By Bette Skandalis
“You only find out who is swimming naked when the tide goes out.” This Warren Buffett quote can be interpreted several ways, but I take it as a commentary on risk management. In other words, when the going gets rough, those who haven’t taken steps to protect themselves against various business risks will find themselves foundering.
But against what risks should you be protecting yourself? Below, I’ve outlined a number of potential risks that could disrupt your business. By understanding your exposure to these risks and taking steps to address them, you’ll be better able to protect your practice and your clients when the tide goes out.
According to a recent ThinkAdvisor article, some of your more financially capable competitors are enhancing their services. For example, Schwab Private Client, Merrill Edge, and Vanguard are offering more services at favorable price points. And robo-advisors such as Wealthfront and Betterment “have marched across the internet like a zombie apocalypse.”
These services have grown in response to changing client demographics and an appetite for high-tech, high-touch services for the emerging affluent market. If you want your business to change with the demographics, explore ways to reach out to millennials, and be prepared to talk about the value you provide compared with the competition (i.e., service, trustworthiness, and quality relationships).
Perhaps you’re familiar with the expression, “If you’re green, you’re growing; if you’re ripe, you’re rotting.” Although you’ve worked hard to get where you are, some growth will enable you to reinvest in more client services in this competitive market. Further, given fee compression, a sideways market, and increased competition for client dollars, finding ways to grow is even more important.
Some options include:
• Teaming up
• Building infrastructure
• Segmenting services for clients
Clients with specific needs look for advisors with specialized knowledge. In fact, recent research suggests that specialist practices are more lucrative than their generalist peers. Although only 15 percent of advisors concentrate on a niche, these practices account for 29 percent of overall advisor assets.
So, for example, if you have knowledge of divorce and access to ancillary advisors, you may be better positioned to serve individuals going through a marriage breakup. Or, you might merge with other advisor firms with complementary services and expertise. By forming teams, you can present a more complete service offering for clients looking for that “one-stop shop.”
It’s well documented that millennials favor financial advice supported by technology. In a survey by Cisco Internet Business Solutions, a majority of wealthy under-55 clients were interested in meeting via videoconference, and many indicated they would like advisors to be technologically proactive. If possible, consider meeting virtually with younger clients. Another strategy is to use Twitter or LinkedIn to reach out to this group—just as they are using social media to learn more about you.
Technology has also affected trading tools and automation, facilitating timely trades and delivery of sophisticated investment strategies and creating more safeguards against market downturns. Your ability to use these tools may be the decisive strategic edge to attract clients. Plus, investing in technology can create efficiencies, drive profitability, and enable you to continue to thrive.
A survey by Capital One Investing revealed that 49 percent of millennials have a full-service investing account; of those who don’t use an advisor, 72 percent say they are likely to use one in the future. Which means the need for skilled staff to support your practice will not diminish anytime soon.
A human resources manager can help ensure smart hires—employees who fit your culture, are ethical and reliable, and are loyal to your firm.
Rules and Regulations
It’s vital to keep abreast of what’s happening in the industry, as increased regulations will require careful planning and allocation of resources to ensure that compliance does not derail the profitability of your firm. For example, the Department of Labor’s new rule imposes a fiduciary standard on all advisors who service retirement plans, including IRAs. Advisors everywhere are trying to understand how the cost for increased education and more business infrastructure to support this standard may pose a monetary threat to their business—and how they will handle it.
Scale and Capacity
Commonwealth’s Practice Management team has observed that advisors tend to experience “pain points” at predictable intervals:
• At $250,000 of production, advisors generally need to think about administrative staff to support the next spurt of growth.
• At $450,000, advisors need technical support and typically hire a paraplanner or research advisor.
• At $750,000, advisors are reaching capacity as solos and need to address efficiency within the practice by analyzing and segmenting their service model and pinpointing their growth plan.
How can you deal with these pain points? Start by creating repeatable office procedures, as well as understanding revenue distribution among clients, profitability by client, and optimal service models. These strategies may help you achieve the level of growth you need while providing the service your clients want.
The Next Step
Now that you’re aware of some common risks, be sure to examine the potential consequences to your practice, along with the likelihood that you will be affected by them. Awareness of your firm’s strengths and weaknesses, as well as any threats or opportunities you face, can help you better prepare for what may lie ahead.
This post originally appeared on Commonwealth Independent Advisor, a blog authored by subject-matter experts at Commonwealth Financial Network®, the nation’s largest privately held independent broker/dealer–RIA. To subscribe, please visit http://blog.commonwealth.com/.
Bette Skandalis is a practice management consultant at Commonwealth Financial Network®, member FINRA/SIPC, an independent broker/dealer–RIA.