"In the long history of humankind, those who learned to collaborate and improvise most effectively have prevailed"
-- Charles Darwin
An international genetics project called The Genographic Project recently discovered that modern humans almost became extinct approximately 70,000 years ago. In fact, before humans left the continent of Africa, the number of human beings existing on earth was under 2,000. Fortunately for us, our ancestors escaped extinction by the skin of their teeth, providing an important lesson in the power of adversity and how it spurs innovation.
Based on mitochondrial DNA testing, scientists postulate that modern humans arrived on earth 200,000 years ago. The need for innovation was not necessary until about 130,000 years ago, when the climate on earth changed. No longer the beneficiaries of a warm tropical climate, our ancestors experienced a massive drought lasting approximately 60,000 years. Isolated from each other and living in tiny groups, there were two choices: extinction or innovation.
The almost inhabitable conditions forced humans to create new methods of hunting, better hunting tools and to develop their speech communication skills. Eventually, the climate improved, and armed with better skills, the human race flourished.
Much as our ancestors narrowly avoided extinction, so too, the global financial services industry narrowly survived a catastrophic collapse in 2008. The competitive landscape has significantly changed, creating both challenges and amazing opportunities. Those challenges include:
- Prospects are harder to find
- Profit margins are falling
- Clients expect more services for less cost
- Investors want investment products that mitigate risk and provide consistent income
- Social innovation and technological innovation is driving growth
The wealth management firms that will survive and thrive, both now and in the future, focus their attention on three things:
1. Human capital
Becoming an elite firm does not happen overnight. Before the transformation process to HIP is fully implemented, a well-organized operational structure and firm-wide evaluation must be completed.
Stage 1: Talent level and outsourcing
Evaluating the efficiency of your operational structure begins with assessing the current talent level of employees. In most average organizations, the distribution of talent is concentrated in a select few, who carry the burden of the underperformers. It is often hard for decision-makers at smaller firms to distant themselves emotionally from their staff, which inhibits them from making good business decisions. I recommend evaluating employees based the following criteria:
1. Work Ethic - 30 percent
2. Creativity - 30 percent
3. Team-Oriented - 30 percent
4. Investment Knowledge - 5 percent
5. Sales Skills - 5 percent
Work ethic, creativity and the ability to be a productive member within a team environment, in my opinion, should make up 90 percent of the evaluation process. Most anyone of average intelligence can learn the fundamental concepts of financial markets. Most people of average intelligence can learn how to sell a concept, service or product. The difference between top performers and low-end performers comes down to traits that are very hard to learn or take a significant amount of time to learn, time which small financial services firms do not have.
You many notice that I do not include operational-based skills as part of the criteria. Most, if not all, operational activities can be outsourced. These include:
1. Asset allocation and fund management
3. Marketing and branding
4. Technology systems and software
5. Accounting and account aggregation
6. Practice management
7. Education and training
Making the decision to make the transition from investment managers to asset gatherers is not as drastic as some may believe. I would even go as far as saying that firms can increase their perception as wealth managers by moving to this model. When a wealth management firm is managing the investments in-house, it is extremely difficult get the perspective necessary to make objective decisions. It's human nature to look for evidence to support our decisions. Except for a small group of wealth management firms that have an in-house investment staff ( 8-10 people), most firms are not going to take the time to look for evidence that goes against their investment outlook or strategy. Looking at the opposite side of the coin is the reason why firms should look to utilize turnkey asset management platforms to manage their clients' money. These firms are in the business of managing managers and have the resources to include tax-harvesting, risk management and inserting the right investment vehicle for specific asset classes.
The decision to outsource services for increased operational efficiency does not mean that the operations staff gets put on waivers. The hope is that these employees can move into roles that generate revenue for the firm.
The process of evaluating current employees, recruiting to fill gaps and outsourcing operation tasks should take between three and six months.
Stage 2 : How are we perceived?
If you have been in the financial services industry long enough, you know the importance of developing a brand. Until recently, many of the firms that I have worked with considered building their brand as a secondary marketing function. More than that, most firms do not have a strategic plan to create their brand. Going forward, I argue that developing distinguishable brand in target markets is necessary for survival.
It is important to remember that people often lack the knowledge to make informed decisions, especially when it comes to hiring a financial advisor. They're constantly bombarded with advertisements and sales pitches. In the restroom, in a taxi, at the grocery store; no matter where you go, there are video streams. This forces potential clients to make decisions on a subjective basis, which is why creating a memorable brand is so important.
The first step in the process is gathering feedback from your existing clients. Have an employee go to surveymonkey.com and create a 10 question survey that focuses on the reasons they chose you.
After you receive their feedback, have your team meet with your board of advisors, which should consist of small business owners in the area and your top wholesalers.
Take three to four hours to integrate three sets of opinions:
1. Feedback from your clients
2. Feedback from your board
3. The viewpoint of you and your team
There are five questions that the above should answer, which will provide you a clear brand message:
1. What are the top three reasons clients hire us?
2. How do we make a difference in clients lives?
3. Why are we in this business?
4. What can clients expect when working with us?
5. What makes us different?
Be sure to read the second article in this series, which will provide further examples of ways to avoid extinction by adapting to today's ever-changing environment.