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A choice of the most debated practice management topics

In building a consulting business, it can be tempting to adopt the ideas of others, simply because it offers a ready-made roadmap to success. But too often, firm leaders travel too far with these maps before realizing they’re getting nowhere.

In this column, I am going to give you an alternative perspective to the most debated practice management topics to benefit your 2022 business plan. In my many years of consulting work, our mentors have encouraged the leaders we consult to think deeply about their business beliefs, the advice and information they read, and to be open and consider alternative perspectives. Do it.

The goal of this column is to provide you with an alternative, critical approach to help you decide what is right for your business. So, without further ado, here are four different perspectives about the most debated practice management topics.

“To Build Your Business, Segment Your Customers.” There is a widespread belief in the wealth management industry that the practice of client segmentation is essential for an advisory firm to grow. Thinking usually centers around smaller accounts that are less profitable, and so those customers must receive a limited set of services, with the firm’s full range of offerings reserved for its largest accounts. This is often done to increase the profitability of the firm and to manage the advisory capacity. Thus, organizations end up with a classification system of customers A, B and C.

Looking at client segmentation from a different perspective, you will find that there is a fundamental problem when it comes to the financial advisor business, especially now that valuations are at a high level. Adopting the approach means that business leaders consider the net present value of their future cash flows to be less important than profits. In other words, profit first and future cash flow second.

Small accounts abound, many of them recurring customers into savings and retirement years substantial accounts. If smaller clients are regarded as second or third tier priorities, they are twice as likely to leave the firm once their assets have grown to a point of high profitability.

Not unlike time, money’s value and compound interest, those small accounts become your future revenue (and valuation) if you invest in them. Remember, the wealth management industry was created by investment managers who understood the value of future cash flows that, while not all of their chosen stocks will appreciate, many will—and they can power substantial portfolio growth. .

“Make a deal – or perish.” The risk of firm consolidation has been a topic of debate for more than 20 years. The idea that there is increasing merger and acquisition (M&A) activity will lead to consolidation in larger and larger firms. And, as a result, smaller advisory firms will be unable to compete and will be doomed to extinction.

Today, there is (still) no evidence that industry-wide consolidation is a real threat, but it is an important activity to watch, especially in the coming years. According to the NRS, between 2000 and 2020, the number of SEC-registered independent RIA firms increased by 19%, totaling 13,880. If consolidation was a threat in the past, we would see the total number of advisory firms declining, not expanding.

For the past 20 years, smaller firms have been able to compete with larger firms due to innovation within certain segments of clients, especially smaller accounts. As a firm gets bigger, the leadership tendency has led to the closing of smaller accounts, which helped the smaller firms to grow. Shaving smaller accounts and establishing minimum account sizes gave smaller firms the opportunity to better serve a smaller account than would be serviced by a larger firm. In doing so, smaller firms focus on future cash flows, which provide a balance against the potential risk of consolidation.

Knowing this, the biggest threat to industry-wide consolidation is if larger firms begin to program to serve all customers better than a smaller firm. As is the case with many industries, innovation is the biggest threat within certain segments of customers.

“Advisor fees are shrinking.” Fee compression has been a hot-button topic in the financial advice business for many years. Are the fees going down? We are seeing mounting evidence that they are shifting, especially within the younger generation of savers.

In the past, the industry has charged for investment advice and included financial planning as a giveaway. But now that equation is being reversed: Advisors are increasingly using investment management as a loss leader and charging fees for financial planning. In doing so, it is making service charges more transparent.

The commoditization of investment management has called into question the appropriateness of charging 1% or more to manage a portfolio. And it has allowed advisors — even those bound to them — to change their value proposition. More and more advisors are providing investment management at low cost and charging their clients for financial planning services.

It may surprise some people to learn that the change in plan fees is pushing instead of cutting into advisors’ revenue and profits. An advisor who charges a 1% AUM fee on an account of $250,000 generates revenue of $2,500 per year. But the average flat fee for services is $315 per month, or $3,780 for a comparable account.

“Market now, rent later.” Many leaders of advisory firms believe that investing in marketing yields the highest return on organic growth. I would argue that the best investment a firm can make in growth is to balance its ability to grow. And businesses that are built around human advisors serving clients grow fastest by adding consultants.

Today we often see independent RIA firms building digital client experiences, and then layering marketing on top of that. Those marketing budgets can reach 10% of the firm’s revenue. The problem is that they assign new clients to an existing core of consultants, without expanding the capacity to make it a marketing success. In many cases this formula results in advisors attempting to adequately serve 250+ or ​​more clients.

When firms load advisors with new clients, customer service will suffer, burnout and turnover will increase and clients, especially existing ones, will notice. This hurts the firm’s future cash flows, forcing firms to solve the problem of growth through profitability, often resulting in segmentation of the customer base. Furthermore, in today’s environment, consumers expect unprecedented levels of accountability, regardless of account size.

When an advisor is too busy juggling an overloaded client base and cannot return calls or emails quickly enough, clients are presented with the opportunity to seek a different advisor. They are also less likely to act as advocates for an unresponsive organization – apparently so – thereby reducing client referrals.

The backbone of building a great advisory firm depends on having talent for service clients, generating client referrals and retaining clients for the benefit of future cash flows.

My advice to business leaders is to question and look critically at all the knowledge gained in building your business. Not unlike other industries, how you do a consulting business changes over time. Taking a more in-depth, more critical look can be more challenging initially, but doing so will help you gain more clarity about what you are trying to achieve over the long term.

Angie Herbers is the founder and CEO of Herbers & Company, a consultancy firm for financial advisors.

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