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Practice Management in a Recession

Revenues are falling and the phones aren't ringing. What should you be doing?

David J. Drucker, 12/30/2008

This economy hurts!

If you're an hourly planner to clients of modest wealth, it's likely that your phone has stopped ringing. If you provide comprehensive planning and money management for better-heeled clients and charge a percentage of assets under management, your revenues are probably falling faster than you can compensate for with revenues from new clients. And if you charge clients retainers, your revenues may be intact but expenses are nonetheless "sticky." What's a financial advisor to do?

Who better to ask than the heads of several broker-dealers who see their many reps grappling daily with these decisions? Chris Radford, CEO of VSR Financial Services (www.vsrfinancial.com) of Overland Park, Kan., and Ken Hyman, President of Partnervest (www.partnervest.com) of Santa Barbara, Calif., discussed what their reps are doing to reclaim their businesses after the devastation wrought by our current economy. (Partnervest is an entity with an RIA, a broker dealer, and an insurance agency that helps fee-based advisors enlarge their practices through greater operating efficiencies).

"How does practice management change in a recession?" I first asked Radford, whose broker dealer serves approximately 260 reps. He responded, "What I'm finding in speaking to our advisors the last few weeks via advisory roundtables and one-on-one discussions is that they're continuing to spend." It seems that advisors have learned what one of Radford's top producers said to him recently. Radford said, "He was talking about working on his own budget and strategic plan." Normally, Radford said, this rep gets 70% of his business from existing clients and the rest from new clients. But next year, with business off about 20%, he believes 50% will need to come from new clients.

Which means spending on marketing will be key.

"This same advisor is noticing that this may be the best client acquisition time he's experienced in many years," Radford said. "So I'm seeing reps asking about seminar programs and other new ways to get clients, although referrals are still the number one source of new clients."

Some reps, Radford said, are choosing to go the seminar route but are doing so more intimately by populating their seminars with referrals from other clients.

"It's a matter of asking existing clients, 'Who should I speak?' to versus mass marketing their seminars" as they might have done in the past, he said.

"I'm not seeing our reps cut back; rather, they seem to be spending more," he added. On marketing? Not always. "Many reps are choosing to spend extra money to make sure they maintain a staff that continues to provide good service during this downturn. As the top producer said, 'Customer service tends to be a bigger differential and driver than performance.'"

Marketing and maintenance of customer service come together, ultimately.

"Our reps understand they have to go out and get new clients, but they also know this is a great time to do it because so many investors are unhappy not getting the service they need from their current financial advisors," Radford said. "They're looking around."

Radford said that he applies a similar philosophy to his own broker dealer.

"Just as our reps know that, if they cut back capacity, they might become short-handed and unable to impress that new client, we're not reducing staff at VSR either." VSR maintains a ratio of no more than three reps to each broker-dealer employee. "We're projecting flat revenues next year, but we're not cutting back in areas of service. We will defer some expenses -- maybe in the area of technology, for example -- but not in the area of service." On the other hand, Radford said that he doesn't necessarily support his reps cutting back on technology. "They need to have a technology budget and a plan. Now's the time for them to invest in their businesses in order to support new client acquisition."

Are Partnervest's reps emphasizing the same activities--marketing and client service--as they deal with the recession?

Yes and no. For Partnervest's advisors, Hyman said, it's all about finding operating efficiencies in this recession.

"It's no different than any other time except, with the markets as they are, our advisors should be spending most of their time communicating with clients and maintaining relationships, as well as keeping informed on the markets," he said.

Of course--and this applies particularly to Partnervest's fee-based advisors--revenues have been decreasing, yet overhead is remaining constant. "What firms often do is attempt to lower expenses by reducing the number of employees, but the remaining personnel end up wearing too many hats, and the firm becomes even more inefficient," he said.

What's a better alternative?

"What we counsel people to do is focus on what they do best, while delegating or outsourcing the rest," Hyman said. "There's no time better than the present to look at that concept as a [business] model."

Also, noted Hyman, market woes will likely bring even more regulatory changes than the industry has already endured in recent years, so the amount of time Partnervest's advisors spend on compliance-related issues is only going to increase. PAGEBREAK

"You need to look at your overall business model. I'm a firm believer in SWOT analysis, i.e., analyzing strengths, weaknesses, opportunities and threats, to determine who you are and what you want to be, and to figure out how to alleviate areas where you're having pain," Hyman said.

Doing so might result in outsourcing of certain functions, for example, Hyman said. Outsourcing is a good example, he adds, because its use results in a variable cost solution.

"What you get is a business model that--when times are difficult--is dealing with variable costs rather than fixed overhead," he said.

Doing a SWOT analysis today--which Hyman advised should be done at both individual and firmwide levels--threats are probably what stand out the most.

"It's what you're faced with on a daily basis these days ... declining revenues, higher fixed costs, greater regulation, unstable markets, the threat of losing clients because their portfolios aren't performing ... it's easy to focus on the threats," he said.

When the advisor examines his strengths and core competencies, Hyman said, that typically brings him back to what he does best and what he enjoys the most--usually the relationship side of the business and working directly with clients. As for opportunities, Hyman said that advisors who have streamlined their practices and who take disciplined approaches aren't focused on client attrition, but on going out and growing their practices.

Which leads to advisors' need for a more efficient approach to "onboarding" new clients.

"Advisors need to have a process for gearing up capacity-wise," Hyman said. "They need to have a methodology in place for how they will systematically work with new clients to onboard them and bring them into the practice. If the onboarding process isn't efficient, this is the time to improve it, to get in the trenches and work through those issues. Not only do clients and prospects put their heads in the sand [during difficult times]; advisors do it too."

Perhaps Hyman's approach to interviewing advisors to see if they're a fit for Partnervest is the approach all advisors should take in this market.

"We start by asking, 'What is your pain? Where are you having the most difficulty?' When we address that pain, we usually uncover more beneath the surface," he said.

That sounds like a prescription for what advisors should be spending their time on now. Some will have the time to tackle this review of their business models and operating efficiencies because client attrition or a slow pickup in new client activity has freed up their time. Others will be busy marketing to new clients and will have to make the time. Either way, a thorough and honest look at your revenue sources and systems can benefit you greatly in a time like this.

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