Do clients see your firm the way you want them to? (Illustration: Gary Waters/Ikon Images/Corbis)

Last April, we launched an online questionnaire — called Kaleido Scope — that gives advisory firm owners an overview of how their business compares with a well-run firm. Their answers to a series of 163 questions are graded on a point system and totaled into an overall assessment score ranging from 0 (bad) to 100 (excellent). As of July 1, we’d run over 163 business assessments on advisory firms, with results ranging from a low of 39 to a high of 82, and an average score of 69, which we’d rate as very weak.

Initially, we created the Kaleido Scope to give firm owners a quick snapshot of where their businesses are today and the areas where they can be improved. However, in the short time the Kaleido Scope has been active, we’ve realized that the assessment is a much more powerful tool than we expected. Not only do the results give us insight into individual firms, but by combining all the results, we’ve obtained a gauge to measure trends in the independent advisory industry as a whole, as they are developing. Unfortunately, the biggest trend we’re seeing so far is that while revenues are growing at a healthy pace, industry profitability is rapidly declining.

According to our data, two factors are contributing to the industry’s dwindling bottom line. First, firms are scoring very high in client retention, with many losing only an average of 2% of their client base per year. While you might think this is a good thing (and sometimes it is), when combined with the fact that those same firms are scoring very low in attracting new clients, it’s actually an indication of a problem, which shows up in client referral rates, which are down from 36% to 23% per year; and in closing ratios, which are down from 70% to 50%.

What’s going on? We believe that in response to a perceived threat from media-hyped online advisory platforms and growing numbers of breakaway brokers, many firm owners today are starting to panic, making knee-jerk attempts to solve the problem. We see many firms today exploring ways to reduce AUM fees or adopt alternative revenue models (such as flat advisory fees) or doing anything they can think of to increase client service and revenues, including throwing money at new technology, marketing, recruiting and M&A — all without regard to the effects on the bottom line. Our assessment data shows that 87% of owners are making these changes without any clear plan or vision for what the resulting business will look like.

To address these new challenges, and many of the long-standing challenges that advisory firms wrestle with — such as growth, profitability, employee turnover and overworked owners — we recommend that owner-advisors take a step backward and recreate their businesses with a clearer vision of what their firms are and what they want them to be.

To do this, we take our clients through a four-step process that we call X-Cell. The X-Cell process that we have developed is researched, designed and tested to help an advisory firm determine what makes them truly unique. Through this process, firm owners figure out what they are really offering to which clients, and with this clarity they gain the knowledge of what they are really selling. The result is that they can quickly evaluate new trends that hit the marketplace to determine the services that their firm should offer and to whom. They are also able to articulate their unique value in a way that resonates with their existing clients, prospective clients, employees and centers of influence.

Over the years, we’ve transitioned many of our client firms into new service models using this simple X-Cell process, and all of them have shown remarkable results. Here are some of the ways these firms have become better businesses:

1. The clients become clients of the firm. Most clients develop an attachment to their advisor. Yet we’ve found that through a consistent client experience (regardless of who a particular client’s advisor is) and clear messaging about what the firm is doing for its clients, most of them become “clients of the firm.” This makes transitioning clients from one advisor to another, in the event their original advisor retires or leaves the firm, relatively seamless. It also makes clients less likely to follow an advisor who moves to another firm and more likely to stay with the firm in the event it’s sold.

2. Training advisors and employees is easier. Once you have clarity on your service model, it’s much easier for everyone in the firm to understand what they are supposed to do and why. Because all your processes and procedures are based on providing a consistent client service, they are relatively simple for everyone to understand and execute.

3. Firm profitability increases. Firms with clients who are similar can service them more efficiently. Both advisors and other employees can handle more accounts. When problems arise, which they inevitably do, they are usually the same problems, which makes them easier to handle. What’s more, the firm gets economies of scale on everything from onboarding new clients to marketing to technology systems.

4. Firm morale grows. Over the years, we’ve written frequently about the benefits of employees feeling that what their firm does is important. We’ve also noticed that efforts to instill employee esprit de corps are frequently undermined when employees aren’t really sure what their firm does. X-Cell solves that problem as well, by making the firm’s mission and its client models clear to everyone from the top down. Once employees have a clear vision of whom their firm helps and how it helps them, they’ll understand why it’s important and, by extension, why their efforts are important, too.

5. It’s easy to create consistent messaging. The four X-Cell questions help owners identify the uniqueness of their firm through their service model. Then they can develop a sales and marketing program to attract the right clients to their firm. The X-Cell process also helps them develop clear, consistent messaging.

But effective messaging and marketing have to be based on reality, not wishful thinking. Once you have a clear picture of what your firm offers and to whom, and a model for how your firm delivers consistently great client service to every client, every time, you’ll have a story to tell that will resonate with your target clients and that everyone in the firm can communicate. Equally as important, everyone in the firm will have a crystal-clear vision of what the firm does and why.

6. The marketing plan becomes very easy to develop and much more effective. Once you know what exactly makes you unique, marketing can be more focused. The best target markets are groups of people who “self-identify”: They know they are members of a particular group, and they act like it by participating in activities together, belonging to the same organizations, attending meetings or conferences together and often reading the same publications. All this group activity makes them easier to reach, either in person or with marketing materials and advertising. They also tend to talk to one another, which greatly increases referrals rates and, usually, closing ratios.

7. Closing new clients becomes really easy. Clear and consistent messaging is also your best sales tool. Most target markets have specific needs, and usually those needs aren’t being met very well. So when an advisor comes along who says, “We specialize in serving clients just like you, and we are experts who know exactly what you need,” it really gets people’s attention. Combine that with a referral from someone who’s also a member of their group, and your firm virtually sells itself.

8. You can charge more for your services. Independent advisors and financial planners have always had a problem articulating their value proposition. Once firms know exactly what they are and whom they work for, their consistent messaging tells existing and prospective clients exactly what their value is and why it’s more valuable than mass-market advisors and online advisory platforms. Consequently, firms that use the service models they create in the X-Cell process can charge more than other advisors and aren’t susceptible to mass-market downward pressure on pricing.

The X-Cell process enables firm owners to create a solid foundation with which a firm can not only address today’s challenges, but can quickly and effectively adapt to the challenges of the future. For the complete, step-by-step guide to transitioning the firm you have today into the firm you really want to have, visit Kaleido.net to download our X-Cell white paper.