Time, money and competition put pressure on RIA owners to be decisive, but taking action can be hard without assurances of success, and it can be reckless to act on gut instinct. To compete, advisors must take calculated risks and make decisions based in part on facts, in part on instinct.
Finding the right balance is where many advisors struggle, but a good starting point is the “40-70 rule,” made famous by retired four-star general and former U.S. Secretary of State Colin Powell.
The essence of the rule is this: collect 40% to 70% of available facts and data, then go with your gut. Working with less than 40% of the facts means taking a poor gamble with obvious potential disadvantages. On the flip side, gathering all data beyond a level of 70% confidence means a window of opportunity closes and the competition capitalizes on your hesitation.
Get To (At Least) 40%
In an industry that prides itself on historical analysis, benchmarking and status reports, it may seem hard to fathom that not everyone gets a baseline of information before acting, but it happens.
Leaders who make quick decisions have strong biases, and may not carefully weigh all options. Advisors who have achieved success by making important decisions largely from their gut could serve their firms more effectively by employing a bit more rigor to their information-gathering process before they act.
Advisors should consider these steps, which will insert a process where it may be lacking:
• Ask the right questions and demand fact-based answers. Gut-based decisions often stem from answers that were based on poor questions. It may not be the right call, for instance, to adjust client service teams after a handful of client defections. Getting to the root cause of client service issues requires RIAs to do deeper probes and ask harder questions.
• Follow the scientific approach. Some situations call for advisors to recall what they did for their grade school science fair projects—first form a hypothesis to prove or disprove a theory and then create a research and analysis plan to drive to conclusion. Rather than make hasty hiring decisions based on a good feeling about a potential employee, for instance, they should take a more rigorous approach to rethinking their work flows. Such thought may yield solutions that bring about greater firm-wide efficiency.
• Use proper analytical frameworks. For example, when advisors consider technology upgrades, they may draw different conclusions if they conduct a competitive gap analysis instead of examining specific client needs. The final decision ultimately affects the firm’s ability to serve clients. When you use the wrong analytical frameworks, it can lead you to false confidence and incorrect decisions.
Avoid Surpassing 70%
Though some advisors rely too much on gut feelings, it’s more common for RIAs to be in a state of “paralysis by analysis”—always over-analyzing and never acting. When the stakes are high, they might take too long agonizing over their next step. They might be worried about investing in technologies that have significant up-front costs. Or they might hesitate while considering an acquisition. They will often surpass the threshold of 70% in search of even more facts and information.
Here are a few telltale signs that analyzing has gone too far:
• The advisor has missed deadlines. While there are occasionally legitimate reasons for “kicking the can down the road,” the rationale behind most delays is anything but legitimate. And that can mean a missed opportunity if the delay is for something important such as the deadline for an acquisition bid. Advisors can avoid this by giving advance thought to the key points of data required to make a decision, structuring their due diligence request list accordingly, and setting sharp internal deadlines.
• The advisor continuously revisits analysis. The thinly veiled tactic of asking for one more piece of data—oftentimes one that may not even exist—is a sure signal that “70%” was passed a while ago. There is a point of diminishing returns in a continuous compare-contrast analysis. When advisors are on their third or fourth demo of a portfolio management system, it is time for them to step back, take stock and make a decision. Assuming the firm has done a reasonable marketplace survey and can base its decision on key purchase criteria, advisors waste valuable time by seeking out that last piece of the puzzle.
• The advisor always waits for everybody to agree. Firms with multiple partners need to be wary of seeking out unanimity on all decisions. Instead, they need an established governance model that puts certain important decisions in the hands of one or two people. This could mean, for instance, appointing a chief investment officer to have the final say on rebalancing tolerance ranges or other investment decisions.
Take Action
Leading a successful RIA firm can feel like a lonely endeavor at times, but the most effective leaders do not operate in isolation. They avoid poor decisions or indecision by knowing how to strike a balance, making sure to collect enough information but also making sure not to go overboard.
Leaders who can make actionable and intelligent decisions will keep their competitive edge and, ultimately, increase their firm’s value.