THREATS AND OPPORTUNITIES IN THE FINANCIAL SERVICES INDUSTRY

By Jerry Butler 

Introduction:

Are you aware of Robo Advisors? Robos are experiencing very good growth and taking market share from conventional distribution channels but so did discount brokers 30 years ago. Regulation, shrinking fees, increasing compliance yet the industry and many advisors continue to grow their businesses and build very successful practices. Why?

30 years ago you could open an account over the phone, the account form was one page, A signature was not required and you could buy the client an investment with no money in the account. Regulations have changed dramatically and we are not going back to the “old” days and those days were not necessarily better!

THREATS TO YOUR BUSINESS

Consider the following threats to the way you currently do business:

1. Many consumers currently consider investment advice a commodity. They see little difference between an independent advisor or broker or a bank or a “career agent”. That is why many will deal at the bank with an advisor with 15 – 20 ……… hours not years of experience. The reason is the amazing branding banks have done (they have had a 100 years!). Banks are trusted. The advisor might leave but the bricks are still in the same place therefore who sits in front of the client has become less relevant.
2. Shopping on the internet has become ubiquitous and financial products are on the shelf as well. Many check out term insurance prices and follow their investments on the internet.
3. Returns have been replaced by fees as the selling point for many institutions. Advertisements tout their lower fees and do not talk about returns. ETFs have become the vehicle of choice for many consumers, advisors and businesses.
4. Right now, there is a large part of the population being neglected by conventional advisors. They are the younger person with little savings now. These are the people who use technology for every facet of their life. They depend on technology and that way of life. Will they continue to use technologies for their financial decision making when they have lots of money?
5. Technology is cheap now and always getting cheaper especially on a per transaction basis and cost of storage. Large businesses with generic products have economies of scale and can manage hundreds of thousands of clients that can be slotted into a finite number of boxes where the algorithms do the bulk of the work. Artificial intelligence will continue to carve out “tasks” in our industry giving a competitive advantage to the large and well capitalized.
6. The middle of the distribution channel – broker, dealers, mga, exempt market dealers – is squeezing advisors. They are cutting payouts and pushing costs and liabilities down to the advisor. While they are raising revenue expectations they are also cutting payouts. Lower revenues and higher expenses appear to be the trend. The survivors who will thrive are the advisors who are willing and able to change and adapt.
7. Trust. Our industry has done very little to place the advisor in the community’s mind eye as a knowledgeable, helpful and trustworthy professional. As a CFP I wonder where and what that organization is doing. I see very little return on that “investment” both from my perspective and from the “client” perspective. That also goes for Advocis (though they have done some) and the Canadian Securities Institute.

I am sure I am missing many other threats but the above should give us all pause. Until the early 90’s the consumer marched down to the closest bank or credit union and got a guaranteed double digit return. Then they all poured into mutual funds and basically got double digit returns through the 90s. Expectations of the consumer were off the charts. “Snap back to reality!” The 80s and 90s were not the norm. Consumers are better educated and more aware of choices and competition in the market place.

OPPORTUNITIES IN THE INDUSTRY

An important issue to remember is that technology like Turbo Tax or Quick Tax did not put accountants or tax preparers out of business. But the accountants who did not evolve into a more sophisticated business model did feel the pain. There are always disruptors in every industry. It is important to look at your business model and your skill set and figure out how you can change your business to bring a value added proposition to your clients.

Do not forget that many people want personal service and most need it. Statistically we know that individuals with an advisor save more and get better advice therefore advisors need to keep evolving to the new ways of the industry

Here are some opportunities as I see it:

1. Join the lower total fees revolution. Change your compensation model and show your clients how you can give better advice and competitive fees. What is your value proposition?
2. Your business model has to reflect your strengths. Are you a generalist? Maybe a financial planning model. Are you or can you be a Specialist whereby you stand out from the crowd? There are many successful business models in our industry but the model has to fit your strengths. Know the different business models and figure out what works for you.
3. Know your target market. Know who they are, where they are and what they want (need). I think too often we define a market by the size of their savings. It is impossible to only prospect million dollar accounts because the owner can be from all walks of life. Your target market is who more than how much. If you are targeting trades people or brain surgeons – than you will know where to find them. The other factor is what are your interests? Your best clients will be the ones with the same interests. You can translate your hobbies into friends and maybe clients.
4. Have a clearly defined Service Proposition and how to communicate it to clients. How are clients treated? How many touches? How many appointments? Be sure your team is on the same page. Compensate staff based on the service of clients expected and provided.
5. Be more than a one or two trick pony. Don’t just work with investments and insurance to replace income. Bring more to the table. If you have a situation outside of your comfort zone – have a referral ready (Center of Influence).
   That can cover mortgage, income tax, property insurance, debt management, estate planning, succession planning, etc. – become the relationship manager for all things financial.
6. If you have a speciality and are in a niche market than that should be communicated to your target market. Your target market may be other professionals to refer to you. Know your value added.
7. CRM. This is the most important feature (especially to increase value) no matter what your business model. This gets everyone on your team on the same page.  This is both in the client’s personal life and their financial life. You should know that Bill is a hockey fan and that his mortgage term is up in 3 months. One of the most ignored facets I encounter is advisors who want to grow their business but do not have a prospect list. Build a list with social media. In addition, the more you know about your prospects – the better chance they become a client (especially if their interests are congruent with yours).
8. Use technology as a way to lever sales and service. Financial planning, contact management, investment analysis, income tax software, etc. can all be used to efficiently and effectively help you with your clients. Present information with charts and graphs – most people are visual learners.
9. Have a Strategic Marketing Plan. Make social media part of your marketing. Relationship Marketing is the most effective business builder right now. It does not matter who your target market is as you can create touches with clients and build a prospect list. Host client education and appreciation nights. The more touches the better. Your marketing plan should have a referral program; identify centers of influence, charitable function projects, etc. The most important aspect = measure and monitor the results comparing budgeted and actual. Analyze how you are doing and know which areas to improve.
10. Think outside the box. Offer free financial planning advice to your client’s adult children. Show them the benefit of starting early. Have their tax returns
    done. What differentiates you from your competition? Find the value added and tell everyone.
11.  Educate and communicate. Tell your clients the different options they have available to them. Explain products and compensation and alternatives. Make your clients feel you are not hiding anything.
12. Clearly communicate your value added every chance you have. You and all your employees should be able to concisely and clearly explain your value proposition.
13. Bottom line – don’t have a book of business; have a business.

CONCLUSION

When CRM 2 started being bandied about Queenston got tons of calls from the arrogant – advisors will be running for the hills. We told the uninformed that Financial Advisors are resilient, knowledgeable and able to adapt. And you have!!

The next disruptor will result in anxiety but be met with the same adaptable business savvy.

Queenston has been successfully helping our clients increase their businesses value with several of our services. Check us out.

Building a Strategic Business Plan

By Jerry Butler 

Introduction:

Read over the italics and use as a guide of what to consider for the actual Strategic Business Plan.

A. Develop Your Vision:

When developing your Strategic Plan you need to consider the following:

• Your marketplace – who are your best and favourite clients. What is the common thread? Is the market large enough for you to be a niche marketer?
• Your competition – Who is your competition? What do they do? What do you do better? How can you differentiate yourself from them?
• Your current capabilities – no sense having a goal of 50 appointments a week if that is impossible. No sense being a stock trader etc.
• Your personal definition of success – has to be quantifiable, measureable and realistic.

These are the general parameters to stay within when developing your plan.

• Tying it together – using the above as your perspectives will allow you to develop a strategy that will allow you and your firm to:
• Respond to your market;
• Differentiate you from your competition;
• Build on your core capabilities; and
• Fulfill your personal definition of success.

B. Define Your Focus:

Who is your target market? How will you “introduce” Limestone? Maybe you want to concentrate on your own files because there are so many? If so, rather than see everyone when 6 out of 10 may be a waste of time – what is your process?

What is the objective of each appointment? What is the service experience? In the book Spin Selling – every appointment should have a goal of finding a need/problem/issue and therefore a potential sale – in other words always have the objective of another appointment. (unless they are willing to buy now!)

C. Evaluate the Gaps and how to close them.

If you want a $1,000,000 in sales and you are currently at $500,000 – what has to be done to close that gap and how long will it take.

The best way to analyze the gap is to consider the strengths and weaknesses of your business. List them. Attempt to design a plan that will enhance the strengths and improve the weaknesses.

D. Execute the Plan

Remember the goals have to be measureable and realistic. I had a client whose sales were $200,000 and every year he would set a goal of $1,000,000 in sales and his sales never changed. I am sure 10 years later nothing has changed.

AIso use increments that are bite size. If you want to increase your sales $500,000 over 7 years than that is $71,500 per year and $6000 per month or $1400 per week – $6000 per month seems more likely than just saying increase $500,000. Each month have a different sales concept  – for example let’s say my goal is to sell x  new insurance contracts. I will make a list of 50 people age 35 – 50 and have my assistant book 25 appointments. I will talk to each about their insurance needs and have a goal to take 8 aps and earn $6000+ in sales commissions.

E. Monitor and Measure Results

It is very important to keep track and analyze the results. Again be realistic in your goal setting so you don’t get discouraged. But good or bad analyze the results.

F. Leveraging Your Business to Increase Sales and Value

There are several ways to leverage your business:

1. Buy another business.
2. Merge with other businesses.
3. Licensed Employees generate revenue.
4. Sales Associates.
5. Technology.

Firms can use all of the above to close the gap between their expectations and current reality. Keep in mind Queenston gets dozens of calls every week to “find me a business”. Easier said then done.

• Building Value

The key is to build a business that will last – reduce transition risk when ready to sell and/or merge. The way to do this is to have increasing and stable recurring income. Profitability should be consistent and in line with averages. A systematic process should be in place for customer service, new clients, etc.

The branding goal should be that every client when asked who their financial advisor is answers the name of your company not your individual name. This can be done by promoting the name of the company. Also having clients meet with different advisors and/or licensed staff or associates.

Other factors to increase value include: location of your office (especially if your clients come to your office); reputation (branding); leveraging of licensed employees (long term)and technology, a complete and comprehensive CRM of clients and prospects; clearly defined and consistent client service model; unique and successful marketing program.

STRATEGIC  MARKETING PLAN

1. OVERVIEW

Limestone currently has two (three?) offices and …….

1. VISION

Where do you want to be in 5 or 10 years into the future. What kind of a business do you want? Sales, advisors, etc.

FLOW CHART

GOALS

Strategic goals are an expression, in measureable terms, of what your business intends to achieve. There are Hard Goals and Soft Goals. Hard Goals address financial goals – the Urgent and Important. Soft Goals refer to the less “Urgent” but Important goals such as employee issues, infrastructure issues (CRM, Technology, Facilities, “different plans”, etc.).

Hard Goals:

Breakdown the “important” products eg.

Insurance Sales                    increase sales revenue by x to y

Investment Sales                   “

Income Tax Sales                   “

Fee business                           “

TOTALS                                    “

New Clients                            “

New AUM                        “

Total AUM                              “

New Term Ins Policies                “

Reduction of Expenses         “

Etc.

You get the idea. Pick those issues that you feel is important.

SOFT GOALS:

Sales and Marketing – appts per week, appointments – selling #; service # – seminars, etc.

Strategic Alliance

CRM – clients

CRM – prospects

ETC.

Goals have to be measureable and have to be reviewed to actual vs goals. Then it is important to adjust what you are doing in order to hit objectives.

PRODUCT MARKET FOCUS

The key here is the FOCUS part. In your Plan you casually mention a few products – insurance, segs, income tax, etc.

It is not just what but who and how and how many.  You may want to focus on a specific product at least for a quarter.

Eg. Term Insurance – we have X Term contracts. We will convert Y policies to either new terms or permanent. We will sell Z new contracts. You can even define the market you are targeting.

VALUE PROPOSITION

What is important to your customers? You cannot be generic. What seperates you from dealing with the Banks or Credit Unions?

“Limestone has xx years of experience and yy education and therefore we are able to help our clients achieve their financial planning goals and objectives.” If you were sitting down with a new prospect is what you tell them going to convince them that they should deal with you?

Should be short and to the point – kind of an “elevator sales pitch”.

The second part is you have to deliver that propostion.

CORE ACTIVITIES

What are the value adding activities that your business intends to perform and how does it intend to perform them?

Eg. Financial Planning including – retirement planning, debt analysis including mortgages, investment and risk analysis ….. for all clients with revenue greater than $1000.

ELEMENTS OF THE PLAN

• Marketing Plan – who is your target market? what will be done to increase profile, increase appointments, etc. promotions – email blasts and seminars; advertising; social media; etc. A clearly defined service model should be developed both proactive and reactive.
• Operation Plan – CRM, Employees, junior advisor, expense reduction, etc.

• Financial Forecasts – spreadsheets

I would recommend doing Quarterly projections broken down by product/service including recurring revenue. Also, set your expense goals in the same manner for the first 4 quarters and then annual for 4 more years for a total of 5 years.

IMPLEMENTATION

There are two categories to list actions in order to prioritize what and when actions should be done.

• Important and Urgent – these are the items that are in “crisis and/or critical” mode. They should be addresses first but not at the exclusion of the day to day operations.
• Important but not Urgent – these are the items that are very important for the long term success of the business but not in crisis mode. This is where a business wants to be as these are the activities that will prevent having to be in the urgent list.

The Robo-Revolution and Other Threats To The Way You Do Business

By Jerry Butler 

Are you aware of Robo Advisors? They are currently taking market share in the US – one firm Wealthfront is bringing in $100,000,000 per month. What do they do? They use algorithms to evaluate clients risk parameters and make Index recommendations including re-balancing all for .25% of assets. Does your business model bring enough value added to justify the extra fees your clients are paying?

The argument against Robo Advisors succeeding is the need for individuals to have personalized service. I agree most people want personalized service especially the older clients. Two groups that are using Robo Advisors in the US are those working at the technology companies and pro athletes (see “Wealthfront deal with 49ers is a big marketing score”; Investment News).  They are young and high income clients that trust and are comfortable with technology.

When I came into the industry 20 years ago I could open an account over the phone, the account form was one page, I did not need a signature and I could buy the client an investment before I got a cheque. Have times changed? I often ask myself – with all the regulatory changes – who is better off? But that is a discussion for another paper. The point is times are changing.

When we combine this Robo/technology threat with the changes in regulation and the financial product distribution industry it probably means we have to make structural changes to our own business model.

THREATS TO YOUR BUSINESS MODEL

Consider the following threats to the way you currently do business:

1. Many consumers currently consider investment advice a commodity. They see little difference between an independent advisor or broker or a bank or a “career agent”. That is why many will deal at the bank with an advisor with 15 – 20 ……… hours not years of experience. The reason is the amazing branding banks have done (they have had a 100 years!). Banks are trusted. The advisor might leave but the bricks are still in the same place therefore who sits in front of the client has become irrelevant.
2. Consumers are getting used to “shopping” for financial products. Many check out term insurance prices and follow their investments on the internet. How many of your clients have or will leave the institution where they have their mortgage for 1/8 of 1%.
3. Historically investment managers do not beat the Indices especially on a risk adjusted basis. According to the Economist (August 9, 2014) based on two studies in the Financial Analysts Journal (July/August 2014) that fewer than 25% of managers even last 5 years. The main reason cited for under performance is that the managers are compared to all of the other advisors – therefore they are not trying to beat the index they are trying to beat the average.
4. Right now there is a large part of the population being neglected by conventional advisors. They are the younger person with little savings now. These are the people who use technology for every facet of their life. They depend on technology and that way of life. Will they continue to use technologies for their financial decision making when they have lots of money?
5. Technology is cheap now and always getting cheaper especially on a per transaction basis and cost of storage. The economy of scale is significant as there can be hundreds of thousands of clients but they can be slotted into a finite number of boxes where the algorithms do the bulk of the work.
6. The middle of the distribution channel – broker, dealers, mga, exempt market dealers – is squeezing advisors. They are cutting payouts and pushing costs and liabilities down to the advisor. While they are raising revenue expectations they are also cutting payouts. Lower revenues and higher expenses appear to be the trend. The survivors who will thrive are the advisors who are willing and able to change and adapt.
7. The industry has done very little to place the advisor in the community’s mind eye as a knowledgeable, helpful and trustworthy professional. As a CFP I wonder where and what that organization is doing. I see very little return on that “investment” both from my perspective and from the “client” perspective.

I am sure I am missing many other threats but the above should give us all pause. Until the early 90’s the consumer marched down to the closest bank or credit union and got a guaranteed double digit return. Then they all poured into mutual funds and basically got double digit returns through the 90s. Expectations of the consumer were off the charts. “Snap back to reality!” The 80s and 90s were not the norm. Now consumers realize if the long term returns are going to be 6 – 8% that if they can reduce costs they are actually increasing returns.

INDUSTRY DISRUPTORS

The white paper by Deborah Fox of the Fox Financial Planning Network “How To Build A Robo-Shield For Your Financial Advisory Firm” describes how Robo Advisors are disrupters of the status quo. The four stages of Industry Disruptors are:

• Stage 1 – The Disrupter enters the Industry – a few years ago there was the start of robo advisors but no one took them as threat to the status quo.
  
  
• Stage 2 – The Disruptor gains transaction in the Industry – The disruptor captures a small but significant market share. The status quo takes notice.
  
  
• Stage 3 – The Disruptor becomes entrenched in the Industry. More disruptors pop up. The top firms in the status quo implement evolutionary changes to their business model.
  
  
• Stage 4 – The Disruptor forever changes the Industry. The firms that evolve out of the status quo will thrive. Those that don’t evolve lose market share or cease to exist.
  
  

Though still at Stage 1 in Canada, Robo Advisors may be close to Stage 3 in the US. The US has been very fee sensitive for a while but certainly it is becoming an issue in Canada as well.

CNBC released their 50 Disruptor List for 2014 recently (http://www.cnbc.com/id/101734664). All were technology companies and 11 were directly related to personal financial planning. One firm; Personal Capital does a financial plan, investment plan and the client can track all their expenses through the same site.

The other elephant in the room is CRM2 which I get calls about daily. Many think it will force advisors out of the business but I personally give advisors much more credit than that. I feel the effects will not be as dramatic as we fear. The key to not having to compete on price is to have consistent and excellent service. The second part of your value proposition has to be clearly communicating that value to your clients. If you are constantly competing with “what and where is cheaper” than
your clients are viewing what you bring to the table as a commodity. Your clients will be looking for the cheapest.

YOUR BUSINESS MODEL

An important issue to remember is that technology like Turbo Tax or Quick Tax did not put accountants or tax preparers out of business. But the accountants who did not evolve into a more sophisticated business model did feel the pain. There are always disruptors in every industry. It is important to look at your business model and your skill set and figure out how you can change your business to bring a value added proposition to your clients.

Here are some ideas to reduce the effects of CRM2 and/or Robo Advisors and /or any other disruptor:

1. Your business model has to reflect your strengths. Are you a generalist? Maybe a financial planning model. There are many successful business models in our industry but the model has to fit your strengths.
2. Know your target market. Know who they are, where they are and what they want (need). I think too often we define a market by the size of their savings. It is impossible to only prospect million dollar accounts because the owner can be from all walks of life. Your target market is who more than how much. If you are targeting trades people or brain surgeons – than you will know where to find them. The other factor is what are your interests? Your best clients will be the ones with the same interests. I have a friend who  translated his love of cars, boats and snowmobiles into specializing in the transportation industry.
3. Know your Service Proposition and how to communicate it to clients. How are clients treated? How many touches? How many appointments? Be sure your team is on the same page. Compensate staff based on the service of clients expected and provided.
4. Be more than a one or two trick pony. Don’t just work with investments and insurance to replace income. Bring more to the table. If you have a situation outside of your comfort zone – have a referral ready (Center of Influence).
   That can cover mortgage, income tax, property insurance, debt management, estate planning, succession planning, etc. – become the relationship manager for all things financial.
5. If you have a speciality and are in a niche market than that should be communicated to your target market. Your target market may be other professionals to refer to you. Know your value added.
6. This is the most important feature (especially to increase value) no matter what your business model. This gets everyone on your team on the same page. This is both in the client’s personal life and their financial life. You should know that Bill is a hockey fan and that his mortgage term is up in 3 months. One of the most ignored facets I encounter is advisors who want to grow their business but do not have a prospect list. Build a list with social media. In addition, the more you know about your prospects – the better chance they become a client (especially if their interests are congruent with yours).
7. Use technology as a way to lever sales and service. Financial planning, contact management, investment analysis, income tax software, etc. can all be used to efficiently and effectively help you with your clients. Present information with charts and graphs – most people are visual learners.
8. Have a Strategic Marketing Plan. Make social media part of your marketing. It does not matter who your target market is as you can create touches with clients and build a prospect list. Host client education and appreciation nights. The more touches the better. Some experts say as high as 70 contacts a year. Your marketing plan should have a referral program; identify centers of influence, charitable function projects, etc. The most important aspect = measure and monitor the results comparing budgeted and actual. Analyze how you are doing and know which areas to improve. Everyone says to me – “I need more referrals” but when asked they do not have a plan to achieve more referrals.
9. Think outside the box. Offer free financial planning advice to your client’s adult children. Show them the benefit of starting early. Have their tax returns
   What differentiates you from your competition? Find the value added and tell everyone.
10. Educate and communicate. Tell your clients the different options they have available to them. Explain products and compensation and alternatives. Make your clients feel you are not hiding anything.
11. Clearly communicate your value added every chance you have. You and all your employees should be able to concisely and clearly explain your value proposition.
12. Bottom line – don’t have a book of business; have a business.

CONCLUSION

In conclusion the industry is changing dramatically. As an aside; but an example of industry changes are the current regulatory problems with Warren Buffett’s Berkshire Hathaway. Mr. Buffett’s motto has always been put trust in your people but be careful who you trust (isn’t that great). Well they have been late filing reports (that don’t mean anything except to lawyers at the SEC I guess) on some of their investments and have been fined. Mr. Buffett has always been proud of the fact that he runs BH on a skeleton staff and does not use a computer (easy for him with his brain). But it looks like the processes of head office may have to change.

For those of us without Mr. Buffett’s personal capacity we have to adjust and change our processes sooner rather than later.

QUANTUM OF ECONOMIC BENEFIT

By Jerry Butler 

Quantum of Economic Benefits = Economies of Scale + Strategic Advantage + Financial Synergy

This could be the most important formula you will have ever learned. This is how you can grow your business’s value. Think about the average advisor’s office – how much more business would you have to do before you needed more space, more employees, more computers, more telephones, more …. I am sure you get the point.

Think of this – rather than 3 or 4 advisors having one assistant each – why not have one licensed assistant processing trades, one marketing assistant booking appointments and managing your data base and one administrative assistant. Probably with those three assistants your office could handle not 3 or 4 producers but 5 or 6. That is Financial Synergy. What about advertising, bulk purchases, and promotions? All of these are more manageable split 4 or 5 ways. That is Economies of Scale. Finally, you can have product and concept specialists which is much more productive than everyone selling a little of
this and a little of that. This could be a major Strategic Advantage. This is a business model that can do business when you are not there – the goal of every businessman.

Plus you have a built in Continuation Plan, Successor Plan and a story of long term stability to tell all your clients. How many times have you been asked “how long are you going to be here?” even if you could answer a question with no real answer wouldn’t they feel better if you had a business model that would guarantee the firm would be around for a very long time. PLUS the larger the company the higher the multiples – merging will increase the value of all the businesses involved.