Nobody ever asks the most important question: 'What's your termination rate?' Because your termination rate is to some extent a determination of how happy your client base is. Instead, people always ask 'What's your performance?,' when they may not understand that you may have had hot numbers in a category that was hot. . . . Your readers have a very low termination rate because they have a small client base and they service the hell out of them, but when you step up to the wirehouses, they have a very high termination rate. Among large advisors you have a 10% to 12% termination rate; wirehouses are double that number, and small independents are probably down around 5%."
That torrent of words came from the lips of Ken Fisher, who is about as ubiquitous as any investment advisor has ever been. From his long-running weekly "Portfolio Strategy" column at Forbes, to his frequent appearances in the electronic media, to his writings in the trade press, and to his heavy presence in television advertising and in your mailbox–and probably in your clients' mailboxes as well–Fisher's prominence is as evident in the financial services world as it is in the consciousness of consumers. But don't mistake his ubiquity and media savvy for shallowness. Fisher is a businessman who has built an advisory firm that is as successful in attracting clients and assets–and keeping them–as it is in public relations.
As the most successful RIA in the universe as measured by his $35 billion in assets and more than 900 employees, Fisher Investments is in many ways the benchmark that other advisory firms should measure themselves against (it was no accident that when Focus Financial Partners' Rudy Adolf described his firm as the largest wealth management firm in the country following a spate of recent acquisitions, he was quick to qualify it: "We're the largest, except for Ken Fisher, of course.") Adolf's qualification was accurate in another way, when he mentioned that while Focus Financial's firms provide comprehensive wealth management, Fisher Investments only provides investment advice to its 18,000 clients. True, but Fisher's focus, history, current strategy, and future goals–and the way he gets and services those 18,000 clients–are not only instructive to advisors much smaller than him, they can also provide some helpful guidance to firms that wish to emulate his success, if not his precise business model. But make no mistake about it: Fisher is very opinionated not simply on what constitutes a good investment, but on what constitutes a good investment advisory firm. By turns contrarian, frank about his past mistakes, and critical of his peers and the industry, Fisher has much to offer.
Retaining Quality Control
Take, for instance, his biggest criticism of the industry. "There are a million things you can say that our industry doesn't much do that most other industries do, and it leads to a mindset that I think of as rubbish–that you have to be either a distributor or a manufacturer." Fisher's experience over time has led him to believe that when you separate manufacturing from distribution, "you give up quality control of the other side. So if you want to be a totally quality control guy, you can't do it."
Fisher is obviously that "totally quality control" kind of guy. "If you're just going to be a manufacturer, you give up control of who your client base is; if you're just a distributor, you really have no control of the product." He admits that the potential for a conflict of interest exists when a firm both manufactures and distributes, but argues that as long as you fully disclose that you just "sell your own product only, and everyone knows what you're doing," then you can go ahead. In fact, he thinks that the rest of the industry's separation of the two arms of investing "is something that I've found to be an attractive, kind of contrarian play," that provides him with an advantage over
his competition, especially in light of his "Three Questions" approach (see sidebar, below). Fisher says he "doesn't want some distributor to say to me, 'You have to take on this client and put up with him, or I'll jerk my other clients away from you.'"
Focus Groups and Client Proselytizing
"If you were to compare" the advisory business with most other kinds of mainstream business practices, Fisher says, "the level of general business orientation just doesn't exist." Going back to his point on termination rates, Fisher would like to see an industry standard on those rates developed and disclosed to clients. "If people had to correctly calculate their termination rates and disclose them–that would tell people a lot."
There's another business practice that advisors would do well to emulate, he argues–the use of focus groups to fine-tune everything from product offerings to prices to the service approach.
Fisher notes that Chip Roame wins plaudits, "rightly," he says, for the consumer panels he runs at his CEO conferences, where actual consumers who could be, and often are, advisors' clients speak frankly about their needs and their experiences interacting with the financial services world. Fisher Investments does focus groups, and has instituted more than one program using what it learned in those groups. "When you do focus groups, one of the things that will pop out at you is that consumers don't have a good sense of the menu of financial services available to them. They know a very limited menu."
That's how the Fisher Friends' lunches were devised, where in a given city Fisher will invite a dozen clients at random to have lunch at a local restaurant, hosted by "the sales guy from that city." That Fisher rep will have the clients introduce themselves, then leave the room. "Suddenly there are 12 clients talking. So far, so good," but Fisher says he was surprised by what happens next: "I assumed that whoever was the most disgruntled in the room would likely bring down the others." However, it works out, he says, "that the others bring up the disgruntled. They work on it to figure out why he doesn't get it, and they in effect become salespersons for the firm. We don't do anything other than the introductions, but the effect of this has been mind-boggling and has lowered our termination rate."
Division of Labor
So what is Fisher's termination rate? "It bounces around 3% and 4%," he says, admitting that his firm is "different than most of the folks you see, because A) we're bigger, and B) we have an exceptional degree of having thought out a specialization of labor, and of function. So we actually provide quite a lot of client service in a very dedicated way. Our people who sell, don't do post-sales service at all–we separate that." That separation also has compliance benefits, he argues, because
"if the salesperson did something to bamboozle the client, when the passoff occurs, the investment counselor [service person]–who's not paid by commission–will actually uncover the problems the salesperson may have created. Whereas if the person both sells and services, if the salesperson does a bamboozle, there's nothing to catch him. So in a sense, if you think of protecting the firm, that passoff acts as a prophylactic–protecting the firm from any misleading representation."
That specialization among his 900 employees is aimed, he says, "at delivering personalized service in a machine-like format."
"If," he says, "you take your standard well-meaning individual RIA, he's got his clients' best interests at heart, and he's got only so many clients, then maybe he doesn't have a problem. But if you're actually trying to grow a firm, and you have to operate through other people, now you're running into problems."
Fisher is also proud of the methods he uses to attract clients, including what "most of your readers would perceive as excessive use of direct mail, and advertising in all its formats." He boasts of being the first to have an infomercial, a 30-minute affair starring Hal Holbrook which started running last November.
Doing what others eschew is something Fisher learned early on. "My father was a really good analyst of businesses," he recalls, "and he drummed into my head this notion–what are you doing that your competitors aren't doing–because it was a question he regularly liked to ask businesses when he was analyzing them–what do you have that's proprietary?" So Fisher's goal is to "come up with things that other people aren't doing," such as those millions of direct-mail pieces every year, and annual client-only seminars in cities across the U.S. Those seminars, he boasts, are "within a two-hour drive of 95% of all Americans." The only non-clients who can attend those seminars are guests of the client. Fisher Investments has run the numbers on clients who attend the seminars (he says about half of that 18,000 total each year) and those who don't. The conclusion? "The seminar programs drop the termination rate–people who go to the seminars," he reports, don't terminate.
It also keeps his clients comfortable, because, Fisher says, "the investment phenomenon takes a long time, and there are lots of ways to get uncomfortable." He uses the analogy of someone who's depressed and "decides to go off their meds–they'll be okay for a while, then they'll have trouble–you've got to keep them taking the medicine." Thus the seminars, and the Fisher lunches, and the constant written communications, even the DVDs and CDs that the firm sends out to clients on a regular basis, and the dedicated service person/investment counselor. That harkens back to his point about specialization of labor and the challenges that lack of specialization pose to smaller advisors. "When you have the person that sells and services, when they go out to sell, they're not available to take the clients' calls. When the person's upset–they've just heard that the market is going to go down because Anna Nicole Smith died–they'd like to get an answer to that right now. The longer they have to wait, the more uncomfortable they are." So the smaller advisor "gets caught chasing his own tail: He sells a little bit over here, he services a little over here, and he's got too many things to do all at once," so when the markets are causing clients discomfort, the smaller advisor is in a "totally defensive mode of just servicing them, which means he's not doing any selling, which means he can only get so big."
So what can the small advisor take away from the Fisher approach? "It's all about specialization of labor," Fisher says. First, he recommends, "determine the highest value added you provide and the lowest value added you provide. Can't you give the lowest value-add you provide to someone else, who maybe could do it better than you could?" After all, he suggests, "there's some reason you're in the business, and it's probably more about doing" the higher value-added thing than the lowest. "After you carve off the lowest," and hand it off to someone else, continue to do the same thing with "the next lowest, and the next lowest, and the next lowest. There is a point to scale . . . but the purpose is not scale for the sake of scale, the purpose is specialization of labor."
Editor-in-chief James J. Green can be reached at email@example.com.