Fidelity hosted another Inside Track, and this time there were over 200 attendees in Boston. Here are five presentations of note.
Have “Mojo”
Bo Burlingham, the best-selling author of Small Giants: Companies That Choose to Be Great Instead of Big, talked about the characteristics that make a company great.
He calls it “Mojo,” the business equivalent of charisma. “When a leader has it, you want to buy from it, you want to work for it. It is a feeling when you are in the presence of a real special company, a great company,” he said. “It is kind of like pornography. It is hard to define, but you know it when you see it.”
He listed six commonalities in the companies he saw as great:
- A clear vision. The owners must know who they are, what they want and why. If not, they can’t make hard decisions. His advice for RIAs is to ask: “What is your vision?” Describe in detail how your employees will view your firm in 10 years. What will your clients say about it?
- Community ties. Great companies are rooted in the communities in which they do business. RIAs must ask, “What can I do to get more into the community?”
- Great customer service. Great companies enjoy close personal ties with customers and suppliers. Customer service is a skill that needs to be hired. That means RIAs must hire people that can project warmth. Have you asked your employees how you can improve the customer experience?
- An environment that puts employees first. Do your employees know your higher purpose for being in the business? Do they understand it and do they define the firm’s culture?
- Strong financials. Stable gross margins are necessary. Burlingham suggests that the management be open-book, because transparency with employees allows them to make smarter decisions. RIAs must ask themselves: What is the greatest threat to your employees’ jobs? If you know it, they will fix it. How well do your employees know your financial goal? Make it clear that the better you are going to do, the better they are going to do.
- Passion. The owners and leaders of great businesses are in love with what their companies do. They all had a passion to make the world a better place and they wanted people to know it.
Hiring For Tomorrow
The number of advisors is declining, and the financial service talent won’t be able to fully replenish the roles of those exiting the industry.
Jylanne Dunne, an SVP in Fidelity Institutional Wealth Services’ practice management and consulting department, addressed this problem in her presentation, citing Cerulli Associates research that shows the number of advisors in 2004 was 339,450, a number expected to decline to 280,859 in 2017.
Fidelity research found 67 percent of firms do not have a succession plan ready for implementation, she said, which proves the need for younger advisors. Yet those younger people do not seem to want to be in the industry. Harvard Business School research found that the number of potential graduates entering the financial services industry is decreasing. It went from 45 percent in 2008 to 27 percent in 2013. We are not seeing the interest, Dunne said.
Fidelity’s research of interns found that only 9 percent of them are familiar with RIA firms.
College graduates are looking for firms that will give them a good work-life balance. They want to be part of a team. They also like to be recruited, at something like a career fair, by younger members of a team.
Getting Into The Retirement Space
Fidelity research found that 91 percent of those advisors currently offering retirement plans such as 401(k)s and 403(b)s are only accommodating the business as part of their broader wealth management practices. If these advisors shift from accommodating retirement plans to accelerating their retirement business, they can be more operationally efficient, better serve their clients and improve their profitability.
Meg Kelleher, EVP at Fidelity Institutional Wealth Services, said retirement plans have great potential, and said advisors even face a risk to the private client side of their businesses if they are not in the retirement plans space. For instance, if an advisor has a top client with a business but can’t serve that business’s retirement plan, another advisor who can will have a foot in the door and might even steal the client away.
Kelleher asked, “Don’t want to know a lot about Erisa or 401(k)? Then partner with someone that does this for a living.”
Know Your Firm’s Value
Valuing your business isn’t just about selling it. A valuation can help it achieve greatness. Why? It allows you to see where your organization is falling short and push you to make improvements.
David DeVoe, the founder and managing partner of DeVoe & Company, said during a presentation on valuing companies, “Your valuation isn’t just a number. Keep the concept of greatness in mind and then tie it back.”
He explained three different ways to value a firm. One is to use book value. He noted that this approach was “dangerous” and not recommended.
The next is to use comparables. This method uses either a multiple of revenue or multiple of cash flow. DeVoe called these approaches “blunt instruments.” For one thing, revenue and cash flow approaches can deliver two totally different results. He showed one example of a company that came up with a valuation difference of more than a million dollars.
Take two organizations that look like they have the same value. What if one of them had to pay two extra expensive employees to get the same revenue? Should they both be priced the same? Employees are a big factor, since they often represent about 75 percent of expenses.
The third way to value a firm is to use discounted cash flow, which DeVoe said was the most accurate method for RIAs. The process includes looking back historically at what has happened with a firm, then projecting into the future five years and, lastly, discounting back to the present, discounting out the risk. “We look out five years. The crystal ball gets a little cloudy after that,” said DeVoe. He recommended using EBITDA. For the discounted rate, DeVoe said in different deals he has seen it go from zero to 50 percent, with many of the deals clustering around 25 percent.
The valuation process can also help an owner figure out whether improvements should be made before he or she sells the firm. Growth factors like new clients, the makeup of current clients, retention, attrition and even acquisitions can play a part in the ultimate value.
As far as the emotional connections sellers have with their businesses, DeVoe laughed, saying, “We joke we are a therapist with spreadsheets.”
Some of the attendees at the presentation wondered whether valuations are more of an art than a science, suggesting the numbers can be tweaked one way or the other. DeVoe agreed that each seller has a critically important element that forces the deals to get creative sometimes. On the other hand, he hinted he has a model with over 3,000 cells in it that would suggest how much of a discount a buyer should get, even if the seller does not sign a non-compete.
DeVoe said a well-thought-out business plan for growth is better than one person making all the sales because he is charismatic. All firms should be looking to maximize their values, so a process used now gets a buyer to pay more in the future.
“Maximize the value of the company,” recommended DeVoe. “Every 1 percent increase in growth creates a 5 to 10 percent increase in value.”
Think Strategically
Laura Kogen, a VP in the Practice Management and Consulting group at Fidelity Institutional Wealth Services, conducted a strategic planning workshop for principals and owners.
She opened her presentation by saying, “Stop for a minute and think of a better way.” Too often, advisors do not carve out enough time to work on their business and do the strategic planning they need in order to rise to new levels.
Fidelity has mapped out a six-step plan:
- Create a mission, vision and values. By taking the time to detail this information, you give the organization more direction. Individuals then will have a better sense of why they are working for a firm.
- Make clear what the clients’ needs are and how the organization aligns with them.
- Evaluate your business. At this stage, it is important to take a hard look at how the business is being run, including what it does when and where it needs to improve. By doing an analysis of the current situation, you will see more clearly what needs to be a focus. Ask the question, “Is there any drive for innovation?”
- Identify and prioritize strategic alternatives. Prioritizing a set of initiatives to reach goals is crucial to have the most impact.
- Establish measurement and tracking and create a structure for plan execution. Who is going to do it and when?
- Document the plan. Putting things on paper will help an organization better reach its desired outcomes. Identify projects and the process. Make it action-oriented. For example, get into the weeds and identify who is going to do the work and note when it is going to get done. When it comes to partners in an organization, make sure you are holding each other accountable.
Mike Byrnes is a national speaker and owner of Byrnes Consulting, LLC. Read more at ByrnesConsulting.com and follow @ByrnesConsultin.