From the June 2009 issue of Boomer Market Advisor • Subscribe!

10 Questions for: Brian O'Toole

Genworth Financial Wealth Management's CEO Brian O'Toole talks one-on-one about advisors' foremost practice management issues. According to O'Toole, it's time to get tough.

We gave a snapshot of the Q&A in our June print addition. Now here's the rest.

Boomer Market Advisor: How can advisors calm clients and ensure they're retained?
Brian O'Toole:
[Advisors] need to first assess the damage to the financial performance of their business and part of that is analyzing the performance or the current condition of client relationships.

BMA: Is it smart to be analytical, to bring out the investment policy statement and say, "Hey look, this is what was signed, this was what was agreed to," or is it ?more about letting clients vent?
I think it's both. We're telling advisors you need to take a sober and responsible look at your business today in terms of its financial performance. That's an important place to start because most firms are down now on average probably 40 percent in AUM revenue, which means that their profits are down typically between 60 percent and 70 percent.

BMA: So what about reducing expenses and improving efficiencies?
Advisors typically have about 40 percent of revenue as overhead and of that, about half is staff compensation. Look at reducing staff only if absolutely necessary. You might look at taking an across-the-board reduction in staff salaries from 10 percent to 20 percent. You might freeze salary increases, suspend bonuses and profit sharing for some period of time until the business recovers adequately. You can defer any capital expenditures that won't have a material impact on the business over the next 18 months and then put an immediate freeze on anything that's nice to have or discretionary, including travel and entertainment. Anything that's not an absolute necessity you should be looking to cut over the next 12 to 18 months.

BMA: And what about efficiency?
[Advisors] need to do a client segmentation exercise because they need to identify and focus on the profitability of their client relationships. Most advisors do not understand where profitability begins and ends within their client base.

BMA: They don't do the 20/80 exercise?
A lot say they do, but it's typically not strong enough and as often as they should. Our research shows typically it's not really the 20/80 rule, it's about a 30/70 rule. The top 30 percent of their client base generates about 70 percent of the revenue but they contribute to almost all of the profitability. Over the years as they build their business [advisors] tend to carry with them an enormous number of unprofitable relationships. And those unprofitable relationships eat into capacity and absorb the time and resources necessary to really grow the business.

BMA: So it's time to get tough and start firing clients?
It really is. You may find that you have liability that continues to move forward with those relationships. So we strongly suggest that advisors work very closely with their compliance departments and with their broker/dealers and manage some of that activity. Advisors need to understand the difference between profitable and unprofitable clients.

BMA: Is it best to outsource the administration at this point?
[Advisors] need to delegate and outsource all non-essential activities. If you look at the Moss Adams study as an example, advisors spend 35 percent of their time and capacity on portfolio management and the operations and technology to support it.

BMA: Just doesn't need to be, huh?
That's an enormous use of capacity. And I think most advisors today would argue that they can get better investment management capability throughout outsourcing, they can diversify the risk of investment management decisions and they can take a lot of that burden off of themselves because buy and hold isn't working very well.

BMA: And what about leveraging technology?
Any time that you can leverage technology to improve the efficiency of your organization, you should do so. We recommend most often to move toward a paperless office, number one, and number two, have a strong client relationship management technology in place. There needs to again be a sober communication to clients that their financial planning goals and objectives are going to have to change. Go through some financial psychology analysis, a financial DNA as an example so they can begin to help their clients better understand their emotional response to this kind of volatility.

BMA: So it all goes back to behavioral economics then?
Absolutely. In-depth rediscovery is critical to the process. It's relationship building, or building them back. We think that some clients are going to need to redo their investment policy statement. But they're going to need to redo those investment policy statements based upon hardcore financial planning and the data, not on emotion.

BMA: Is now the time to be doing some kind of client survey to ensure that their service standards are where they should be?
Absolutely, we recommend that. Now here's the challenge. When you talk to advisors, you'll find that very few have any kind of mechanism for surveying clients or judging ongoing client satisfaction. Are you familiar with Advisor Impact and Julie Littlechild?

BMA: I am not, no.
They're a firm up in Toronto, and they do client audits; a major part of that is client satisfaction. Those surveys can be customized to the needs of the individual advisor. This is a great time to do that. Not only does it give you insight into overall client satisfaction, but research indicates that when you survey clients and you look for their input in regards to client satisfaction, that, in itself, improves client satisfaction. The only challenge is that it tends to be relatively expensive. That process can typically cost somewhere close to $2,000 to implement.

BMA: So is now the time to be making this kind of capital outlays?
I think in the long run it's worth it, but in a resource-challenged environment, it may be difficult. That's the tradeoff. Typically that kind of an audit will uncover numerous investment opportunities and cross-selling opportunities.

BMA: So it's going to pay for itself?
It can pay for itself relatively quickly, but again in a resource constraint environment those are some of the hard decisions that advisors have to make. As a firm we have also implemented this concept called Net Promoter Score. Fred Reichheld wrote a book called, "The Ultimate Question." He is a member of an organization called Bain and Company. And Net Promoter Score is a very simple mechanism for advisors to consistently survey and monitor overall client satisfaction. It's based on asking the question, "Based upon your experience with our company how likely would you be to refer us to a friend or colleague?" And it has a range between zero and 10. Nines and 10's are promoters, seven and eights are indifferent and zero to sixes are detractors.

You subtract detractors and you will arrive at a net promotor score for the firm. This is a very simple and easy way for advisors to consistently look for that feedback. It may ultimately be the short-term solution with the thought being that as we begin to recover we'll look to do a more in-depth client audit and satisfaction survey.

BMA: But at least it's something to get them started, right?
Exactly. But typically when you're doing a client satisfaction survey and audit it really needs to be done by a third party. Most advisors don't know the right questions to ask and because the client knows that it's not a third party they don't tend to be as candid and as open as they need to be.

So client service plan is important. [Genworth is] also trying to get advisors to monitor how they spend their time. In our Mastery program we have something called the 1QA Success Principle. And the 1QA Success Principle is that advisors who spend 60 percent or more of their time in client-basing activities grew four times more than those who spend between 30 percent and 60 percent. So one of the most important things that an advisor can do is to make sure that they're spending their time in either financial problem solving, client relationship management or business development. Those are the client basing activities that lead to growth and success in their business. What you find is that because advisors are pulled in a thousand different directions, they're so busy multitasking or as Dan Sullivan calls it, "The ceiling of complexity," they lose focus on spending their time on the most productive activities.

BMA: Again, it comes down to the capital outlay question on the current environment?
What's interesting is, if you look at the use of technology within the advisory community, it's pretty high already. But again, reduce costs through adjusting your staffing, perhaps renegotiating leases, deferring all non-essential expenses or nice-to-haves and then improve efficiency wherever possible. Those are the things that can have immediate impact. The next thing is client retention and we have a six-step process for client retention. And that starts with acting with conviction. This is a time to provide leadership and guidance and information and education in these difficult times.

BMA: Filter the noise, huh?
Advisors have to - But it's hard because you go to the office every day and your clients are emotionally distraught. This is a very challenging time. In our business, when times become most difficult, that's when you have to do the most work. Even though revenues are declining the paradox is that capacity is being challenged by client retention and business development. So that makes the situation more difficult. We started out by saying, "Look, you need to act with conviction and you need to get yourself highly educated about what's going on in the global financial marketplace because clients are going to look for clarity." That's a story you've got to be able to tell.

BMA: What else are you suggesting?
The next thing that we suggest is listening actively. And here is where you get into the empathy that's required and letting [clients] go through the five stages of loss. It's the psychological side of the business, but the fact of the matter is that people are going to be angry, they're going to be fearful, they're going to be anxious and you've got to get through all of that emotion before you can sort of come out the other side and say, "Okay. So given that, what can we do to move forward and realistically assess the situation that we're in today."

BMA: This is the therapist hat.
Yep. And then reinforce the decision making process and the importance of process. We want to make sure that clients understand that they didn't do anything wrong that we're in sort of unprecedented times where diversification has had very little effect in terms of risk management and we're going to suggest to them that they're still pursuing some of the finest investment management capability that we think is deliverable in the marketplace. So we try to reinforce the logical side of process.

BMA: Work the plan?
Yes. And then improve communication. You're going to have to be extremely proactive and highly educational in this environment, you're going to have to be very responsive. When clients call in and they've got questions and concerns and they need you to scratch the itch you need to do it very quickly. And then we're also suggesting as kind of a - just as part of an overall strategy to deliver those small little positive surprises with the clients whenever you can to remind them that at the end of the day it's about a relationship and it's about a relationship for a long time or for a lifetime and that we're looking to maintain that relationship as a trusted advisor and to provide all random acts of kindness wherever possible.

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