At the end of April, we launched our Kaleido Scope advisory firm business assessment, a free online valuation that enables us to give firm owners an overview of how their firm compares to a well-run firm in each of six key business areas: management, human capital, finance, client service, operations, and sales and marketing. As of early July, we had a total of over 300 assessments.
Initially, we created the Kaleido Scope to give firm owners a quick snapshot of where their business is today and the areas in which it can be improved. Even in the short time it’s been active (we’ve had advisors taking the assessment since last October in beta testing), we’ve realized the assessment is a much more powerful tool than we expected. Not only do the results give us insight into individual firms, they also provide a gauge for the independent advisory industry as a whole. What’s more, because we’re seeing a steady, ongoing stream of results (rather than just a snapshot in time), we’re seeing industry trends as they develop.
Unfortunately, the trend we’re currently seeing is that, for the first time in our experience, firm revenues are growing at a healthy pace but profitability is declining—a disturbing trend, especially considering that we’re well into a bull market with the prospect of a market downturn looming.
The Kaleido Scope assessments consist of a series of 163 statements about an advisory business to which a participant can offer one of six responses: strongly agree, agree, neutral, disagree, strongly disagree or don’t know/not sure. The responses are graded on a point system and totaled into an overall assessment score, ranging from 0 (bad) to 100 (excellent). Results so far range from a low of 39 to a high of 82, for an average score of 69, which we’d rate as very weak.
To test how accurately firm owners gauge the status of their own firms, we had our advisor clients take the assessment and compared the results to what we already knew about their firms. The firm owners were surprisingly accurate about where their firms were in all areas.
Here are the trends we’re seeing so far that are contributing to the industry’s dwindling bottom line:
Client service. We currently see two trends that signal problems in the client service area. First, firms are scoring very high in client retention, losing less than 5% of clients per year. While you might think this is a good thing (and sometimes it is), when combined with the fact that 79% of those same firms scored very low in attracting new clients, it’s actually an indication of a problem.
The low acquisition rate results from not getting as many new client referrals as one would expect. So one has to ask: What is the perspective of the clients who are not referring their friends? The inordinately high retention rates suggest that many of today’s firms are underpricing their services, not overpricing like many trade publications and past industry studies have shown. At the same time, many of these firms overservice their clients.
Why is this a problem? Although it may keep clients in the fold, too low pricing for too much service can actually create a negative image, as if your services are not as valuable as higher-priced alternatives. And over-servicing can be annoying to clients. Consequently, clients don’t feel good about making referrals.