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Practice Management > Building Your Business

Opportunity Knocks

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As we’re all painfully aware, it looks like the four-and-a-half year Bush bull market came to a dramatic and abrupt end in the final quarter of last year. On October 9, 2007, the Dow Jones Industrial Average reached its all-time high of 14,165: as of February 28, 2008, the DJIA had fallen to 12,582, down some 11.2% in just under five months.

Even worse, the end doesn’t seem to be in sight, and probably won’t be until the subprime mortgage mess is cleaned up, and global oil prices begin to stabilize.

In the universe of independent advisors, once folks realized they were experiencing a major change in the financial markets, and not just an October surprise blip, the reaction was predictable. Most advisors battened down the hatches in anticipation of a drop in revenues from fewer assets under management and clients who were being forced into tightening their belts, and possibly even some client attrition. They started scrutinizing their expenses (with an even sharper pencil than usual); put a hold on capital expenditures such as upgrading their technology (who these days isn’t constantly planning to upgrade their technology?); and canceled their plans to expand their practices with additions to their staff, such as bringing in a young professional or two.

This was the reaction of the majority of advisors, that is, except the most successful, those who have enough experience under their belts to know that independent advisory practices get the substantial part of their long-term growth during down markets. Those advisors who are prepared for new clients will be able to use the coming turbulent months to take their firms to the next level. Those advisors who aren’t prepared for growth will likely see themselves and their staffs slowly sinking in the quicksand of new business from which they–and their practice–may never recover.

From Whence They Came

To understand why independent advisors actually attract the bulk of their new clients during bear markets, we have to start by taking a look at where their clients come from in the first place. Since independent advisors typically don’t market (they usually don’t need to), they tend to attract the financial consumers who were at one time susceptible to over-the-top marketing hype, which is to say, almost all financial consumers.

It’s usually only after a painful experience with a broker or agent/broker (or two, or three…), that it starts to dawn on these “clients” that their “advisor” might not actually be in the business of giving objective advice. That’s when they start looking for a better source of financial advice; if they’re lucky they stumble upon an independent financial advisor. (In fact, an advisor I know won’t even take new clients who are under 50 and who haven’t learned what the financial services game is really about from a broker experience or two.)

Now, even after the light is beginning to dawn on the more perceptive brokerage clients, as we all know it generally takes some kind of event to overcome inertia, and motivate a clients to change advisors, even if they aren’t happy with their current advisor. When we’re in a major bull market, as we have been since ’03, where anyone with the skill to fill out a trading ticket can make money, it’s hard for clients to bring themselves to make a move because things are going so well. But when the market changes, and the flaws in their “diversified” portfolios begin to show, that’s often incentive enough for clients who are beginning to “get it” to start looking for an advisor who gets it, too. So in a bear market, brokerage clients in numbers larger than any other time will be looking to make the move to an independent advisor.

Avoiding Chaos

On the receiving end of this client migration are likely to be independent advisors who haven’t done anything different to attract these new clients, and if they aren’t experienced enough to anticipate that these clients are coming, can be pleasantly surprised. Unfortunately, in a small business, even pleasant surprises are not always good things. As we’ve seen time and time again, in the independent advisory business, practices that aren’t prepared to handle an unexpected volume of new clients can quickly slip into to a precarious downward spiral, which I call Chaotic Growth.

First, it’s a very difficult thing for most advisors to turn away new clients, even if they and their staffs are approaching or have reached their absolute capacity. Once the resulting work overload kicks in, and everyone is running at 110%, 24/7, it’s almost impossible for the overworked owner/advisor(s) to recognize there is a problem, or do anything about it. Like their new clients, it’s usually not until some unpleasant event gives them a wake-up call that they try to take action: firm morale plummets and relationships fray, the burned-out staff begins to turn over, and the drastic drop in service quality leads to unhappy clients. Often a combination of all three happens.

The sudden realization that their firm is in trouble usually leads the owner/advisor to take drastic action, which, predictably, is not a formula for success. In an effort to cover the growing workload, the wrong people are hired, then inserted into the wrong positions with little or no training. Sometimes owner/advisors will try to buy themselves out of their jam, with expensive new technology, which can further drain their already overstretched resources, which can lead to another set of problems. Some throw a lot of money at the wrong consultant. Again, they’ll probably do some combination of all three, reinvesting a great deal of money back into their firm but with little to show for it.

Before the Gold Rush

The alternative for this recipe for disaster at worst and for a missed opportunity at best is to prepare for the new clients that your firm will undoubtedly attract during the current market downturn. Here are the elements that I tell my clients they need to position their practices for successful, systematic growth, rather than chaotic growth:

Have a strategy. Once the clients start flooding in, it will already be too late for you to take the time to figure out what you want your practice to look like. Do yourself a favor and before that happens, decide how big you want to grow, how many people you want to manage, and whether you want partners. Ask yourself who you want as clients, and what services you will need to offer them. Don’t forget your own personal needs. Ask yourself what job you really want and determine your exit strategy. If you don’t control your growth to get the practice/job/lifestyle you want, it will control you, and chances are you won’t like where it takes you.

Know your target clients. Armed with a clear idea of the kind of clients you consider right for your firm, it will be much easier to choose which of your new client prospects to accept, because you probably won’t be able to take them all. That way you can focus your limited resources on providing the services that your target clients need, keep the quality of those services high, and avoid the inefficiency of trying to be all things to all clients, on the fly.

Offer the right fee structure. I don’t want to descend into the fee vs. commission debate here, but the point is that the better you can position yourself as an objective source of financial advice, the more attractive you’ll be to new clients fleeing the brokerage world. Your fee structure should also be tailored to your target clients: These days, high-net-worth folks are showing increased interest in flat fees, for instance, while elderly clients with depleting portfolios and growing needs may require fees based on their total net worth, not just their investments.

Systemize your operations. When your firm is in growth mode, it’s essential that everyone from professional advisors to the receptionist understand exactly how every client is to be treated, what services they should get, how those services will be delivered, and what their own role is in that process. To maximize growth, flying by the seat of your pants won’t get the job done any longer.

Hire the right people. This is the most essential element: Starting a growth phase with the right employees in the right jobs, and having a detailed plan for when it’s time to add more people, and what jobs you’ll need to fill. Remember, there’s always a lag time between when you decide to fill a position and when you can find, hire, and train a person to do that job. With professional employees, it can take a year or more before they are pulling their own weight. Moreover, don’t forget training: you can shorten to a few months the time a new hire takes to start making an impact on your firm with an effective program to train them on the technology, systems, products, services, and processes that your firm uses to meet the needs of its clients.

The fact is that the current bear market can be the best thing that ever happened to your practice, or your biggest nightmare. I’ve found that those who believe opportunity will come, and prepare for it, always seem to be successful. Those who wait for growth and then react usually react badly. Here’s a good litmus test: If your firm’s not growing during down times, that’s a pretty good indicator that you’re not prepared.

Angela Herbers is a virtual business manager and consultant for independent financial planning firms. She can be reached at [email protected]


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