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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.

Solidify Financial Management

It’s not uncommon to hear a firm principal say, “I am not sure exactly how much money we made this year.” Not knowing what your profits are could be a problem; not knowing how you intend to make profits could be a disaster. Profit management does not just mean keeping close track of your cash flow. Effective profit management further entails that you determine how you’re going to make money. Questions you should consider include:

o How high should you set your asset management fees?

o Should you charge retainers?

o Should you charge hourly fees or institute a plan-by-plan fee for financial planning services?

o To which clients should you charge those fees?

o How do you control expenses?

On the bright side, preliminary data from AdvisorBenchmarking’s research suggests that RIA firms will return to positive profit growth rates in 2003, after an aggregate decline in net profits of 26.31% between 1999 and 2002. The recovering stock market is surely one factor responsible for that reversal of fortune, but another is the increased focus on profit management. Anecdotal evidence gleaned from AdvisorBenchmarking’s interviews with its research focus group members confirms that profit management is front-of-mind for most RIAs.

So RIA firms are already paying more attention to financial management. Let’s take a look at some key considerations and steps that might help you maintain effective financial management in 2004:

o Determine your financial focus. Ask yourself this: Is our firm’s focus on increasing assets under management (AUM) or increasing profits? Many RIA firms fall into the trap of measuring their success through assets, without regard for the underlying financial components. I’ve seen firms with twice the assets of another firm, but half the profits. You need to answer this question first, before you plan your firm’s financial management.

o Benchmark your firm’s financials. In turning the focus to profits, you should first examine your revenues and expenses and then calculate the resulting profit margin. These financial variables will not reveal much if you don’t know what the industry’s averages are.

One good source to benchmark your firm’s financial status is through our free benchmarking survey Web site,, or through other such services for advisors.

With a solid understanding of how your financials stack up against those of your peers, you can now move to manage the components that affect your profitability: assets, revenues, and expenses.

o Enhance revenue sources. If your firm is like most RIA firms, it’s likely that your revenues are not solely derived from assets you manage. Last year, RIA firms generated 23.4% of their revenues from financial planning or consulting fees, up dramatically from 11.5% in 2000. Without a doubt, these increased fees were triggered by an increased demand for planning services, as investors today require more comprehensive planning than ever.

This financial and wealth planning component is one revenue source over which you have better control than, say, the asset management fees. As such, consider maximizing the planning fees as a way to enhance revenues. One way to do that is through charging retainer fees. A growing breed of advisors has increased the use of retainers–those up-front payments made at the outset of the relationship. A few other firms charge retainer fees year after year to some of their clients. Those fees, while additional to the clients, often help enhance your perceived value to them. The client realizes that your services extend beyond mere asset management, and hence, you don’t just get paid through asset management fees.

Keep Growing Revenues

Another more cost-conscious way to enhance your revenue stream is simply to ensure that you charge fully for your financial planning services. Advisors are famous for underbilling for their services, especially financial planning. Just remember that your clients need your valuable service more than ever today, and you have the right to be fairly compensated for it.

o Do not reduce your AUM fees. While we had reported a decline in AUM fees among RIAs in 2002, we are by no means endorsing such a move. This is not a price-based business. This is a service and relationship-based business. Unless you have very compelling reasons to cut your fees, do not do it. I know an advisor who runs a very successful RIA firm in Minneapolis who told me that some of his prospects keep mentioning that this other firm down the street charges much lower fees than his firm. His reply to those price-wary prospects was something to the effect of, “I am aware that this other firm charges lower fees. And I’m sure that no one knows the value of their services better than they do!” And that’s where it ends. The prospects get it: There may be a reason that these services are cheaply priced. Investors, especially HNW investors, appreciate what they pay for, and they also know that quality service comes with a price. My message here is not to cut your fees simply to enhance your value proposition.

o Impose or maintain a minimum. According to AdvisorBenchmarking, 73% of RIA firms have minimum account size requirements. The reasoning behind it is very simple and can be illustrated with an example. Last year, the industry’s median expense per account stood at $2,331. The median AUM fee stood at 1.10%. This means that an RIA firm needed accounts of no less than $211,909 in order to break-even ($2,331/1.10% = $2,331 in revenues). And since you’re in business to make profits and not just to break even, that account size should be even higher.

From the example above, you can see how a firm without a minimum might end up losing money on clients with accounts less than a certain threshold. Needless to say, that threshold will differ from one firm to another depending on its size, staff, and a host of other factors. The important lesson here is that minimums are essential to profit management. You do not need more clients to turn high profits–you just need bigger clients.

o Control your costs. Knowing which costs to control is no easy task. The dynamics differ across the board, without much unity even among firms of similar sizes. The option of outsourcing certain operational functions has gained popularity among advisors in the last few years, but our research still doesn’t capture specific areas where outsourcing has been effective.

Further, our research shows that the biggest cost for RIA firms is salary and compensation, making up as much as 76.5% of total expenses last year.

Some would argue that this expense is, therefore, one where cost cutting would have a substantial effect. I strongly recommend against cutting salaries or slashing staff simply to control costs for two important reasons. First, our research tells us that, as of last year, each RIA firm employee served 34 clients on median, up from 31 served the year before. So if anything, you likely need more staff to serve your growing client base. Second, I firmly believe that enhancing staff productivity is a much better way to maximize personnel leverage, which ultimately reduces costs for the practice.

So how do you control costs? Keep close track of your expenses and try to break them down for each client. More important, realize that proper billing for your services, not cost cutting, is what will keep your margins healthy. And if you have concrete evidence that outsourcing certain operational functions would reduce your costs without compromising quality, then do it.

Now, with a well-defined business strategy and a solid financial management model, your chances of doing well in 2004 might be a bit higher than others. There is no guarantee that it will be an ideal year, just a better one.


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