountable person forwards the project to the next stage in the process. The deficiency in this case is the lack of a "pull process'' that proactively nags for more information, or more data, or the completion of the step.

Inadequate staff training and knowledge also create problems. Most entrepreneurs do not have the time to serve clients and to manage staff--so the latter tends to get short shrift. In many cases, advisors conclude it is faster and easier just to do the task themselves rather than train somebody new--perpetuating the culture of inefficiency.

To resolve these often obvious workflow problems, advisors must align their processes to create a consistent seamless experience for clients and staff. Rendering advisory services is a synchronized effort, not a solo (or silo) performance.

Business Models

Three distinct operating models as an advisory firm evolves through its life cycle:

  • Advisor-centric
  • Client-centric
  • Process-centric

Please note I use the term "client-centric" here to refer to business processes, not the delivery of advice. From a management standpoint, we are trying to observe how processes affect firm efficiency.

In the advisor-centric office, each of the advisors has his own way of doing things. While functional in a solo practice, this structure becomes inefficient as advisors combine forces with the aspiration to achieve economies of scale and build practice continuity.

The client-centric office often evolves as the next stage in a practice's operating model, especially as an advisor moves upstream to wealthier clients with more complex financial lives. In this scenario, the processes are often customized for each client or client segment. Clients get great attention, and in many cases have staff dedicated to serving them. It's common for a client-centric practice to acquire capabilities in response to specific client requests.

Advisors in this model often take one-off business from important clients--for example, managing a small 401(k) plan even if the practice is not adequately set up to handle deposits. It's difficult to provide education to employees and serve the total client relationship without some compromise in service to other clients. The client-centric office is costly, often requiring numerous systems and, in many cases, extremely experienced people with diverse skills and knowledge.

Eventually, the best-managed practices migrate into a more systematic process-centric model in which the client approach is standardized while the advice continues to be customized for each client. While processes may vary by segment, those firms achieving optimal efficiency have a protocol for how they interact with clients from the prospect stage through the ongoing relationship.

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Benefits Achieved

Larger practices often fear building an inflexible, unresponsive model that makes the firm hard to work with from the client's point of view, but the benefits of institutionalizing an approach tend to outweigh the limitations for several key reasons:

  • Most practices are experiencing overhead increases faster than revenue growth;
  • Much of this rising overhead goes to the additional labor (and the attendant expenses such as office space, hardware, software, and training) that is required to maintain a customized platform;
  • The farther an advisor gets from each step, the less sure she can be that things are done correctly--clear protocols allow the advisor to monitor errors and breakdowns.

In addition to managing costs and maintaining quality control, a clearly defined process also impacts the practice's ability to grow. In the inefficient practice, advisors spend far too much time mired in operational details that are better delegated to people with an aptitude and discipline to manage them. When principals lift themselves out of the daily toil of moving data through the system and focus on adding and serving clients, they increase the top line and client satisfaction. A study of some of the country's leading ensemble practices, performed by Moss Adams LLP for Pershing Advisor Solutions, LLC, found that process-centric practices were surpassing client-centric practices in revenue and assets per client by about 20% (For a copy of the updated Mission Possible report, e-mail pasinformation@pershing.com)

It is true that the practices whose processes were client-centric were also doing quite well. In an era of increasing margin pressure, time pressure, and talent squeeze, however, advisory firms must find ways to lower their break-even point and drive greater productivity while still delivering excellent advice to their clients.

Efficiency's Cost

Often I hear critics complain that there is too much emphasis on growth and profitability, which in their minds entails a compromise in the quality of advice provided to clients. In reality, profitability and client service can grow together.

Clients suffer when the advisor is overworked, unfocused, and inefficient. Clients are at risk of getting bad advice when their advisors lack a process of peer review or quality control, or have a dysfunctional approach to compliance supervision. Errors tend to occur in greater volume without a protocol for handling each step and a process for handoffs.

Finding a good tension between checks and balances and responsiveness requires constant testing, but it isn't necessary to change processes frequently. Moreover, if your staff is trained (and cross-trained) properly, you begin to trust the protocols more.

That said, every firm should create a dashboard for assessing operating performance on a regular basis. Detailed metrics should focus on the number of calls per client; the nature of client requests (to observe patterns); the number of activities initiated, like accounting openings and trades; exceptions; errors; and staff time dedicated to certain functions. Trends in these metrics help to identify potential bottlenecks, deficiencies in training, or even the competence of the staff performing the tasks.

At a high level, advisory firms should observe measures including revenue per professional, revenue per staff, number of clients per professional, and clients per staff.

Complexity Increases

Most advisors I've met are anxious about complicating their business lives. But by creating definable and measurable processes, they may actually simplify the management process. As a helpful analogy, just think of how some of your less-organized clients came to you with a shoebox filled with documents--you brought order to their chaos, and an ability to measure and monitor progress towards their goals.

To grow a business that achieves optimal efficiency, productivity, and profitability so that you can serve your clients better, it is critical to develop a management discipline in which you have confidence.

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