Enjoy the current installment of “weekend reading for financial planners” practice management edition! This week’s reading kicks off with an interesting interview with “robo-advisor” Betterment CEO Jon Stein, who seems to be shifting in acknowledging that perhaps his platform will be more likely to co-exist with advisors than compete directly with them (though that doesn’t slow Stein from a lofty goal for a whopping $100B of AUM in 5-7 years!).
From there, we have a long array of practice management articles this week, including: an overview of the results of the 2013 FA Insight People and Pay industry benchmarking study; a discussion by practice management consultant Angie Herbers of the most common fatal succession planning mistake (focusing too much on valuation) and how to manage it; an interesting survey of new advisors that highlights what a subset of “quick starters” are doing to succeed (growing their businesses to more than $50M of AUM in under 5 years); how female advisors, while still forming a small minority of total advisors, are actually winning on some key advisor metrics for success; how “big data” solutions are coming soon to help advisors better manage their practices and serve their clients, with an initial glimpse at two new offerings; and a review of the latest Redtail Document Imaging software solution for advisors.
There are also some articles specifically about marketing and business development, including: an overview of 3 services that help advisors to better market and grow; how some advisors are having extraordinary new business success by attracting clients through Yelp, albeit while operating in a “grey” area of compliance; and some guidance from Bill Winterberg on how advisors can get started with video on their websites.
We wrap up with three interesting articles: the first is a good discussion from Mark Tibergien about what it really means when firm owners say they want staff and especially future partners to “act more like an owner”; the second is a look at the latest trends in website development for financial advisors and some examples of the advisory world’s best advisor websites; and the last is a discussion of how advisors need to look beyond classic business metrics to really measure “success” or risk evolving their businesses in ways they didn’t intend. Enjoy the reading!
Weekend reading for November 23rd/24th:
Betterment’s Jon Stein Talks Human-RIA Coopetition – On RIABiz, this article with Betterment CEO Jon Stein provides an interesting perspective on how the “robo-advisor” is evolving since it launched in 2010. Betterment is targeted primarily at clients who don’t meet the minimums of typical advisors, particularly for those who just want simple asset allocation tied to their stated goals, with a lot of the busy work handled automatically (e.g., rebalancing, reinvestment of dividends, tax-efficient management, etc.). The firm is now up to more than $300 million of AUM, spread amongst a whopping 24,000 customers, with fees in the 15bps-25bps range. While early on Betterment had made inflammatory comments about advisors, Stein has indicated that the company is now shifting to explore a potential partnership outreach to the advisory community, in pursuit of the somewhat astonishing goal of $100 billion in assets in 5-7 years. The key distinction is that Stein views the Betterment solution as a low cost way to implement commoditized asset allocation portfolios; that doesn’t eliminate advisors or make them irrelevant, but it does force them to find another value proposition beyond simple portfolio construction, and Stein ultimately sees advisors and Betterment co-existing, where each functions in the area they serve best (and accordingly, Betterment is looking to partner). Advisors, though, may have to focus more carefully on their price structure; as Stein notes, some advisors may charge a 1% fee that is justified for the depth of their expertise and relationship management, but others, perhaps not so much. Notably, Stein also suggests that the Betterment technology around asset allocation, tax optimization, and loss harvesting, is superior to their most direct competition, Wealthfront.
Advisors, Take a Bow: The 2013 People and Pay Study – From Investment Advisor magazine, this article highlights the latest 2013 People and Pay Study from FAInsight (which covers th 2012 business year). The overall results of the study show advisors are doing relatively well; the typical advisory firm achieved the highest profitability and greatest level of owner income of any FA Insight study (going back to 2008), and the benefits are attributable not only to the booming markets but also improved management practices around controlling costs and using people more effectively. In fact, the overall conclusion of the research is that “well-designed people practices accelerate growth and provide insulation against periods of adversity.” However, good people practices doesn’t just mean paying people more; in fact, the study found that while client growth was up 5.5% in 2012 and revenue was up 9.2%, overhead expenses actually declined as a percentage of revenue, suggesting that human capital costs are increasing at a slower rate (though hiring overall picked up, as the average firm rose from 5 to 7 full-time-equivalent employees), and allowing the typical advisory firm to log a profit margin in excess of 20% (the highest of the past 5 years). Nonetheless, managing human capital effectively remains central in the advisory world, as people-related expenditures dominate the overall expenses of advisory firms, averaging 75 cents for every dollar of total costs in 2012. And while firms have generally been effective in managing costs, the study results reveal some problems areas too, including: many are still struggling with designing a clear organizational structure for their firm (nearly 80% of advisory practices have no documented organizational plan for the future); firms are overly reliant on their lead advisors and the gap between lead and junior advisors is dangerously wide; and many firms are not effectively empowering their best and brightest (and most self-motivated) team members to shine (especially given a declining use of incentive compensation). The FAInsight study also looked at key differences in “standout” firms, and found that standout firms actually spend less overall on people by employing relatively fewer and paying out less per capita for compensation while maintaining strong revenue per full-time-equivalent employee, leading to superior profitability through superior productivity; key success points include using non-professional staff to leverage the time and capacity of the professionals, and standouts provide more access to formal training programs and maintain development plans for support team members.
The Fatal Succession Planning Mistake – In this cover article for Investment Advisor magazine, practice management consultant Angie Herbers looks at what she characterizes as the biggest succession planning mistake: focusing too much on the valuation of the business while trying to implement an internal succession plan. While the reality is that an astonishing number of advisory firms have no succession plan at all, or an internal successor identified, Herbers emphasizes that even for firms that do, there are a lot of unexpected potholes in the road that they don’t realize as they navigate the succession plan for the firm time. And the industry knowledge of effective succession planning is very limited, due primarily to the fact that it’s only been in the past 10 years that so many independent advisory firms have finally been able to grow to a size that merits a substantive succession plan for a material amount of transferrable value in the first place. Ultimately, Herbers finds succession planning problems are usually one of three types: lack of financing options (which means the sale is either financed from future growth, or the time for transition has to lengthen); wrong incentives (junior partners are often underincentivized to help with growth, though if they’re overcompensated too early that can dampen motivation too); and unrealistic assumptions (transition plans based on too low a growth rate or over too short a time period). Yet overarching all of these problems are what Herbers terms the “fatal” mistake: an excessive focus on the valuation of the firm, which may lead to unfavorable deal terms, divisions between buyers and sellers, and/or a lack of options to get the deal done at all, especially if it leads to ignoring the other aforementioned problem areas as well. To address this, Herbers suggests that it’s crucial to de-emphasize valuation and focus on educating future owners about firm growth, finances, and the deal structures of succession. Rather than bargain around the valuation, succession plans should negotiate around the assumptions of the deal, including the time frame, the firm growth rate, the profit margin, and the role that the selling owner will play in the firm, now and in the future. For those interested in more detail, read the full article, or check out Herbers’ new white paper “Take Two: The New Direction of Succession” on her website.
What Superstar Advisors Get Right – In Financial Planning magazine, practice management consultant John Bowen shares the results of an interesting industry study his company conducted across more than 2,100 financial advisors, how successful they are, and how they got to where they are. Overall, the study grouped advisors into four categories: Newcomers (less than 5 years and less than $50M of AUM, which were 23.2% of the survey); Rank & File (industry veterans practicing for at least 5 years but not yet at $50M of AUM, which were 31.9% of the survey); Elite (at least 5 years and $50M of AUM, which were 39.9% of the those surveyed); and the Quick Starters (under 5 years of experience like the Newcomers, but already over $50M of AUM; these were 5.1% of the surveyed advisors). So what was it that the Quick Starters were doing that led to such success? Some notable statistics: 80% of them were age 34 or under (actually younger than the overall Newcomer group, where only 50.1% were in that age range); more of them were women (still only 31.4%, but a larger share than the 18.1% female in the overall survey); they tend to serve more clients (despite having just started, over 1/3rd of quick starters serve 300 or more clients, similar to the 39.7% of Elite advisors who do so); their clients tend to be more affluent (36.1% of Quick Starters have at least 30 millionaires, while only 2.5% of Rank & File do and 1% of Newcomers; by contrast, even amongst Elite advisors only 39.4% met this threshold); they reinvest far more into their early stage businesses (despite the favorable AUM and client metrics, almost 2/3rds of Quick Starters have net incomes of less than $100,000 and only 7.7% earn more than $200,000, while for the Elite it’s only 13.1% under $100k and a whopping 49.6% over $200k). So what are the strategies for success with the Quick Starters? Bowen finds: They are selective (nearly half of Quick Starters already have a clear minimum, while only 25.6% of Rank & File do and 18.5% of Newcomers); they use and rely on teams (more so than any other category); and they plan for business growth (73.2% have business plans in place, and 61.1% have separate marketing plans as well).
Long The Underdogs, Female Advisors Are Actually Winning In Two Important Categories – From RIABiz, this article draws on a recent PriceMetrix industry study that found female advisors are disproportionately working with female clients more than male advisors are, and that female advisors have a higher average household account size than male advisors, which suggests that female advisors may be well positioned for business growth, even though they currently make up only 12% of the overall investment advisory workforce. The article suggests that the differences in gender clientele may be attributable both to female clients feeling more comfortable with female advisors, and that female advisors may be more comfortable networking with female prospects than male prospects. In turn, strong communication skills in female advisors may be helping to ensure that those female prospects turn into female clients, and building a stronger trust foundation that leads to larger average account sizes in the PriceMetrix data. Notably, there is also anecdotal evidence that male vs female advisor motivations are different as well; it seems that men appear more likely to be money-motivated in their advisory role, while women are more likely to look at advising as an opportunity to help others. Overall, given that the number of women who are primary income earners for their households is on the rise, this research suggests that the women-serving-women advisor segment could be poised for significant growth.
Two Big Data Solutions for Financial Enterprises – In Morningstar Advisor, technology guru Bill Winterberg looks at how “Big Data” opportunities are starting to arrive for advisors, based on some new software/technology that was revealed at the recent T3 Enterprise conference. For those who aren’t familiar, “big data” is a term used to describe a collection of data that is so large it can’t be managed and interpreted using conventional tools; for instance, imagine loading 10 years of historical transaction data from all your client portfolios into a spreadsheet and trying to determine the flow of money in/out of particular market sectors over time… it’s theoretically possible to analyze with a spreadsheet, but realistically it’s just too much data to effectively manage and analyze. Accordingly, Winterberg highlights two solutions emerging that are specifically designed to help advisors glean some value out of their unmanageably-large client data sets. The first is via Redtail CRM and their new “Redtail Data Cloud” service, which draws on data from their CRM, email, and imaging solutions, along with potential outside data via APIs (e.g., from MoneyGuidePro financial planning software), to create some meaningful analytics, such as a heat map of the United States illustrating the distribution/concentration of clients (or AUM) across the country; other solutions might include being able to match financial plans to client records to produce a list of who to call because their plans are out of date, or notifications of when clients’ plans fall below a crucial probability of success threshold. A second solution emerging is cleverDome, a paperless document management system that aims to make it easier than ever to find any document at any time by leveraging big data to index and tag documents in multiple ways, reducing searchability down to something as simple as just searching for any keywords associated with the document (especially important in a world of complex file folders often filled by higher-turnover admin staff positions who may implement inconsistently). The bottom line – this may just be the tip of the iceberg for solutions that make it far easier for advisors to leverage the data available to them to get better intelligence on their own businesses and solutions for their clients.
The New Paper Trail – In Financial Advisor magazine, advisor technology consultant Joel Bruckenstein looks at the landscape of document management systems for advisors, in particular the Redtail Imaging offering for advisory firms that don’t want to purchase a large (and generally much more expensive) enterprise solution like Laserfiche or XTRAC Solutions. For those who aren’t familiar, Redtail’s core business is their cloud-based CRM, which has a whopping 60,000 advisor users; it’s not the “most robust” CRM, but instead is designed to be effective at core features advisors need and at a competitive price, and Redtail imaging aims to do the same thing with respect to document management. Of course, for many advisors, the first question is why a document management system is even necessary, if there’s already a good file structure on their hard drive (or network drive) with folders for every client and regular backups. Bruckenstein responds by noting how technology has advanced since this “acceptable in 1998” solution, including storing data in a Write Once Read Many (WORM) format (important for demonstrating to regulators that files haven’t been altered or tampered with), having an audit trail of file changes, being able to find a needed document in seconds regardless of where it’s located, etc. Even with some cloud-based services like Dropbox or SkyDrive that can accomplish more of the above features, Bruckenstein suggests that Redtail Imaging still has further features advisors should consider, including not only the aforementioned WORM storage and audit logging (to see exactly who has edited a document and when), but also the availability of a third-party downloader (a tool that allows the firm to provide access to limited specific information to a third party to download, such as if an advisor went out of business and there was a court order to access the firm’s documents), and integration with the advisory firm’s CRM (as Redtail imaging integrates with Redtail CRM) as well as tools to easily link documents to multiple contacts or to grant access to outside advisors (e.g., specific files to share with accountants and attorneys). Bruckenstein also notes that Redtail imaging is fairly simple and straightforward to use, and is not intimidating like some other “more comprehensive” systems, and as noted earlier is intended to be “competitively” priced at $49/month (with discounts available through many B-Ds and other organizations) for up to 10GB of document storage.
Elements Of Attraction – From Financial Advisor magazine, this article by practice management consultant David Lawrence looks at three services available to help advisors market and grow their businesses, in a world where growing by referrals alone seems to be getting more difficult. The first offering is FiPath, which offers a lead generation program called ReferMyAdvisor, an online profile to build a digital presence, educational webinars on marketing for advisors, and marketing consulting services; they also provide some support for social media and help address compliance issues. A second option is called The Creative Juice, which helps to create an automated online webinar available 24/7 for clients and prospects to help attract and convert business. The third option is FinancialMarketing360, which works to market your firm with a lot of online tools, including mobile phone and tablet ads, social media branding, and search engine optimization, as well as overall advisor website design and hosting. Ultimately, advisors should match the program to their needs; FiPath is the most flexible, while Creative Juice is really for those who want to have a hands-off seminar marketing program, and Financial Marketing 360 is primarily for advisors who want to create a web presence in concert with their overall marketing. (Michael’s Note: WARNING on Creative Juice; one reader pointed out this thread from Wealth Management suggesting that the Creative Juice program may not be legitimate and also this thread for a predecessor company iMediaPro operated by the same individual. I have no information to substantiate or refute the validity of this claim, but thought it was notable enough to add to the summary as a cautionary note.)
Intrepid Advisors Strike Gold With Yelp – This article from Financial Advisor IQ looks at how a few advisors have been using consumer-review website Yelp to grow their business. The key is that if/when/as consumers search for advisors (or any other business) on Yelp, they can sort by which offerings have the highest rating, which means advisors who have positive reviews from clients jump right to the top of the search results. The obvious caveat, though, is the SEC and FINRA rules prohibiting testimonials, and Yelp seems to fall into a grey area; advisors (or other businesses) technically can’t control Yelp reviews, which makes them third-party and potentially ok, but if advisors direct prospects to the reviews or to clients to post reviews, that may trigger a testimonial compliance violation. At this point, the SEC has simply said “Whether a third-party statement is a testimonial depends upon all the facts and circumstances relating to the statement.” Nonetheless, some advisors who have pushed forward with Yelp have had striking results; one states that he is getting a new paying client every day through his Yelp presence. Notably, many large firms are already on Yelp – as a search for Wells Fargo Advisors or Raymond James reveals – the caveat is simply that very few have reviews, as it’s the reviews (not the listing) that appear to trigger compliance concerns. As long as there are compliance concerns, though, and few advisors are active on Yelp, it seems to be helping the visibility of those few who are.
How to Make Videos That Turn Prospects to Clients – An interview with advisor tech guru Bill Winterberg, this article provides some great guidance on how advisors can begin to incorporate video into their websites and marketing. The first video Winterberg suggests is called the “explainer” – a 60-90 second video that clearly explains how the advisor/firm helps people with specific needs, concluding with a specific call to action such as signing up for an email list or scheduling an appointment. The second must-have video is a biography of the advisor, ideally no more than 3 minutes; in a world where prospective clients want to connect, the printed biography just doesn’t cut it, because it fails to convey mannerisms, passion, the way the advisor communicates, and the overall “human element” the way video does. Once these core videos are created, the next step is to begin to create ongoing video content that’s targeted specifically to clients; the more clearly defined the niche clientele, the more focused the video content can be to reach them; examples include advisors Andy Millard, Jeff Rose, and Alan Moore. For advisors who are nervous in front of the camera, consider bringing in an acting coach who can help the advisor talk about what inspires them and get them more comfortable. Ultimately, videos can be produced in three ways: pure self-production (e.g., using an iPhone and Instagram); what Winterberg calls the “prosumer” (part Pro, part Consumer) approach, where the advisor buys higher quality video equipment and does the editing themselves; and the full pro approach where the entire process is outsourced, which may have the highest cost but also brings the instant quality of an experienced pro.
The Advisory Profession’s Best Web Sites – This article from Advisor Perspectives is an interview between industry commentator Bob Veres, and Bart Wisniowski of Advisor Websites, and looks at how website design is evolving for financial advisors (along with some examples of best practices). Notably, what constitutes a “best” website still has to be aligned with the goals of the firm in the first place; if the goal is reaching out to existing clients as a lifestyle practice, the key design elements will be different than a website designed to attract prospects and acquire new clients, which in turn will vary depending on whether the firm is active with blogging and social media or not. Nonetheless, a few key aspects are clear: today’s websites need to be visually appealing (website banners and stock photography from 5 years ago doesn’t cut it anymore, and instead imagery should be consistent with the area and staff photos should be professionally done); advisor websites should have high “usability” meaning they’re easy to read, to navigate, and have clear “calls to action” to guide people about what to do next and where to go; having a website that is mobile-friend is crucial (as more and more people are searching for information from their tablets and smartphones, not just desktop computers); be relevant to the needs of the site visitors (if it’s for existing clients, have access to client login area; if it’s for new clients, have event registration to sign up for your next seminar/webinar). Wisniowski also notes that when they look at the most popular websites of their advisors, they virtually all have blogs, though by Advisor Websites’ data only about 5% of advisors are currently blogging (some via writing, though video blogging is becoming popular as well). Other areas of note in good website design include: integrating social media (if you’re active with any platforms, it’s easy to link them back to your website); proper compliance tracking (to capture & archive each version of your website over time); and tracking data with Google Analytics (and possibly exploring pay-per-click advertising through Google as well). The article wraps up with several examples of good websites, including JRA Financial (good design and layout), JF Thompson Wealth Management (good video blogging and good calls to action), DiNuzzo Index Advisors (regular fresh content in the “What’s New” area), Millard & Company (weekly video blog material and memorable graphics), Independent Financial Group (good lead generation with free downloads and targeted content), NFA Wealth Management (good usability and layout), Athlete Wealth Management Group (clear target market, social media links, and blog), and Private Ocean (unique design and very mobile-friendly).
Tibergien: Act Like an Owner – In Investment Advisor magazine, practice management guru Mark Tibergien tackles the interesting question that in a world where many advisors don’t promote staff to partnership because they don’t “act like an owner”, what DOES it mean to “act like an owner” in the first place? There are many ways that people explain this behavior: “If you see something, say something” or “Partners are held accountable for their commitments” or “Develop others in your firm” or “Make prudent decisions about spending money” or simply “You’re not an employee anymore, so take responsibility for what you are doing and what the firm is doing.” In other words, Tibergien points out that the essence of what it means to “act like an owner” is almost like becoming a member of an exclusive club, with certain restrictions to gain access and certain privileges for being a member. The starting point, Tibergien advocates, is that a prospective partner must: 1) make a meaningful financial contribution to the business (e.g., new business development, though don’t underestimate the value of good client retention from a key base of client revenue); 2) have a willingness and ability to develop other people (those who don’t help in the development of younger associates are not helping build a business to last); 3) have an attitude and approach of safety towards protecting the firm (compliance is NOT just the CCO’s job!); 4) be a capable leader (lone rangers don’t make good partners, no matter how much business they bring in); and 5) be likeable, as partners are going to be spending a lot of time together for many years to come, so they should at least get along! The bottom line: acting like an owner is not about seniority, but about recognizing the responsibilities that come with the role, to act with confidence, to make good and ethical decisions, to hold other accountable, and to contribute in a meaningful way to the organization’s success.
Can Advisors Actually Measure Success? – In Financial Planning magazine, industry commentator Bob Veres looks at how advisors and advisory firms measure success, noting that as businesses grow, scale, acquire professional management, and establish clear business management metrics, the process may be building more profitable businesses but also risks making other key factors invisible in a world where the “most successful” firms are measured by asset growth, AUM, and owner income. For instance, firms can open the net wide to try to gather a lot of clients, but are they really serving the “right” clients for whom they can deliver the best services and value? Or in the process of focusing on efficiency, productivity, and profitability, is the firm also looking at the quality of client relationships (which ultimately impacts how they refer, or whether they stick around when a mistake is made), especially given how difficult that is to measure and build into an incentive plan? The fundamental problem is that as the business grows, it becomes increasingly important to measure and track metrics, but in turn that can lead firms to excessively focus only on that which they measure (or can measure easiest). The point here is not to imply there’s a trade-off between doing a good job for people, or having a big and successful firm; instead, the trick is figuring out how to manage and measure the business in a manner that is financially successful and still does a good job.
In the meantime, if you’re interested in more news and information regarding advisor technology I’d highly recommend checking out Bill Winterberg’s “FPPad” blog on technology for advisors. You can see below his new Bits & Bytes weekly video update on the latest tech news and developments, or read “FPPad Bits And Bytes” on his blog!
I hope you enjoy the reading! Let me know what you think, and if there are any articles you think I should highlight in a future column! And click here to sign up for a delivery of all blog posts from Nerd’s Eye View – including Weekend Reading – directly to your email!