Some advisors offer too much for too little, making it difficult to serve clients effectively -- and profitably. (Illustration: Matthew Hollister)

The financial planning business model has undergone a number of transformations since it was created in a room at the Chicago O’Hare Hilton in 1969 by a group of securities salesmen looking for a better way to market mutual funds. Their solution was comprehensive financial planning, which reportedly worked quite well until rising oil prices tanked the stock market in the late ’70s.

At this point, planners turned their efforts to recommending tax shelters — primarily oil and gas and real estate — until the Tax Reform Act of 1986 eliminated the deduction upon which those shelters were based. So planners switched to offering variable annuities, which offered tax-advantaged investing in the bull stock market that had started in 1982.

Then, the stock market made a major correction in October 1987, and planners turned to Modern Portfolio Theory to better reduce client risk with allocated portfolios — creating the asset management business model that the industry still uses today and transforming planners from salespersons into portfolio managers.

However, not everyone was quick to jump on the asset management bandwagon. Wall Street took a firm stand against retail asset management, petitioning the Securities and Exchange Commission to prevent advisors from charging AUM fees. But by the late 1990s, the lure of ongoing fees on growing portfolios proved too attractive, and even the wirehouses consented to let their brokers manage client assets.

Business schools tell us that this is the normal growth curve for new industries: starting as “mom and pop” businesses delivering a needed service, experimenting with various business models until they get it right. Then they experience great success until large corporations finally take note and move in, typically using their resources to increase quality and their size to drive down prices.

But financial planners have been spared such a corporate takeover for the past 15 years because digital technology has allowed them to increase their service quality. Instead of cutting prices, Wall Street increased them, leaving planners as the comparatively low-cost provider of high-quality financial planning and asset management services.

Unfortunately, Wall Street wasn’t the only industry to notice the success of financial planners’ retail asset management. Enter the digital advisory platforms (commonly called robo-advisors), which started providing asset management to retail clients at a fraction of the cost of independent financial planners — and undermining the current AUM business model of the independent financial planning industry.

At the same time, a flood of breakaway brokers has increased competition for independent advisory clients, creating a perfect storm of new market pressures. We believe that the independent planning world is already feeling the effects of both pricing pressure and more competition, and that it has already begun to transform its business model once again.

But unlike many observers, we don’t believe this is such a bad thing. In fact, it’s just what the financial planning profession has been waiting for. With AUM becoming a commodity, the focus is shifted to financial planning and other services. To continue to compete in this new business environment, financial planners will have to successfully articulate this new value proposition to their clients and prospective clients.

Problem is, most financial planning firms still seem to be finding their way. Our analysis of the current state of the planning profession comes from our Kaleido Scope Practice Management Assessment, an online questionnaire that gives advisory firm owners an overview of how their business compares with a well-run firm in each of six key practice management areas: management, human capital, finance, client service, operations, and sales and marketing.

Initially, we created the Kaleido Scope to give firm owners a quick snapshot of where their businesses are today and the areas in which they can be improved. In the short time the Kaleido Scope has been active, though, we’ve realized it’s 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 the independent advisory industry as a whole. Furthermore, because we’re seeing a steady, ongoing stream of results (rather than just a snapshot of the previous year, which forms the basis of most advisory industry surveys), the Kaleido Scope reveals industry trends in real time, as they are developing.

Profitability and Pricing

Two key trends that we’re currently seeing is that industry profitability is rapidly declining, while firm growth is beginning to decline as well. According to our data, two factors are contributing to both problems. First, firms are scoring very low in attracting new clients, which can be seen in falling client referral rates (down from about 36% to around 23% per year) and declining closing ratios on the new client prospects they do get (down from 70% to 50%).

At the same time, 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 that 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. We believe that the inordinately high retention rates suggest that many of today’s firms are underpricing their services.

Pricing that is too low can create a negative image, as if your services are not as valuable as the alternatives. At the same time, many of these firms overservice their clients; that is, they continuously add services to meet the needs of new clients, taxing their resources and decreasing the quality of their other services. (We find that fewer high-quality services create a far better client experience.) Consequently, clients don’t feel good about making referrals, and the increased number of services drives up operating costs, hence the drop in profitability.

In our view, two causes underlie these disturbing trends. The first is structural. In our experience, most independent advisors approach building businesses backward, using what we call the “I” model — what services do I want to provide? — rather than starting with the services that clients actually need. Using this model, they launch their business starting with the services they can and want to provide to clients, and then try to attract clients who want those services. Doing this leads to having a whole lot of services — the “be all things to all people” model — or to simply adding services that are unprofitable.

The result is usually an ongoing series of quick fixes as firm owners attempt to meet the growing needs of their expanding client base. This leads to inefficient operations and confusion about what the business really is — among staff members, clients, prospective clients and even the owners themselves. This in turn leads to low referral rates, low closing ratios, high employee turnover, ill-conceived and costly new initiatives, and low profit margins and owner income. We’ve come to realize that many of the problems that advisors come to us to help them fix stem from these initial mistakes and the quick-fix attempts to correct them.

A New Vision

Consequently, many firm owners today are sensing client dissatisfaction with the services they provide (more often than not, the result of overservicing). That, combined with fear of the media-hyped online advisory platforms, is causing owners to panic and make knee-jerk attempts to solve the problem. We see many firms exploring ways to reduce AUM fees or adopt alternative revenue models (such as flat advisory fees), and 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 their 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 back and re-create their businesses with a clearer vision of what their firms are and what they want them to be.

Of course, this won’t be easy. Notice that in the brief history of financial planning earlier, the vast majority of financial planners were getting paid for something other than financial planning: tax shelters, annuities, mutual fund sales or asset management. Planning itself has been the “loss leader” to attract clients.

To make the transition to marketing financial planning as a service in itself, we work with advisory firm owners to determine what makes their business unlike other firms in their market. Through this process, firm owners figure out what they are really offering to which clients. With this clarity they gain the knowledge of what their business should look like and how to market it.

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.

Surprisingly, given its profound benefits, the process is quite simple. It requires firm owners and partners to answer four basic questions about their business and what they offer. The answers create what we think of as a “cell” of services that represents the DNA of that firm. When firm owners identify this cell, their firm becomes truly unique, resulting in a business that is able to rise to the competition and address changes in the advisory firm landscape with ease.

Here are the four questions advisors should answer as part of the “X-Cell” process.

  1. Whom are you going to service? Sometimes called a target market or a niche, this business jargon doesn’t fully articulate the goal of financial advice: to help clients attain their personal goals. To answer this question, simply identify whom you and your firm want to help. The idea is to narrow your client base (rather than expand it) because that will make your business more efficient — and successful. A firm can work with more than one target client group, but not so many as to reduce efficiency. We find three to four client profiles to be the maximum a firm should work with.

  2. What are the financial needs of your client profiles? This is really the key to creating an effective service model. While it’s true that most financial planning clients have fairly similar needs, there can be major differences among specific client profiles.

  3. What services do you really want to offer to clients? Your answer will determine what your advisory firm will look like. You don’t have to provide services for all the financial needs of your profile clients, but you do have to provide essential services and complete those services really well. Answers largely will depend on the expertise and preferences of the advisors in your firm, but you can hire advisors with additional expertise.

  4. How exactly are you going to meet those client needs? Each service or product your firm offers should be exactly the same for every client and delivered to them in exactly the same way. This creates consistency of client experience, and it provides superior client service. It also minimizes mistakes and allows firms to create cost-efficient processes for each service.

It’s relatively easy to implement the process when you’re launching a new advisory firm. It’s a bit more complex to transition an existing firm. The biggest danger is damaging the existing business. Here are some issues to think about as you make the transition:

  1. Build the firm you want to have. If you keep trying to solve the problems you have today, you’ll always have problems. Instead, we encourage owner-advisors to make decisions for the firm they want: building out the services they want to add, creating consistent messaging about the services they offer and who they serve, and developing strategies for marketing to the clients they want.

  2. While making decisions for tomorrow’s firm, keep doing business the way you are currently doing it. Your revenues today have to finance your firm tomorrow, so don’t do anything to shrink them. You want to build a larger firm upon the foundation you already have, not start from scratch.

  3. Meanwhile, start the process of transitioning into the service model you identified. Gradually phase out clients and services that don’t fit in the new firm. Some clients will leave on their own, but for those who remain, eventually you’ll have to either let them go or find a solution that essentially separates them from the rest of your firm, such as setting up a subsidiary firm with its own advisors and streamlined systems, which can be spun off at some point in the future.

Benefits of the X-Cell Process

Over the years, we’ve used this process to transition many of our client firms into new service models, and all of them have shown remarkable results. They seem to be resilient to the pricing pressures of the digital platforms, and to the competition from breakaway brokers. Here are some of the ways that these firms have become better businesses:

The clients become clients of the firm. We’ve found that through a consistent client experience 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 relatively seamless when an advisor retires or leaves the firm. 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.

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.

Firm profitability increases. The more alike a firm’s clients are, the more efficient it is to provide services to them: Both advisors and other employees can handle more accounts. And when problems arise, which they inevitably do, they are usually the same problems, which makes them easier to handle. What’s more, the firm will get the leverage of economies of scale on everything from onboarding new clients to marketing to technology systems.

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 understand why it’s important and, by extension, why their efforts are important, too. Nothing is more motivational than the belief that what you are doing matters.

It’s easy to create consistent messaging. Once you have clearly answered the four process questions, who you are as a firm and your uniqueness as a firm become readily apparent through your service model and marketing efforts. It is at this point that you can move to developing a sales and marketing program to attract clients to your firm. The process also helps you develop clear, consistent messaging. Many advisory firms skip the first four steps and go right to developing messaging to tell clients and prospective clients what they do. 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 client profiles 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.

The marketing plan is easy to develop and much more effective. Once you know what 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. They participate in activities together, belong to the same organizations, attend meetings or conferences together and often read the same publications. All this group activity makes them easier to reach — in person, with marketing materials, or even advertising. And, of course, they tend to talk to one another, which greatly increases referrals rates and, usually, closing ratios.

Closing becomes really easy. Clear and consistent messaging is also your best sales tool. Most good 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.

You can charge more for your services. Independent advisors and financial planners have always had a problem articulating their value proposition. For the most part, it’s boiled down to being “independent,” but even that is hard to put a value on. Once firms know 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 our process can market their former loss leaders more effectively, charge more (and also charge differently, such as with subscription fees, retainer fees or flat fees) than other advisors and aren’t susceptible to mass-market downward pressure on pricing.

They are the firms of the future.

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