Build a Recession-proof Practice. 5 key ways to help you strengthen your practice now for greater efficiency and profitability. seic.

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1 Build a Recession-proof Practice 5 key ways to help you strengthen your practice now for greater efficiency and profitability seic.com/advisors

2 There s no doubt about it. Since the financial crisis of 2008, staying profitable has become that much more challenging. Clients have become more demanding, expecting greater involvement in decision making. They are looking for less volatile portfolios and a higher level of customization delivered with leading-edge technology. Thanks to an increasingly difficult regulatory environment and changing technology, the complexity of your business has also increased. The result has been a squeeze on margins in spite of the fact that the average advisor s assets under management (AUM) grew over 9% from , revenue on assets actually remained flat. 1 In addition to a squeeze on margins, many advisors are finding themselves in a position of having more lowerrevenue clients than they d like. The average advisor book contains about 20% lower-revenue clients, but on average, these clients contribute only 2% to revenues. 2 Lower-revenue clients take up a disproportionate amount of your time and resources. They also make it harder to attract and retain larger accounts. Average Advisor AUM Average Revenue on Assets MILLIONS $100 $90 $80 $70 $74,000,000 $80,800,000 $90,200,000 $97,000,000 PERCENT 75% 74% 73% 72% 72% $60 71% $50 $40 70% 69% 69% 68% 69% $30 68% $20 67% $10 66% Source: Price/Metrix Annual Report on the State of Wealth Management, March Source: Price/Metrix Annual Report on the State of Wealth Management, March 2015 Small households (<$250,000 in assets) slow an advisor s growth and impede their ability to attract high income households 3 Source: PriceMetrix Stay or Stray, December Douglas Bank. CEB analysis. Higher Value Clients Higher Value Clients Average Advisor Book Composition 80% 20% 98% Client Value Segments Average Revenue Contribution Lower Value Clients 2% Lower Value Clients BUILD A RECESSION-PROOF PRACTICE 2

3 ways to optimize your practice now for greater efficiency and profitability. When the next crisis comes, it will be too late to give your practice a profitability tune-up. The best time to make changes is during up markets, so you re prepared when the 5market weakens. 1 Choose the right operating model Your operating model gives you the structure needed to move your vision forward. The rewards of refining your operating model will extend well into the future, and will enable you to increase your effectiveness with clients, provide a seamless, professional interface, and increase your retention rate for both clients and employees. The right operating model will also allow you to scale for growth, consolidate for efficiency and gain time savings. The operating model you choose will depend on your vision for your practice. Do you want to be an Asset Manager or Asset Gatherer? Asset Managers Asset Gatherers You ll need to decide up front whether your practice will be primarily commissions-based or advice-based. More advisors are choosing advice-based practices because they align your interests more squarely with those of your client. An advice-based practice is also a better match with a value proposition because it shows you as a trusted advisor, rather than a product salesperson. Another decision you ll want to make is whether you are an asset manager or an asset gatherer. Asset managers enjoy managing the details of their clients investments themselves, including fund selection, asset allocation decisions and fee calculations. Asset gathers prefer to develop new business, dive deeper in the discovery and planning processes, and strengthen client relationships. If you fall into the latter category, you ll want to determine what tasks can be outsourced and find a turnkey asset management partner who can manage those aspects of your business. When you partner with a self-managed platform, you: Select funds and managers for each client. Determine the asset allocations, rebalancing client portfolios as needed. Handle all fee calculations and create statements, performance reviews and tax reports. Market to and service your clients. When you partner with a turnkey asset management platform, you: Identify client goals through a planning and discovery process. Map a client s goals to the appropriate platform model. Spend the majority of your time developing new client relationships and servicing existing relationships. Whichever direction you choose, you ll need to make decisions about your processes, work structure and people (see infographic on page 4). When it comes to processes, consider your current systems and practices. Is a total overhaul of your existing systems possible or even desirable? Which processes can be redesigned and streamlined? In which areas would an investment in new technology add significant value? For your work structure, you ll be looking at who does what and how the work gets done. Ask yourself: Are there opportunities for automation or centralization in your back office? Could outsourcing be used to better leverage your time and resources? BUILD A RECESSION-PROOF PRACTICE 3

4 And when examining your people and organization, consider: Does anyone s role need to change, or do they require additional skills in order to function effectively and grow with your firm? Consider how you might use incentives to motivate the change you d like to see among your staff. Once you ve carefully considered these questions, draft a detailed description of how you d like to see your practice operating in the future. You ll then want to create a timeline that takes you to your goal, with realistic, achievable steps along the way. Before you get started, it s important to get commitment from your partners and employees, where applicable. You re shooting for a full-team effort. To keep your team focused on the goal, make it a point to celebrate important milestones as they re achieved. And do expect difficulties along the way. Change seldom happens without them. The reward will be a more streamlined and competitive practice that s better equipped to handle challenges and retain employees and clients. You ll also be primed for faster growth and improving profitability. Wealth managers make key choices regarding the Target Operating Model OVERALL ECOSYSTEM COMPANY, PROVIDERS, PARTNERS AND CLIENTS PROCESSES WORK STRUCTURE PEOPLE AND ORGANIZATION Process Model Architecture Centralization Structure and Role Process Redesign Footprint Job and Career Design Technology Standardization Workload Balancing Coaching and Enablement Workflow and Task Automation Sourcing and Outsourcing Leadership and Governance Source: The Boston Consulting Group, Optimizing Operating Models in Wealth Management, Beardsly, Bronstein, Pardasani and Montgomery, January BUILD A RECESSION-PROOF PRACTICE 4

5 2 Build your value proposition You know that your value proposition is important, but you may not realize the extent to which that s true. The fact is, your value proposition is foundational to just about every aspect of your business, affecting not just how clients and prospects see you, but also how you see yourself. According to a recent study, One of the key drivers of price misalignment is the advisor s inability to articulate the value of his or her services. 4 If you re not confident in your value proposition, you ll end up with clients who view you as less valuable than you are, and will be less likely to refer you. Your value proposition is a 10-second statement explaining what you have to offer. To build a great value proposition, think about how your top clients would describe what you do for them. Or, better yet, ask them and see what they say. Remember to focus on the needs of the people you are targeting, not on your services. For example, I specialize in organizing and simplifying the complicated financial lives of people like you, or, We provide individuals and families with advice that gives you the confidence to make informed financial decisions. Once you ve created your value proposition, use it on your website, stationery, signature, voic message, receptionist s greeting, signage and social media. In addition, you ll want to make the key ideas behind your value proposition part of your ongoing discussion with your clients. With each meeting or phone call, your clients should have a sense of the value you re adding to the relationship. 3 Enhance your client service statement and client roadmap An easy step to take in tuning up your practice involves creating a one-page explanation of what you do for your clients your Client Service Statement. Be sure to include the full range of services you provide, with both broad and narrow categories like: investment oversight, retirement income planning, family wealth planning, wealth protection, designing personalized portfolios, quarterly statements, quarterly meetings, independent advice, commission-free trades, and 401(k) allocation advice. A well-crafted Client Service Statement supports your value proposition by making it easy to show the value you are able to add to any client relationship. It s also a great way to cross-sell to existing clients. Consider sending your Client Service Statement along with your regular client communications or as a special mailing. You can also take your Client Service Statement back to your 12-b-1 clients to let them know that you are expanding your services and can thus expand your relationship with them. We also recommend creating a Client Roadmap to explain your on-going value. This simple workflow can help your clients better understand your planning process and when to expect to have review meetings. If you re not confident in your value proposition, you ll end up with clients who view you as less valuable than you are, and will be less likely to refer you. BUILD A RECESSION-PROOF PRACTICE 5

6 4 Align price with value It s a fact that more advisors these days are finding themselves competing on price. To get the client, sometimes we lower our fees. But when you win clients based on price, you erode your clients perception of your value. Advisors who find themselves with too many lower-revenue accounts need to take action. One way to tackle the problem is to tier your offering. You might have silver, gold and platinum levels that are based on AUM, and offer increasing service and involvement for larger clients. It may be a good idea to migrate lower-revenue clients to a junior relationship manager who has the time to grow those relationships. You might explain, I d like to pair you with an advisor who has more time to serve you. Consider outsourcing or centralizing tasks that are standardized and that don t require your judgment calls as a way to lessen the burden of smaller accounts. Your goal is to free up more of your time to spend on higher revenue-generating activities like prospecting and serving your larger clients. When bringing up the subject of raising your fees with a client, you ll want to prepare ahead. If you can, provide context that points out the industry s going rates, showing that your rate increase is both reasonable and fair. Trust in your fee schedule and consider ahead of time how you d handle a negative response. Would it be possible to graduate your client to higher fees over time? Or are there opportunities to expand the relationship so that a discount might be warranted? Advisors who price their services low may undercut client perceptions of value, but Those who price high run the risk of creating insurmountable service expectations. 5 The key is to price in the range of about 0.8% to 1.5%, and to make sure you re setting your fees based on the value you provide. So the next time you consider discounting to win business, ask yourself if you d rather be the guy saying, I ll charge you less than you re paying now or the one saying, Let s discuss how I can help you meet your personal financial goals. By changing the discussion from cost to one that s focused on your client s aspirations and how you can help them reach their goals, you can open the door to greater profitability. Advisors who find themselves with too many lower-revenue accounts need to take action. BUILD A RECESSION-PROOF PRACTICE 6

7 5 Expand client relationships When casting your vision for your practice, consider switching to advice-based as a way to expand your client relationships. Switching to advice-based can also help you build the value of your business, creating a more valuable investment for your future. Deeper client relationships are the best way to increase your client retention rate and improve your profitability Stage Time Frame (months) Honeymoon 0-12 Critical assessment In it for the long run Source: PriceMetrix Stay or Stray, December These days, investors are demanding that advisors provide advice aimed at helping them reach their goals. And while financial products are being increasingly commoditized, what isn t being commoditized is what provides your best opportunity for differentiation advice. Requirements High trust period Clients determine whether the relationship meets their needs Retention rates stabilize The number of fee-based accounts among advisors nationwide has increased significantly in recent years. Why? The trend toward advice-based relationships has been driven by increased regulation surrounding advisor compensation, declining commissions, the commoditization of financial products, and consumer demand. These days, investors are demanding that advisors provide advice aimed at helping them reach their goals. And while financial products are being increasingly commoditized, what isn t being commoditized is what provides your best opportunity for differentiation advice. In addition to switching to advice-based, communicating well with clients is critical to building a relationship of trust. There are three phases in the client relationship each with different communication needs. In the first year, you benefit from a high-trust period, which we ll call the honeymoon. In psychological terms, that s called choice-supportive bias, referring to the tendency we all have to think positively about the purchase decisions we ve made, and to overlook any faults. All that changes in your second year, which we ll call the critical assessment period. During this time, your clients are going to be looking at the relationship with a more critical eye. Because they re most likely to leave you in this stage, this is the time to double-down on your service, and to make sure you re communicating on a regular basis the value you re adding to their financial management. After about 4 years, retention rates stabilize. Most of your clients will be with you for the long run at this point. Which clients are most likely to stay with you? The highest retention rates belong to older clients with household incomes above $250,000 who have more than one account with you, and are paying fees in the range of 1% to 2% ROA. 6 These results underscore your need to focus more of your time on higher-revenue clients, especially when it comes to cross-selling. BUILD A RECESSION-PROOF PRACTICE 7

8 An investment in your practice is an investment in your future, and there s no better time to get started than now. If you would like to learn firsthand how financial advisors have incorporated these 5 business tactics to build a more profitable and efficient business, contact SEI at PriceMetrix Annual Report on the State of Wealth Management, March Corporate Executive Board, Embedding Sustainable Pricing Discipline in the Organization, June 27, The Boston Consulting Group, Optimizing Operating Models in Wealth Management, January Corporate Executive Board, Key Tips to Overcome Common Profitability Pitfalls, January 8, PriceMetrix, Stay or Stray, December PriceMetrix, Stay or Stray, December Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company SEI (05/14)