Maximizing the return on your practice.
I recently received a brochure from the Financial
Planning Association called 20 Keys to Being a Smarter Investor. It's a
brochure created for consumers and shows them "how to apply time-tested
investing principles and techniques so that despite the inevitable ups
and downs of the markets, you can realistically achieve your family's
financial goals." It struck me as I read this brochure that these
principles are ones that all advisors in the industry could agree
on-whether a financial planning practice, a money manager, a
stockbroker or an investment consultant.
What was also striking was how directly each of
these principles applies to the management of these advisors' own
businesses, yet how inconsistently they are applied. We've all heard
about the shoemaker's son, and the planner who doesn't plan. What about
financial advisors who don't follow their own investment advice? The
principles you use to guide your clients' investments are the same ones
you should use to guide your biggest investment-your business.
I narrowed the list of 20 down to ten as a starting
point for applying sound investment practices to your business:
1. Clarify your goals
2. Follow a detailed plan
3. Allocate investments according to goals and needs
4. Diversify your investments
5. Put your financial house in order
6. Pay attention to investment expenses
7. Don't let taxes dictate
8. Understand your own risk tolerance and required return
9. Educate yourself
10. Monitor and revise your plan
1. Clarify Your Goals
As with an investment portfolio, smart investing in
your business means investing with a specific purpose in mind, a
specific objective you are trying to accomplish. Underlying all
tactical decisions you make in your business needs to be the long-term
vision of what you are trying to accomplish.
The strategic planning process we take advisory
firms through is designed to help them consider all the alternatives
they could pursue in their business-all the opportunities in which they
could invest their limited time, money and management resources-and
choose which opportunities to pursue. In this process advisors evaluate
all their investment opportunities through four filters:
Current capabilities. What opportunities would you pursue just given what your firm is currently good at and the platform you have to build upon?
Market forecast. What are the
external market factors impacting your business-demographics, economy,
legislation, population trends? Where do you forecast they are headed
and what impact will that have on your business? Given that, which
business opportunities would you pursue in light of your market
forecast?
Competitive forecast. Who are
the competitors in your market and how are they positioning themselves?
Given where they are positioned-or where white space may exist in the
market-which business opportunities would you pursue to best position
your firm vis-à-vis your competitors?
Personal definition of success.
Given what you personally want to get out of life, and out of your
business endeavors, which business opportunities would you pursue to
best fulfill your personal defition of success?
The "right" strategic plan and goals for each business are very different because the way each business owner evaluates each of these perspectives is very different. If you ever hear an industry pundit claim "THIS is the opportunity! This is the market you should all pursue! This is the niche, or the right client base!"-resist. Make sure that you are considering all your opportunities, evaluating them in a meaningful way and choosing the opportunities that are right for your business. This is the strategy that will guide your business, and each of the investments you make in your business, going forward.
2. Follow A Detailed Written Plan
In investment planning, this is your investment
policy statement. In business planning, this is your strategic plan.
This is the plan that outlines how you are going to get from where you
are to where you want to be-the business you envision five or ten years
down the road, the business you defined in step one: clarify your
goals. Like an investment policy statement, your strategic plan is a
road map to keep you on course, to eliminate business investment ideas
that don't fit your plan, and to provide a way to monitor your
performance and progress toward your goal.
Make sure your detailed plan is not just a binder
that gets filed on the shelf to collect dust until next year's
"strategic planning retreat." The important thing about your strategic
plan is that it first defines where you want to be-your strategy-then
defines specifically what needs to be done to get you there-your
operational plan-and assigns accountability for the specific tactics
that need to be fulfilled to implement your strategy. For each of these
tactics, use the chart above to define SMART.
3. Allocate Investments According To Goals And Needs
We saw that the advisory businesses that weathered
the down market particularly well-adding clients and assets during one
of the worst stock markets in years-were the ones that had a long-term
plan in place on how they would differentiate themselves in a
meaningful way in their market. And they stuck to that plan and their
business vision, investing and allocating their resources based on
where their strategic plan indicated they should.
We are all tempted with business opportunities that
seem too good to pass up-new markets, new hires-but follow the
"structured investment process" you have outlined as your business
plan. You re-examine a client's investment policy statement before
pursuing a new investment opportunity that might send them in a new
direction, to ensure it is in line with their long-term goals. Your
business plan-as often as it will tell you what you should do and what
opportunities you should pursue-will also tell you very clearly when to
say "no" and when to recognize that something may be a great
opportunity, but not for the business you are striving to create.
4. Diversify Your Investments
While most clients have a large enough portfolio to
diversify their investments, most advisors do not. It is far more
effective for a small business to choose a business strategy and focus
its resources where they can have the greatest impact. Many advisors
take on a defensive strategy and choose to pursue multiple markets,
client profiles and business opportunities at once. What they find is
that they have spread their resources so broadly that they aren't known
for anything. Instead, the most effective advisory firms choose what
they will be known for-an offensive strategy-and focus their resources
on that strategy.
While I would not recommend a diversification of
focus in a small business, oftentimes diversification of skills and
capabilities is a good strategy. Don't clone yourself in your
business. Instead, hire people with complementary skills who do
things well that are not your natural strengths. Coach individuals to
develop skills that are necessary to implement your chosen strategy,
recognizing that not every capability the business needs to possess
must reside in you personally.
5. Put Your Financial House In Order
Before your clients know what they can afford to
invest they have to have a budget, a spending plan, a cash flow
analysis. If they relied on a tax return alone to convey to you their
entire financial situation, you would not have an adequate picture of
their financial condition. However, many advisory firms do just
that-they rely on their tax return as their only meaningful financial
document, and do not track the data necessary for sound financial
management of their most significant investment.
On a monthly basis, you need to track your income
statement, balance sheet and cash flow. For detailed structures for
each of these financial statements, e-mail me and I will send them to
you.
These statements are valuable because they tell you
what is happening in your business and allow you to quantify your
investment, the performance of your investment, and your return on
investment.
On a summary level, your income statement will look like this:
Income Statement:
Revenue
- Direct Expense
---------------------
Gross Profit
- Overhead Expense
--------------------------
Operating Profit
Revenue: Dollars coming in the door, net of any dealer concession if applicable.
Direct Expense: Professional compensation (base and
performance-based incentive pay for any individuals who bring in
clients and/or provide advice to clients, including owners' salaries if
they are in a business development or client advisor role).
Gross Profit: The margin you will monitor over time to evaluate your productivity, pricing, product and service mix, and client mix.
Overhead Expense: All other expense required to run the
business, including support staff, management staff and administrative
staff salaries, benefits, rent and office expenses, marketing expenses,
etc.
Operating Profit: The margin you will monitor over time to
evaluate expense control and efficiency of your infrastructure. This is
what remains to fund future growth, distribute as firm-based incentive
and pay a return to owners.
6. Pay Attention To Investment Expenses
The FPA brochure says that "during booming markets, investors often
don't pay much attention to investment expenses." The same is true
among advisory practices, where spending was rich and infrastructure
was built during the good market, and even since, most advisors don't
carefully monitor their expenses. Make sure that you monitor your
overhead and other investment expenses, not just in dollar terms but
also as a percentage of revenue. Watch your profit margins (gross
profit dollars divided by revenue and operating profit dollars divided
by revenue) to ensure that you know what you are spending, how that
spending is trending over time and how that investment is generating
revenue and a return.
7. Don't Let Taxes Dictate
Much like "tax-saving strategies should not override
the underlying economics of a particular investment," advisory firms
should not endeavor to lose money, or limit their profitability, in
order to reduce their tax liability. Monitor your real financial
performance as a business. Don't play tax games that cloud the picture
of how your investment is truly performing. As an investor in your
business, you should demand accurate reporting and a sound return on
your investment. Don't sacrifice returns to spare yourself taxes.