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:
    - 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.

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