Defense is the best offense. 2016: the year of sustainability

The DOL. It’s top of mind for many advisors— and for a good reason. The proposal (that will likely go into effect in 2016) has the potential to change how advisors are running their businesses with the introduction of a new fiduciary “best interest” standard for all brokers and advisors giving advice on retirement accounts and receiving compensation for it. In particular, fee structures, service models, and the number and types of products advisors choose to use are likely to be scrutinized by the proposed legislation. Arguably, it behooves virtually all advisors who wish to have a sustainable business to anticipate and prepare for the changing regulatory and competitive landscape for retirement accounts. Consider the DOL proposal as an opportunity to take a different approach with your business planning. Instead of the typical planning focused on hypothetical projections about next year’s growth, reframe your strategy toward creating a more sustainable business and managing your enterprise risk. By doing so, you’re ultimately positioning your business for long-term success. After all, striving for sustainability gives advisors a basis for identifying key success metrics and helps maximize resources.

There are four pillars of a sustainable advisory business

1. Manageable number of client households.
2. Product inventory control
3. Documentation and implementation of key processes
4. Optimized client experiences, including client portfolios.

Successfully managing these four pillars in your business not only helps you go on the ‘defense’ with the DOL proposal, but also on the ‘offense’ by helping you deliver lasting, high-quality client satisfaction – the holy grail of advisor success. Clients who feel valued and well served tend to become valuable advocates for your firm. On the flipside, dissatisfied clients leave the firm, leading to attrition – which can be a risk if it happens too much. With competitive pressures in the advisory market showing no signs of abating and with client needs constantly shifting, ambitious advisors need to continuously retool, refresh and improve the experience they offer clients in order to secure the highest level of client satisfaction.

How might you go about creating a sustainable business with these four pillars?

1. Review the number of client households in your book. Are you meeting with each of your clients on an annual basis, at a minimum, to review their portfolio, risk tolerance, and overall goals? If the total number of households you’re attempting to serve exceeds your ability to realistically meet with them regularly, then you must audit the relationships to arrive at a manageable total number of households.
2. Scrutinize the CUSIPs in your total business; in particular, the CUSIPs in your clients’ qualified accounts. Does your business have the necessary time and resources required to effectively provide oversight on all of the CUSIP positions across your client portfolios? There may be an 80/20 rule in terms of the high percentage of total AUM (80%) concentrated on a low number of CUSIP positions (20%). Although this ratio introduces scale concerns, an additional risk is the liability associated with the remaining accounts that lack the position concentration to justify the necessary allotment of time and resources. If your analysis reveals that investment changes are necessary, the transitions can be made without tax implications within retirement accounts.
3. Document your key client touch-point processes. Work with your staff to identify and document the client touch points that create an ideal client experience. Establish sub-processes for important stages in the relationship (e.g., onboarding new clients, referral process from client advocates, client review meetings) and identify the personnel responsible for leading the implementation of each associated task. These processes partially define the value that you deliver to the client relationship and also provide an internal “operations manual” for your business.
4. Optimize your client experiences, including client portfolios. Designing a client experience that delivers high client satisfaction is what virtually all advisors aspire to achieve. This requires intentional client discovery as well as the ability to articulate value in terms of outcome-oriented solutions. Finally, advisors must be diligent with client portfolios, seeking all avenues for optimization, including effective tax management.

The potential payoff of focusing on managing business risks

An added benefit to focusing on creating a more sustainable, risk-managed business is that the value of the firm itself is potentially enhanced in the following ways: a manageable number of high-quality relationships; documentation that tangibly captures the secret sauce that drives the business and reduces personnel risk; and a controlled number of high conviction products. These are all attractive attributes to potential buyers or co-owners of your firm.