Victor Hugo once said, “The future has several names. For the weak, it is the impossible. For the fainthearted, it is the unknown. For the thoughtful and valiant, it is ideal.”
With the stock market holding on to its yearlong rally and investors coming in droves to seek your help, the future of the RIA business holds great promise for advisors, but it is far from “ideal.” Competition continues to grow, expenses are still rising, clients are more demanding, and the list of challenges goes on.
But as Hugo suggests, our perception of the future is a byproduct of our own strengths or weaknesses. As we approach a new year, the biggest strength you can have as an advisor is to have a solid business plan in place. Your plan should include, but not be limited to, the following essentials: financial management, staff relations, client acquisition, service offerings, technology, operations, succession planning, client relations, and investment management.
While each of these is important, we’ll focus on just two critical areas: business strategy and financial management, the cornerstones of every successful business plan.
Many advisors frown at the thought of creating a business plan. In fact, our multiyear research at AdvisorBenchmarking, in which we examined the best practices of more than 600 RIA firms, shows that less than 14% of all RIA firms have a written business plan. At the root of this tendency is the notion that many advisors still treat their firms as practices, not businesses–practices that don’t warrant setting goals and measures, instituting checks and balances, or even writing a business plan. But whether you call your firm a practice or a business, whether you’re a sole practitioner or a multipartner wealth management firm, it’s essential to define your firm’s strategic goals.
Define Your Strategy
Defining your business strategy doesn’t necessarily mean that you have a clear vision of where you want to be in, say, seven years, although it’s helpful to formulate an ideal future. Questions you should consider when creating your business strategy include:
o Do we want to remain a planning-focused firm with a retainer/fee revenue model?
o Do we want to add more wealth management services to our existing service lineup?
o Do we really need more clients, or should we focus on capturing more assets from our existing clientele?
o Can we go it alone, or do we need partners or even acquirers?
o Should we offer different levels of service for different types of clients?
The above questions are not exhaustive, but they do illustrate the difference between questions asked to determine strategic goals versus quotidian ones. The latter would include decisions such as “Should we switch our financial planning software?” The software you use is an operational issue that, while crucial, does not affect your firm’s overall strategic direction.
So now that we agree on what strategic business goals should encompass, let’s take a look at a step-by-step approach to help you define and create your firm’s business strategy.
1) Identify your firm’s capabilities. This should be relatively easy: List the products and services you offer and the strengths your firm has. Let’s name our hypothetical firm ABC Advisors. ABC’s stated strengths might read like this: “Our firm has a seasoned staff of CPAs and attorneys providing our clients with top- notch estate planning and tax services,” or “We provide various investment models suitable for many types of investors,” or “We have solid relationships with other professionals providing us with a steady flow of client referrals.” Make sure not to confuse your capabilities with your differentiators. Your capabilities do not have to be unique to your firm. They are likely to be available at other RIA firms. Your objective is to draw a picture of what your firm offers now and how well you offer it. A typical firm’s capabilities matrix would cover the areas of investment management, wealth management services, staff structure, client acquisition, tenure, operational efficiency, and so forth.
2) Identify your firm’s challenges. Every firm has challenges. ABC Advisors might be suffering from the following problems: time-consuming manual operations, small but demanding clients who don’t generate enough revenues, difficulty in attracting enough qualified high-net-worth clients, or clients’ loyalty that is directed to one senior planner and not to the firm. Your goal in this step is simply to identify what these problems are and how they affect you. Don’t worry–yet–about finding the solutions.
3) Define your strategic goals. Now that you know your strengths and challenges, the next step is to determine your firm’s goals. Those goals need to be based on a clear understanding of your capabilities and your challenges. Using some of the examples from the first two steps, ABC Advisors might define the following goals for the firm after examining both its capabilities and challenges: Maximize profits from the biggest client relationships by offering them a wider array of services; preserve the principals’ valuable time when dealing with smaller clients; and improve the size and quality of clients acquired through outside professional partnerships. These goals are a function of capabilities defined in the first step (e.g., top-notch estate planning and tax services and solid relationship with outside professionals) and the challenges defined in step two (e.g., demanding clients who consume time but don’t generate enough revenues, and difficulty in attracting qualified HNW investors.)
4) Determine how to implement the strategic goals. With strategic goals clearly defined, the real question is how to implement them. Using the goals defined in the step above, ABC Advisors might decide to take the following actions:
a) Segment the client base into two tiers, based on size and profitability to the firm.
b) Offer the top tier more personalized wealth management services under a special high-touch client program and charge a one-time fee for joining the program.
c) Begin charging additional fees to the bottom tier of clients for offering such wealth management services.
d) Improve communication with outside professionals regarding the firm’s ideal client profile to ensure the acquisition of investors with higher net worth who meet the firm’s needs.
This hypothetical implementation plan is a direct reflection of the firm’s strategic goals defined in step C: Maximize profitability from the most profitable relationships, control the time and resources devoted to the smaller clients, and acquire higher-net-worth clients through professional partnerships.
5) Establish timelines and responsibilities. With the business goals and implementation plan defined, it is most critical to set timelines for implementation, as well as to assign ownership to appropriate people at the firm to execute this strategy.
6) Evaluate and reformulate. You should also check on the progress of these goals on a periodic basis and reformulate your plan of action if necessary. In the case of ABC Advisors, one area of evaluation is likely to be the impact of the client segmentation on the smaller clients. The firm may sense disgruntlement among its smaller clients, who now will have to pay additional fees to receive wealth management services. Such an occurrence is a natural downside of the strategic goal to devote the firm’s resources proportionally to the client’s profitability to the firm. ABC will have to handle the problem wisely, ensuring that it doesn’t alienate and lose those smaller clients. But with a solid understanding of its strategic goals, the firm is better suited to make decisions that take into account its big-picture strategy and not just the possible client problem at hand.
And with that, you now have a business strategy in place that will direct most of your important decisions throughout 2004.