December 9, 2010

Top Ways to Differentiate Your Practice in 2011

During 2010, the registered investment advisory (RIA) industry felt the impact of the bear market—in fact, some firms have still not bounced back from the financial crisis. The RIA landscape was dramatically reshaped by clients’ demands for more of their advisors’ time and for reassurance from their advisors. The good news is that advisors, investors and consumers expressed a boost in confidence in November, with major indexes all reporting higher levels, reflecting the increased confidence. Investment advisors were more optimistic not just in November, but for the last three months. And the Advisor Confidence Index, which measures advisor sentiment in the economy and the stock market, has been improving since August 2010.

To-do List:  Focus on Communication and Service

Difficult times can be opportunities for well-grounded advisory firms to grow. Many financial professionals are doing all the right things, including staying close to their clients, as well as increasing their focus on communicating with clients—a trend we have recorded throughout 2010 and one that we have long advocated. The ability to maintain a firm’s strategic objectives while quelling client concerns has never been more important.

As proactive communications are crucial, especially during difficult times, spending time with clients is also critical. In the latest AdvisorBenchmaking report, advisors ranked client acquisition and marketing as the area which they feel they most need to improve (according to 47% of survey participants in 2009 and 74% in 2008). They also named finding new clients (79%) and communication with clients (55%) as the most challenging areas of their business. Yet for firms that excel at relationship management and client communications, it appears that finding new clients is a natural outgrowth of that strength. In fact, profitability can be directly tied to time spent with clients. Firms that spend more than 60% of their time with clients have nearly four times the profits of the next-most-profitable firms (see chart at top).

To-do List:  Have a Marketing Strategy

Half of advisors surveyed think that increasing marketing and networking will lead to more success. It’s interesting to note that while 47% of advisors said that client acquisition and marketing is the area that needs the most improvement, 61% percent of advisors don’t have a marketing plan in place.

As advisors look forward to the next five years, 79% say the most important business growth driver will be referrals from existing clients—the same key growth driver we have seen in past years. Since advisors’ most important goal is to increase AUM (according to 53% of advisors), 2009’s growth puts them on the right track and we think that will continue going forward in 2011. The industry as a whole is optimistic about meeting its growth target—almost half of advisors surveyed (42%) expect that they will grow their business, as measured by AUM growth, by 11%-20% over the next five years. However, this forecast is not as optimistic as it was in 2007, when almost half of financial professionals (44%) were planning to grow their practices by 30% or more in the next five years.

Remember that though it is important to have a marketing strategy, it is equally important to be able to adapt that strategy to changing environments. This will enable advisors to start prospecting again when the time is right.

To-do List:  Have an Exit Plan

Advisory firms continue to face daunting transition issues as advisors age and contemplate retirement. Only one in three firms are adequately prepared for retirement, according to a study by Pershing Advisor Solutions LLC. AdvisorBenchmarking study findings reveal similar facts: Advisors often overlook the key role of succession planning in building and protecting their business from the start. Yet with the average age of advisors around 50 in the last few years, a lack of exit strategy is the biggest threat to advisors’ businesses (29% of survey participants found this to be the top threat in 2009 compared to 21% in 2008). Be sure to make succession planning a part of your regular business strategy and planning—long before you leave the business.

Looking Forward

We believe that with the right strategic approaches, the industry has a bright future ahead. We hope that it will be a better year for the markets, for your clients’ portfolios and for your businesses. To position your practice effectively, stick to your strategic business plans. Give your customers more face time, along with the services that they want and products that you have educated them on. It will go a long way in making sure your clients are happy and stay with you for the long haul.

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