What they are and why you need them.
Early this year, wealth management firm CDHM
Financial Advisors in Itasca, Ill., did a cost benefit analysis and
decided to fire one-third of their client base-or 100 out of 300
current clients. The decision didn't come easy-it was wrenching. But
after running and crunching the numbers, the firm found that the lower
half of their clientele generated only 15% of the firm's revenue and,
based on that assessment, opted to concentrate on the top two-thirds.
In explaining the rationale for the decision, CDHM financial advisor Kevin J. Meehan says, "It's a process, because it's not easy to fire clients. In our business planning, we assessed that the profitability of the lower 100 revenue-producing clients was not acceptable for our objectives. We also determined that by keeping them in the firm we were doing a disservice to our most profitable clients by not having the time that we allocated to the lowest 100 available for our most important clients."
Four years earlier, in 2001, during the bear market, CDHM made another crucial decision affecting operations. Dissatisfied with the cost and performance of many of the money managers it had brought in to run their client portfolios, they instead shifted to using less expensive exchange-traded funds, and hired in place of the other managers "less style-specific, more tactically oriented" money managers, according to Meehan.
"This both reduced the cost to our clients and reduced the volatility of their portfolios," explains Meehan. "It didn't affect our profitability and, as a matter of fact, we found that our strategies attracted significant amounts of new business while other advisors seemed to be suffering."
Careful planning went into both decisions. Both were made as a result of a formal business planning process at CDFM Financial Advisors. It's a firm-wide effort that takes place once a year. "You have to have everyone's buy-in to the process," says Meehan, who views the business plan as a mode of discipline that keeps everyone on track. "Once it's done, that's really a guideline in our firm for weekly meetings to assess how effective we've been to implement the plan we've laid out."
Why don't more financial advisors follow this prescription? "My observation," says Meehan, "is that more advisors in the wealth management world treat their practices as just a practice instead of a business. If you look at any household names of large, recognized businesses, most successful organizations have a vision and a purpose. Ultimately, because of their success, one can only assume that they have detailed, robust business plans."
Mary Lacey Gibson is a small business coach of long standing, as well as a certified financial planner in San Juan Bautista, Calif. Many clients are advisors with small practices or just starting out. For them as well as others, the chief benefit of a business plan is that "it forces the business owner to examine all aspects of the business. It allows him to understand the big picture and how all the details of the business intersect to create the big picture." Incorporating into the plan a personal vision statement of where you want your business to go and its mission is also important, maintains Gibson.
"It always amazes me," she says, "that people in the planning profession who understand the value of a personal financial plan for their clients don't have a business plan in place for themselves. Also, it's really important that advisors don't go to all the effort of creating a business plan only to throw it into a desk drawer."
Unfortunately, many do, Gibson says. "Many people start a business only to create a job for themselves. They are unclear on the concept of management and get stuck in operational aspects of a business. What starts out as a passion gets to become something they dislike, due to not having planned how they would handle the details of accounting, technology, marketing and management."
Most advisors who take the trouble to craft business plans and vision and mission statements go through a formal process. By and large, planners like Meehan and Diane Statham, a franchisee with Ameriprise Financial Services (formerly American Express Financial Advisors) in Houston, are pretty straightforward in their approach. Others, like business coach Gibson and Holly Hunter, a CFP and wealth manager in Portsmouth, N.H., embrace elements of lifestyle planning like those popularized by George Kinder in his book, "The Seven Stages of Money Maturity."
Gibson's coaching business is centered on helping owners and advisors develop and implement business plans. One such client, Ann Lefferrier, a planner in Bend, Ore., operated several years without a business plan. Now she's glad she plans out each year. It's helped her focus and avoid unnecessary tangents, she says.
"Creating a clear vision statement creates a natural tension between where my business is today and where I'd like it to be," says Lefferrier. "This tension, combined with the specific steps in my business plan, naturally pulls my business towards a future state."
As for her own business, Gibson sets aside a weekend in January and creates a two-year working business plan. "On that weekend," she explains, "I do a thorough revenue review of the past year. I adjust the year's worth of planning I already have in place, and add a second year to that to create a new two-year plan. I'm also thinking about more long-range goals for my business, so that the two-year goals encompassed in my working plan will move me toward my long-range goals."
Gibson uses her mission and vision statements as a starting point for each year's planning cycle. Her planning starts with an assessment of personal goals, personal risk, and strengths and weaknesses after which she starts addressing business needs. As lifestyle guru Kinder instructs, she tries to keep her personal and business lives in balance.
Gibson refers to her plan, checking with its benchmarks throughout the year. "For me the plan is the business. It helps me every day in my business. It represents my business, where I want to go and activities that will get me there. I don't see it as something separate from or overlaid on my business. It is my business, and from it comes the other documents I need to operate, such as employee manuals, customer service policy and procedures documents, and strategies for compliance."
Statham's plan, de rigueur with her marketing group in South Texas, consists of projecting her anticipated gross revenue for the coming year and laying out strategies for obtaining new clients to augment those already in-house. Integral to the process is projecting the number of potential referrals she anticipates and the number of new clients she expects to obtain through seminar events, alliances with organizations such as Costco, her natural market of friends, relatives and acquaintances, as well as her associations with CPAs, attorneys, realtors and other professionals.
"This process in a sense is parallel to what I do for many clients," says Statham, a fee-only advisor who has done a business plan the last five of the ten years she's been with Ameriprise. "I help my clients set goals, help them collect the data necessary to analyze those goals, and then provide them with a written deliverable that offers recommendations about addressing the six key areas of financial planning to help keep them on track to achieve those goals. It's an integral part of my business. It keeps me focused on those tasks I need to address on a weekly basis."
The business planning process also incorporates a personal vision statement and a mission statement. "We're encouraged to make certain we properly understand what's important to us personally and professionally," Statham says.
Meehan's group at CDHM goes through a similar planning process lasting two to three days. It involves evaluating the services the firm provides, along with the various markets they serve. And from that they try to deduce their profitability for that year.
"Once we assess those issues," Meehan says, "we decide first what it is we're doing we could eliminate and what it is we're not doing that could create a better business. It's from that analysis that you begin to write a business plan. We then target objectives relating to revenue, client acquisitions and what marketplaces to develop those clients from. It also involves our service strategies, marketing strategies, as well as what we need to do internally as an organization relating to processes and personnel."
He adds, "We look at the business plan as a vision statement for the business, but within that is a purpose statement for the firm. Our purpose statement is to provide financial peace of mind to successful people looking to partner with a successful wealth management firm."
Hunter's softer but no less disciplined business planning technique consists of asking clients several questions involving their goals and values. She describes the process as life altering for both herself and her clients, and went through it herself with another financial planner. Today, she says, they mutually support one another's planning efforts.
Hunter utilizes Kinder's three questions: How would you live your life? What would you do with your money? Would you change anything?
"What it has helped for myself and my clients is to connect our money, our values and our lives," says Hunter. "It's important to have a written document to formalize your goals and values, your dreams and passions for your life, what's meaningful. It's important that a financial or business plan addresses the core issues of your life.
"I think delivering a business plan without the life planning would be delivering a lemon," says Hunter. "It's like biting a hollow [chocolate] bunny. It's all air. There's no substance."
As we've seen, a business plan not only allows you to stand on the mountain top and see the big picture but gives you the opportunity to understand all the facets that intersect to create that panorama. And it can greatly simplify your life.
"Advisors learn to turn off the lights, lock the door at the end of the day, and go home without taking the business with them," says Gibson.
Bruce W. Fraser is principal of Bruce
W. Fraser Communications, an editorial services firm in New York City.
He has written for many publications. He can be reached at
email@example.com. Visit him at www.frasernyc.com/home.