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Strategic Business Management

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In today’s challenging market environment, financial advisors are struggling to help their clients gain control over their finances, but few pay close enough attention to how they generate their own income and manage their own personal financial affairs. To help advisors do this, it will be useful to take a historical look at the market (from the post-dot-bomb bust in 2002 until today) to gain some broader perspective. As Winston Churchill once said, “the farther back you can look the farther forward you can see.”

In October 2002, the Dow stood at 7,591 and rose to a high of 14,279 on October 11, 2007 — for a total gain of 88 percent or 13.5 percent compound growth over the five-year period. The October 2002 DJIA of 7,591 was of course down from the Jan. 14, 2000 high of 11,723 — representing a 41 percent compound drop in 18 months. However, from Oct. 11, 2007 when the Dow reached a high of 14,279 to its recent low of 6,440 on March 9, 2009, the cataclysmic 54.9 percent drop represents one of the most dramatic events in U.S. financial history.

Let’s take a brief look at the period covering the 1960s through today on the DJIA.

’60s: Decade low on 6/20/62, DJIA was 536, and decade high on 2/4/66 was 995; comp. growth: 16.7%

’70s: Decade high on 1/11/73, DJIA was 1,052, and decade low on 12/6/74 was 578; comp. growth: -45.1%

’80s: Decade low on 5/21/80, DJIA was 759, and decade high on 10/9/89 was 2,791; comp. growth: 15.6%

’90s: Decade low on 10/11/90, DJIA was 2,365 and decade high on 12/31/99 was 11,497; comp. growth: 14.2%

’00s: Decade high on 10/11/07 DJIA was 14,279 and decade low on 3/9/09 was 6,440; comp. growth: -54.9%

From the data it appears that the current significant drop in the Dow from the high in October ’07 to the current low (March 9, 2009), which represents approximately a 54.9 percent compound rate of decline over the last 17 months, is significantly steeper than the drop in the ’70s of -45.1 percent. Now, let’s take a look at the last 10 years of the Dow and examine the impact it might have had on your business.

Clearly, from 2000 to early 2002, the Dow was relatively flat, and then we had two steep drops, with a resultant sudden improvement at the end of ’01. The following year was tough for the Dow and yet from early 2003 the market vaulted upwards back to the levels we saw from 2000 to 2002. Then for the period covering 2004 to mid-2006, the market rose from 10,000 to 11,000. In mid-2006, we began the dramatic rise to the point where we topped out in Oct 2007, whence began the precipitous drop to the levels we see today.

Where are you going?

In order to look forward to a post-recession economy, we need to look back and ask some questions as to how you have managed your client’s investments:

1: What did you do with your clients’ investments in 2001 when the Dow dropped from 11,000 to about 8,400 before rebounding back to 10,000 at year’s end?

2: What did you do with your clients’ investments in 2002, when the Dow dropped from above 10,000 to around 7,400 and took a long time in all of 2003 to recover back to 10,000?

3: What did you do with your clients’ investments from 2004 to 2005 in a slow-growth market?

4: The questions as to what you advised your clients to do from the period beginning in 2006 to the high in late 2007 is moot, since the growth allowed the opportunity for most clients to make significant returns.

Since I am not an investment advisor, but someone who has financially guided numerous individuals and companies over the past 35 years, allow me to lay out a strategy which I believe will be helpful to your business in the next 12 to 18 months.

When it comes to my selection of an investment advisor (whom I have been with for a long time), I want someone who can and will provide any or all of the following:

- Works with me to discover my personal financial objectives, including my long-term objectives for retirement

- Assesses my entire financial situation (all major holdings including home equity, art, stock options, etc.)

- Designs a customized investment plan that offers a realistic opportunity to achieve my goals

- Screens the industry’s best service providers to identify those that offer services that complement my goals

- Monitors the providers and replaces investments if they fail to meet my objectives

- Tracks the providers to be sure they don’t stray from the investment style they were hired to implement

- Monitors my portfolio constantly and recommends adjustments to my strategy based on conditions in the capital markets, changes in my life situation, and progress towards my goals

- Provides education and guidance to help me understand my investments and to keep my goals in sight and portfolio on track regardless of current market conditions

- Feels my pain directly on the bottom line when times are tough

Investment advisors, like all other financial professionals whose earnings are based on performance, will undoubtedly feel the pinch in this disturbing market collapse and slow recovery. There is no doubt that your earnings will be affected in the short-term, so your task is to do everything you can to lower your personal and business operating overhead. Just as investors have been forced to make tough financial decisions, you too must do the same. You need to apply “breakeven analysis” on yourself just as businesses do all the time. Take your Total Fixed Costs and divide them by your commission rate. For example:

- Total Business and Personal costs (after reducing where possible): $13,000 per month

- Commission basis for your earnings (I am making a middle assumption here): 28%

- Monthly breakeven gross sales required at 28%: $46,428

Now simply look at the gross sales number required, evaluate this number in light of current market conditions, and set this goal across your entire client roster to see if it is possible. Since your commission basis is not generally under your direct control, it stands to reason that you must carefully analyze and evaluate your fixed operating overhead, and see where cuts can be made. Naturally, it is ‘crucial’ for you to utilize a financial accounting tool (I prefer QuickBooks Pro over all other software) on a strict and rigorous basis.

I am constantly amazed and astounded to see how this requirement is avoided by financial professionals. Without being armed with financial data on a monthly basis, you are financially ‘out of control.’ Without taking a long, hard look at your expenses, there is absolutely no ability to control those costs. A monthly P&L, delineating every expense you have, will give you strong insights into where and how reductions can be made. I worked with a C-level executive, earning six-figures-plus, who simply operated on the philosophy I call, “expenses rise to meet income,” and when his company suffered a downturn and his income was cut by 23 percent, he was devastated. After completely entering his income and expenses for 2008, and then spending some considerable time with him, I was able to reduce his operating overhead substantially, refinanced some high-interest debt (he never even looked at it), and got his financial life back in control. As I said to him: “We never plan to fail, we just fail to plan.”

What you know for sure is that at some point in the future, this financial crisis we are in will end. Those who take the time now to attend to their clients’ needs, even if it produces little net income now, will reap huge rewards when the pent-up demand for financial products lets loose. Notwithstanding the fact that some of your current clients have suffered significant losses in the current market downturn, you also need to focus a great deal of attention on building a new base of clients.

Your choices for selecting a target market can either be a “red ocean strategy” — trying to outcompete the competition and dislodge clients from other advisors (like rowing a boat with one oar, the outcome should be obvious), or you can adopt a “blue ocean strategy” and embark on a course of action that will make the competition irrelevant. (I strongly recommend that you read “Blue Ocean Strategy” by Dr. Chan Kim and Renee Mauborgne. This book was on the business bestseller list for almost 18 months). Here is some blue-ocean thinking that might you might find motivating.

I graduated from the USC Graduate School of Business (MBA) in early 1972, which turned out economically to be a disastrous year to be looking for a new job. The economic outlook was bleak, and in fact in 1971, then President Richard Nixon imposed wage and price controls. The 90-day freeze was unprecedented in peacetime, but such drastic measures were thought necessary. Inflation had been raging, exceeding 6 percent briefly in 1970, and by prevailing historical standards, such inflation rates were thought to be completely intolerable.

There were about 70 MBAs and few were landing jobs. We all had a stack of similarly outlined resumes, and so I decided to be a contrarian. I purchased some extra fine paper stock from a well known paper company, and had the paper cut 8 1/2 ” by 11 1/8th. I also had my resume offset-printed at a local print shop.

On the top 1/8 of my resume I paid for a strip of USC Crimson to be printed. When a recruiter would gather the resumes and tap them on the table to get them into a neat pile, one would stick out 1/8 of an inch — mine. I received at least six to eight calls from recruiters who gave me ‘kudos’ for being innovative. I have taught that lesson over the past 37 years that I have been teaching and, of the well over 5,000 students I have been in contact with, that is the story they remember the most. The point I am making is to watch what the competition is doing and do the opposite.

In 1979, I started an accounting and business management firm, and had to begin getting clients. Trying to dislodge a client from a competitor was a total waste of time, so I “reached beyond existing demand.” I applied to teach at the USC medical school, dental school and law school. I taught a course in practice management, general managerial accounting skills and some investment strategies (using The Intelligent Investor by Ben Graham as my resource). I knew full well that there would be a lag period between the time I met these ‘future clients’ and their need for my services, but I kept in contact with at least 90 percent to 95 percent of them.

The dividends were huge, and in a period of two to five years, I had built up a significant number of these professionals who needed the services of my accounting firm. In fact, from 1978 to 1986 I spoke at literally hundreds of business seminars, and kept on teaching my practice management courses at USC, UCLA and Pepperdine. I spoke at hundreds of medical seminars and symposiums, legal practice management courses, and also expanded my client list to the music industry, using the same marketing strategy. It was the legal application of what bank robber Willie Sutton said when asked, “Why do you rob banks, Willy?” “Cause that’s where the money is.”

Those who take the time now to show their clients that they care, by investing time into being a problem solver, will be the first to reap the rewards when we come out of this downturn. The pent up demand for investment vehicles which provide safety and growth potential will be enormous, and who better to turn to for advice than someone who was there in the tough times. Additionally, take the time now to begin to build a new layer of non-customers, and convert them into a stable and growing community of new clients.

Errol Gerson is the principal at the Gerson Group – Management Consultants and provides strategic financial, management and financial planning to mid-size companies (less than $100m). He also teaches business management and entrepreneurship at the Art Center College of Design ( in Pasadena, Calif.) in Pasadena, Calif.