From the August 2009 issue of Investment Advisor • Subscribe!

Formulas For Success: The Missing Link

The best run firms align operational efficiency and human capital

Most operational hazards arise from the ineffective management of human capital--yet far too many advisory firms view "operations" in the restricted context of software, hardware, systems, and platforms. Pershing Advisor Solutions recently published a white paper entitled Mission Possible II: The Link Between Operational Efficiency and Human Capital, which outlines a number of critical issues that threaten advisory firms from an operational standpoint. These risk factors include:

1. A broad experience gap between the owners of an advisory firm and their staff;

2. The absence of dedicated management;

3. An undervaluation of operations staff;

4. Workflow kinks.

Let's look at each of these risk factors in turn.

Experience Gap

It has been well publicized that the average age of advisory firm owners is increasing, currently hovering in the mid-50s. An age gap of 25 to 30 years between firm principals and the rest of the staff is not uncommon. With the institutional wisdom concentrated in one or two wizened wizards, an organization misses the leverage created by delegating responsibility to others. Further, it appears that many firm elders often have neither the time nor the patience to train others, or the tolerance for mistakes that come with learning something new.

Absence of Management

The business of financial advice is becoming more complex, and firm owners often fall behind in managing a growing enterprise with many moving parts. Most advisors direct their main focus to client service and keeping abreast of new developments in investment, risk management, and planning. At the same time, many do not actually enjoy managing people. For this reason, the best-managed firms quickly recognize the need to add individuals who will be accountable for executing the firm's strategy and making sure that the business is operating efficiently and effectively. But the initial cost makes it hard for smaller firms to invest in professional management, even though evidence shows that such strong management creates more profitable firms that grow more rapidly over time.

Undervaluation of Staff

While there is often a tendency to blame employees for poor performance and errors, firms must utilize a disciplined approach to proper employee selection and retention practices and match the right people to the right jobs. It is much harder to invest the time and energy in helping people develop than just to be their boss--at least short term. But with the addition of more operations staff comes the need to develop a human capital strategy that defines a firm's investment in its people.

The rate of turnover in operations positions is huge. The cost of turnover is also huge, with estimates running at 150% of a person's compensation each time an employee is lost. The best-managed firms view employees as an asset to invest in and upon which to derive a return, rather than a cost to be managed.

Workflow Kinks

As advisory firms grow in complexity, processes also need modification. More people in the mix means an increased risk of error with each handoff. The repetitive nature of certain work can be tedious for some, and the need for constantly adapting to new situations may be scary for others. The complex business being conducted by individuals not properly matched to job functions upsets the quality of the process. Further, most practices begin with all workflow geared to support the advisor. But as a firm adds new advisors, each will have personal preferences. An advisory practice that attempts to adapt processes to each unique professional is not sustainable over time. Eventually, the workflow will have to move away from being "advisor-centric" and become institutionalized, trainable, and repeatable in order to maximize efficiency.

In the course of developing the Mission Possible II white paper (for a copy, please e-mail me at mtibergien@pershing.com), we also observed challenges related to cultural dysfunction within growing practices, an over-reliance on technology as the solution to everything, and pricing models that did not fit the offering. However, it became apparent that the difference between the great firms and the merely good firms had to do with the use of people.

Assess, Then Correct

In many practices, the symptoms of inefficiency may not be apparent. Use the benchmarking process to observe patterns and trends; used properly, it will help you determine if your plane is losing altitude--before you hit the mountainside.

A proper assessment of your business requires the analysis of service errors, overhead expenses, compliance violations, client satisfaction, staff and client turnover, profit margins, and delays in getting things done right. Most advisors do not have a baseline for comparison of these data points, so initially you may be forced to set an arbitrary standard that is acceptable.

For example, you might have a tolerance for no more than four errors a year that cost the firm money. Such errors may include the failure to execute a sell order in a timely manner, or the failure to bill fees on the right amount of assets. When you identify the types of mistakes that you and your associates make, you can put some measures and training around these issues to minimize future failings.

Diagnosis of the problems may be the easy part. Implementing a new approach to doing business may prove a bit more challenging, especially for advisors uncomfortable with delegating, or for firms that have neither the time nor the talent to address the management issues properly.

Once you have begun to look at the patterns unfolding in your business, consider several critical questions:

o Is my strategy--and my optimal client--clear to employees?

o Does my organizational structure support my strategy?

o Do I have the right people doing the right things to execute my strategy?

o What measures should I put in place to evaluate performance around operational issues?

o What changes in my client service experience do I need to make to ensure consistency and focus?

Update the Model

Certain improvements can occur quickly, such as adjusting your attitude about the value of the operations staff. How do they impact the client service experience? Who can you call upon to help you work out the kinks? How will you involve them in the solutions and acknowledge their contributions? Firm owners must leverage their talent to the optimal level but still demonstrate respect to these individuals for what they contribute and how they impact your business.

The other steps around improving workflow--closing the age gap and hiring professional management--are a little more daunting. Solutions will become obvious as you define the business you're in and the client service experience you strive to deliver (see sidebar above).

"Process-centric" firms have many advantages over practices that customize their approach around either the advisor or the client, including scale, efficiency, and a low risk of errors. In an environment where it is increasingly difficult to find people who fit your culture, where margin compression necessitates better cost management, and where a proclivity towards mistakes will cost you business over time, the advisor of the future must examine his approach to business. Even more critical, the advisor of the future needs to think about who to hire, how to define their work, and how to manage this talent with the idea of improving productivity, not just handling more volume.

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