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Practice Management > Building Your Business

Finding the Right Strategy for Success

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Financial advisors preach diversification as the key to managing risk while building value in portfolios. Diversification in a small business like your practice is not usually as effective, since you have finite resources to dedicate to building your business. If you spread these resources too thinly, you’ll dilute your momentum and undermine your ability to take your practice to the next level of success.

In our work with the FPA creating the annual Financial Performance Study of Financial Advisory Practices, we’ve found that one of the key factors to the success of any advisory practice is identifying and implementing what we call its “strategic differentiator.” Our studies show that many advisors have made strategic choices that are differentiators. However, many of these advisors have not gotten past the thinking stage into the action stage, and as a result, have not translated that strategy into tangible success. To achieve meaningful benefits from your strategy, you must commit to a strategic differentiator: Your culture, processes, product and service offerings, staff, and financial performance must all embody the strategic choice you have made.

Using research from the management consulting group of Tregoe & Zimmerman, Caryn Spain of Applied Business Solutions Inc. in Seattle has identified nine possible differentiators in every business. Under license with Ms. Spain, Moss Adams applied her concepts to the advisory world. We found there are eight strategies that advisors use to differentiate themselves and their practices from other advisors in their geographic region:

Niche Market. These are firms specializing in serving the unique needs of a particular clientele, such as business executives, inheritors, doctors, and so forth. This strategy shows a fairly equal distribution of solo and ensemble firms.

Dominant Local Firms. These are one of the three largest practices in a particular market. Ensemble practices comprise 82% of dominant firms.

Technical Specialty. These are firms specializing in a particular service–like estate planning–or a type of financial product, such as long-term care insurance. Fifty-nine percent of specialty firms are ensembles.

Unique Sales Method. These are firms that use an unusual marketing approach such as client seminars, direct mail, or targeting specific professionals for referrals. Solo firms make up 55% of these firms.

Local Presence of a Major Brand. American Express Financial Advisors and AXA Advisors embody this approach. Sixty-eight percent of the advisors using a major brand are solo practitioners.

Sell More Services to Existing (non-financial planning) Clients. These are advisory firms that are affiliated with an accounting, legal, insurance, or investment firm that offers a comprehensive array of services to clients who are currently served in a more narrow capacity. These firms are equally divided between solo and ensembles.

Low Cost Provider. These are practices that compete largely on the basis of charging lower fees for widely available services. Seventy percent of these firms are solos.

Famous Person. These are firms that rely on the public persona and reputation of one of its owners to attract clients. Ensemble practices make up 80% of the firms relying on a high-profile advisor.

While these strategies are not necessarily mutually exclusive, each choice does require a specific commitment of resources. More importantly, the benefits to your firm change depending on which is your dominant choice. For instance, consider the tactical differences between a firm with a “technical specialty” and “niche market” firm. A niche market firm identifies a specific client market, then determines and delivers the products and services that are relevant to that market. A technical specialty firm, on the other hand, offers a particular technical skill or product, then seeks out markets to whom that service or product will be of value.

If you are a niche firm, your resources will be committed to tracking the needs of your named market and then finding the right products and services to fulfill their needs. If you’re a specialist, you will be investing resources in maintaining the high level of specialty, but primarily you will be concentrating on finding and developing new markets for your particular expertise.

What’s more, some specific strategies are often more suited to either solo or ensemble practices. For instance, practices that are built around a famous person are four times more likely to be ensembles. That’s largely because the time and energy necessary to maintain a public presence usually requires an advisor to hand off much of the actual work with clients to others. On the other hand, one might think that low-cost firms would be large assembly lines with great economies of scale: actually, 70% of firms that compete on cost are solo practitioners. Larger firms, it turns out, have higher fixed costs (mostly related to staff) and consequently have less flexibility to lower compensation costs than do their solitary peers. Also, because financial advice is a relationship business rather than a commodity, low fees rarely offer a marketing advantage. In fact, they can do just the opposite by damaging professional credibility. So larger firms with more marketing muscle rarely feel the need to lower prices when other successful strategies are available.

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What’s Most Popular?

Our studies show that the most popular strategic differentiators are either niche market firms, which make up 25% of advisory practices, or local dominance (21%), with technical specialty, sales method, and major brand each representing about 10% of the industry. Competing on cost or the fame of a principal are used by very few firms.

The data in the table at right provides some insight into why some of these strategies are so popular, and suggest opportunities with under-exploited differentiators. For instance, the three most popular strategies (niche firms, dominant firms, and technical specialties) also generate the most revenues per professional. But notice that dominant firms, with $254,000 per professional, command a considerable margin of 25% more than the next-highest strategy (technical specialty), and more than twice as much as the lowest strategy: a major brand.

Dominant local firms employ the most successful strategy by far in terms of income: generating an average $113,000 per principal. Their dominance creates broad revenue opportunities, and their larger size allows them to achieve both professional leverage (doubling the number of clients per professional) and operating efficiency. This suggests that the resources required to achieve the dominant position in your region will probably be well spent.

At the other end of the spectrum, while staking out the low-cost position clearly deserves its lack of popularity–this approach generates median revenues of only $129,000 per professional–reliance on the fame of a principal results in larger revenues ($175,000 per principal) than its tiny market share might suggest. Building a firm around a high profile advisor can also translate into a very healthy bottom line.

The small group of firms pursuing this strategy in our study were sharply divided between firms that had great profitability and those with operating losses. This was primarily due to the challenges faced by often distracted high-profile principals in managing the productivity of other professionals and the high costs of maintaining prominence. Still, these firms as a group were able to deliver the second highest median income, $94,900 per principal.

Although chasing fame is not for everyone, attaining some degree of local or regional prominence is not as difficult as many advisors believe. The list of advisors who, through radio, local television, a newspaper column, a book, or public speaking have received considerable public exposure is quite long. A quick overview of their formulas for success reveals, in most cases, nothing more than a simple and direct delivery of well-accepted financial principles, illustrating both the power in what the vast majority of professional advisors do, and their potential to reach a wider audience.

Picking Your Differentiator

So how do you decide which differentiator is right for you? Here’s a short list of issues that you need to consider:

o Evaluate how your firm would fit with each of the strategies, compatibility with your structure (solo or ensemble), your expertise, how you process work and deliver client services, and how you commit resources.

o Review your existing client base for concentrations that might lead to a tighter strategic focus.

o Consider your competition with each strategy. Are there any openings or areas where your firm could easily dominate?

o Conceive a clear, concise message that will resonate with each potential market. Usually this simple exercise will tell you everything you need to know about which strategy is the right one.

Each answer requires a review of what resources you need to achieve fulfillment with this strategy. Any diversion of resources from your strategic choice will result in dilution and thus low return. The fear, of course, is that you pick wrong: That’s why so many advisors hedge on their strategies. But if you have done your homework, your probabilities of success are much higher by choosing a strategy, than if you had no conscious strategy. Remember that a new strategy is a long-term vision, not a short-term event. The recommitment of resources to your choice will be concentrated on new clients while you continue to harvest income from your existing client base. If you remain focused on your strategy, over time you will see a complete transformation of your practice.