Finding the Right Strategy for Success

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.