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Tear It Down to Build It Up

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The financial advisory business is in the midst of an important transition: Advisors are starting to talk about the need to raise the bar for operations people. After recently completing a white paper for Pershing Advisor Solutions on the future operations model, at Moss Adams we have come to the conclusion that soon operations will become as important as excellence in investment management.

It’s clear that for most firms, investment management is no longer the unique proposition it once was. The independent advisory community has historically outpaced the rest of its financial services brethren by offering cutting-edge investment products. These days, though, Wall Street and Hartford have caught up–opening their platforms to a broad array of products and making ubiquitous fee programs, asset allocation, and even financial plans.

In this environment, how do you distinguish your advisory practice with clients? I recently posed this question to an advisor who needed help with his strategy. I wanted to know why he thought his clients stayed with him. He quickly said, “investment performance.” I was dubious, so I asked permission to pose the same query to some of his best clients. His largest client told me he stays with the advisor because “his staff makes me feel important.”

The advisor business has become a relationship business, and the key to relationships is how clients are treated. As your practice grows, that increasingly means “operations”–everything from client intake to execution of the plan, from trading and reporting to compliance and financial management. We have observed through our studies and with detailed interviews with 41 leading advisory practices, however, that advisors’ processes can’t keep pace with client demands and firm growth. These advisors tell us they are reactive and not strategic about how they address operations issues, and their staff is overwhelmed.

Every advisor we interviewed said that technology is not the key to resolving inefficiencies in their business. In fact, most said their systems are not used to their full potential. The reason? They have not been able to hire and retain the right people to make their software and hardware sing.

What’s more, many said they were quite frustrated with their staff. There was usually a painful silence when the question was turned to “How do you think your staff feels about you?” Apparently, this affliction is a communicable disease.

The symptoms of this ailment show up in staff turnover, which for lower-level administrative people averages more than 20% a year. In small firms, turnover of operations staff averages nearly 40%–meaning many firms have a revolving door. The reason this occurs is because individuals are often mismatched to the job when they are hired and are required to do multiple tasks which are not necessarily compatible nor even within their skill set, but are certainly functions the advisor does not want to be (nor should be) doing himself.

When we hear of a problem such as staff turnover, we ask if the cause is the people you are hiring, the expectations of the job, their lack of training, or a lack of respect for their value to the firm? Significantly, advisors are so busy that they wind up using duct tape and a tighter grip to keep the problem from bursting. (The Pershing white paper is available by contacting [email protected]).

Ultimately, as advisors grow their practices and their frustration with low morale, errors, exceptions, and staff turnover boils over, they find several commonalities:

  • Staff jobs and therefore expectations are poorly defined.
  • Staff is viewed as a cost to be controlled, not an investment on which to get a return.
  • The advisors themselves lack interest or ability to prepare their staff for success.
  • There is no clear leadership, and certainly no training.

The Three Transformation Points

We’ve found that far from being random problems, tension between principals and staff occurs at regular, and very predictable, points in a firm’s growth curve. Practices typically go through three major transformations in which advisors experience financial distress and a dramatic change in their control of both clients and staff. These transformations are often a function of size measured in revenue, but also sometimes the number of clients they are serving.

These watershed moments occur at about $250,000 of revenue, when a solo advisor or small firm hires the first administrative staff; then again at about $2 million, when the firm realizes it needs to add capabilities and expertise to its operations; and then at $5 million, when the firm becomes a large organization with departmentalized expertise, running multiple processes at the same time.

These transformation points are most visible when we look at the overall cost of administrative, support, and management staff as a percentage of total revenues of the firm (see chart below). Note how each transformation leads to a two-fold loss in efficiency: Firms are likely to add capabilities ahead of revenue and are usually inexperienced in running the new model. Therefore, they struggle to run efficiently.

How do you know you’ve reached such a point? Usually it shows in increased client complaints, exception reports, staff turnover, response time to clients, and overhead as a percentage of revenue. That’s because as a practice evolves, the capabilities of its staff gets left behind. Your decision is whether to outsource or hire talent. The dilemma is that while you might be able to afford the tech tools, you can’t necessarily afford the staff unless you make some fundamental changes in your business model.

To solve the problem, advisory firms need to deconstruct then rebuild their operations to keep pace with growth. A good first step is defining your optimal client. Only then can you build a client service experience that fits this client instead of inefficiently trying to serve multiple classes of clients with a diffused service approach.

As desirable as it might be to customize the experience for each client, it is difficult and costly to do this until you achieve critical mass. So until your firm is generating at least $4 million to $5 million in revenue, it will be important for you to standardize the client service experience–meaning you will need to systematize the way in which you work with clients. Otherwise you will be consumed by costs and distractions and diversions in how you spend your time.

A systematic approach to operations gives firms the ability to monitor capacity at each step, budget and plan for upcoming workloads, and seek additional resources if demand exceeds capacity. Part of deconstructing and reconstructing is recognizing that as you evolve, your tools change gears. The first stage is an advisor-centric operations model designed for the advisor himself; the second is the process-centric model where you follow a standardized process and allow only a few exceptions; the third is a client-centric model in which you customize your approach by client. The reality is that when you do not have sufficient critical mass, you cannot afford to customize how you function.

Growth-oriented firms need to think more strategically about how they are integrating their technology and administrative staff into their client service experience. This begins with several key acknowledgements:

People drive firms, not technology. Technology must be combined with the right people–those with a specialty and career in operations and the skills and experience to lead in that area.

More sophisticated technology requires more sophisticated staff. Administrative staff with only minimal training can no longer handle the complex applications coming out of the industry’s R&D departments. Firms must continuously upgrade the knowledge and skills of operations staff.

Your investment in operations talent will impact your bottom line and growth prospects. Attitudes toward operations staff should change from expense reduction to investing in talent and experience.

It’s not about managing overhead–it’s about quality. Too often, when management focuses on operations, the goals are how to minimize costs or reduce overhead. The emphasis should be given to quality, consistency, and safety. No matter how low its costs, no firm can be successful without maintaining the highest quality of client service and regulatory compliance, and that requires a culture of quality in operations.

Leadership, not Technology

The holy grail of operations is not best-of-class technology, but the inspired leadership of an experienced and dedicated chief operations officer supported by a talented team of operations specialists. Currently, the biggest weakness in advisory firms is the lack of leadership and a career track in operations. Principals rarely have the time or direct experience to devote to operational issues. The most successful firms are hiring experienced staff from larger investment organizations for the strategic role of operations management and development.

When COOs become as heavily recruited in the profession as investment specialists and CFPs, then the business of financial advice will have made an important transformation. If you have not reviewed the way in which you manage operations for at least the last two years, and if you are suffering from morale or turnover problems and are seeing your overhead percentage increase, it is time to examine if you need to deconstruct then reconstruct your business, and whether you need to add a dedicated and committed operations leader to pull your back office to the front of the house.

Mark Tibergien is a nationally recognized specialist in practice management for financial services firms, and partner-in-charge of the Securities & Insurance Niche for Moss Adams LLP, the 10th largest CPA firm in the U.S. You can reach him at [email protected].


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