Find Your Thundering Herd

There’s an old Randolph Scott Western called The Thundering Herd, where one of the characters says, “Being in love ain’t going to hurt him. Getting hitched is where the trouble begins.”

I had a flashback to this movie recently as I read a column by Bob Veres on practice dysfunction (“On Dysfunction & Org Charts,” available to subscribers at www.bobveres.com). It was very compelling. Bob captured the psychology of the entrepreneur quite well by highlighting the conflict between wanting to go it alone and wanting to do it with others: the business owner’s version of “getting hitched.”

What Bob is talking about is the dilemma of whether to remain solo or commit to growing an ensemble practice, i.e, a firm comprising multiple professionals. Apparently, there are many advisors who feel much guilt about wanting to remain solo practitioners in light of the clamor to get bigger. Those planners’ distress is magnified because most humans, like the buffalo, prefer to follow the herd. In a stampede, after all, the view only changes for the lead bull. Following behind is much more comfortable, because we don’t know what risks await us up ahead. Moreover, there is safety in numbers. If we can rely on benchmarks, rules of thumb, and best practices to make decisions about our business, surely there is a greater chance of survival.

Fair enough–we’re social animals. Once we accept this fact of human psychology in general and admit its application to entrepreneurs in specific, our challenge is to find the right Thundering Herd. Will it be a group that follows the lemmings, swims with the turtles, or runs with buffalos? Will it be groups of advisors who have a sense of purpose and a direction that not only allows us to protect our flanks but also prosper? Or will we fall in with a group that jumps from fad to fad, only to wallow in mediocrity and self-limitation?

In our 2004 FPA Financial Performance Study of Financial Advisory Practices, we found that there were indeed herds of advisors who were flourishing (a feature on the study can be found on page 66). Some were solos, some were ensembles, but all had characteristics that differentiated them from the rest of the pack. Most notable were practices that committed to either niches–a specific client market–or technical superiority–a specific planning specialty. Remarkably, they completely flipped the 80/20 rule.

According to Pareto’s Constant translated into the financial planning business, 80% of your business comes from 20% of your clients. It doesn’t have to be that way. The better practices have managed to flip-flop it into a 20/80 rule, putting the majority of their client bases in their target markets–their sweet spot, if you will. In fact, according to our 2004 FPA Study, those firms that have 80% of their clients in their target market generate nearly 3 times more annual revenue than those who live by the 80/20 rule (see “Staying on Target” below), or about $1.35 million compared to less than $500,000. Dramatic? Sure. But this makes sense because all advisors have a physical limit on how many clients they can serve, so why not make most of them your optimal clients instead of suboptimal? You’ll understand them better, serve them better, and provide that service much more efficiently with less time, effort, and staff involved.

What really caught my attention was that our analysis found that advisors who focused on smaller clients but who had 80% of them in their “sweet spot” still had higher gross margins and greater personal income than those who overdiversified their client base with a handful of larger clients.This was true for solo practitioners as well as ensembles. It seems the theory that the only way to succeed in the advisory business is to attract high-net-worth clients may be more fiction than fact.

My point is that client size is not the most compelling thing advisors should change about their business–client focus is. This appears to be intuitive to most advisors. In this same survey, advisors told us the two biggest things they would change about their practice would be clients and staff (see “What Advisors Wish” chart at right). What inhibits them from changing either is their reluctance to make a commitment to a certain type of client or a certain business model.

What kind of clients did the top firms focus on? When they picked a niche, the most successful practices identified a specific client market like small business owners, professionals like doctors or professors, widows, divorcees, gays and lesbians, or born-again Christians, to name a few.