Growth has an unexpected downside for some wealth managers--they find their businesses encountering bottlenecks. The obstacles range from procedure to technology, but the result is often the same: The firm develops ad hoc, short-term solutions for each new crisis.
Ken Evans, a senior consultant with Moss Adams LLP in Seattle, Wash., has found that wealth management firms reach critical thresholds throughout their lifecycles, frequently when they realize annual revenues of around $2 million and again around $5 million. As firms hit those particular targets, he says, they reach a point where the business has to transform itself to get to the next level. "They almost have to deconstruct their business and then reconstruct it going forward," says Evans. "As they reach those size thresholds, operations and processes become the center of many discussions."
Adapting processes to cope with higher volumes of business in a professional services firm is nothing new, of course; successful accounting and law firms have surmounted the same challenge for years. However, the rapid growth of many wealth management firms has caught some owners unprepared. Dave Welling, a vice-president with Schwab Institutional in San Francisco, notes that the industry has experienced 20 percent-plus growth rates over the past four or five years, and advisors are now working to deal with the responsibilities that accompany that success. "Many of them have grown up overnight and realized that they're running a real business that used to be pretty small," he says. "But now they have a lot of employees and clients, and the business requires much more coordination if they want to be productive and keep those kind of growth rates going."
Increasing efficiency isn't just an academic exercise; the results flow directly to a firm's profitability. Schwab Institutional conducts regular benchmarking studies in which more than 1,500 advisory firms across the U.S. participate. Welling says those surveys have revealed that the firms judged best-managed and fastest-growing--two separate categories--spend significantly more time putting a plan in place, documenting the plan, and aligning the organization around executing against that plan. "What's strikingly different about all the growth leaders and best-managed firms is how much time they spend thinking about how they spend their time," says Welling. "It is striking, and it shows up in the numbers. Our best-managed firms have 50 percent to 80 percent higher revenue per professional than everybody else does. If you look at revenue per staff member, it's more like 30 percent to 40 percent higher revenue (for these firms)."
It's tempting to look for a quick-fix productivity solution from an external source, but that's rarely the answer. Deena Katz, CFP, is an associate professor at Texas Tech University who also has 26 years of hands-on experience with Evenksy & Katz in Coral Gables, Fla. She was an advisor to wealth managers when she was consulting with Moss Adams and points to a Moss Adams survey that examined operational issues. The survey found that many advisors were looking for the "killer app," that is, the one piece of software that would handle everything and solve all their operational problems. That quest, however, overlooks the underlying problem, says Katz. "Nobody is using the software power they have now," she says. "What they need is a 'killer process.' They need to have their process down so efficiently that it absolutely saves time and energy."
Some advisors who focus extensively on process management admit that it wasn't always a top priority for them. Greg Friedman, CFP and president of Friedman & Associates in Novato, Calif., planned originally to operate indefinitely as a small boutique-type advisor when he started his firm in 1991. By the mid-90s, he arrived at the realization that his business had passed the point where he could recall every detail about every client It was then that he decided to modify that vision and grow the firm--a decision that led to a need to change his internal processes. "I remember distinctly when suddenly I couldn't remember everything just right off," he says. "And I went, 'Oh no; this is an issue!'"
Friedman's revelation occurred in 1994 when his firm had approximately 40 clients and $10 million under management. He knew the business needed procedures that would create a consistent client experience, which in turn required a consistent methodology for improving workflow. But Friedman also faced another challenge specific to his locale--an extraordinarily tight labor market--that increased the need for improved efficiency. The rapid growth of tech firms around San Jose in the mid-90s spurred demand for skilled employees and caused hiring headaches for small businesses. "The boom sucked up talent everywhere, even down to administrative levels," says Friedman. "I couldn't even hire a receptionist. I could not hire to save my life, and it was driving salaries up all over the place."
The hiring constraints forced Friedman to either aggressively seek improved efficiency or halt the firm's growth. His initial attempt to increase productivity--creating checklists to systematize the firm's workflow--was admittedly low-tech. In 1995, he hired a developer to start moving those checklists into a database, which subsequently evolved into the Junxure CRM program that has more than 1,000 users today. Friedman's efforts to systematize the workflow largely succeeded. Over the past 13 years his wealth management business has grown to a staff of seven serving 140 clients with $230 million in assets--an average growth rate of over 25 percent. Friedman continues to seek out productivity enhancements, but he estimates the firm's current processes could accommodate a client increase of 50 percent without additional staff.
In 1991, Warren Mackensen, CFP, launched Mackensen & Company, Inc. in Hampton, N.H. as a solo practice. He had worked in the nuclear power industry and on nuclear submarines--work that relied heavily on documented procedures. Mackensen adopted the same approach to process management in his new business. "I created accounting procedures on day one," he says. "When I hired my first administrative assistant, she couldn't believe I had written procedures even though I worked alone. I did that simply because I didn't have time to figure out a second time how to do my month-end accounting. From there I immediately created workflow processes and have created procedures for everything we do in the office."
By 1994, Mackensen realized that the commercially available software focused primarily on storing basic contact information and lacked the flexibility and features needed to track his firm's processes. In 1995, he started developing a CRM database program--subsequently named ProTracker--to meet his needs. Today the software has more than 900 users. The program contains the workflow processes that Mackensen & Company's staff follows, with user feedback that-- over the years--has improved those processes. Mackensen's wealth management firm has grown to a staff of four serving approximately 130 clients with $85 million in assets, and he estimates they could increase the client roster by 25 percent without adding staff. His litmus test for deciding when to add staff reflects Mackensen's personal values: "When I can't go skiing mid-week, then that's time to add some staff."
Of course, most advisors don't start software companies as outgrowths of their efforts to improve workflow. CFPs John LeBlanc and Robert Siefert combined their individual practices in 1997 to create Back Bay Financial Group in Boston. The firm has since grown to a staff of 15 serving approximately 225 clients with assets in the $350 million range. Each client works with one of the firm's four wealth managers; support staff back up the managers. In 2005, LeBlanc compared Back Bay's productivity metrics with those published in a Moss Adams survey of other wealth managers. He realized that his managers were handling fewer client relationships than was the norm at other firms, and he began seeking ways to help his managers use their time more efficiently.
The result of this search was the formation in late 2005 of an internal standardization committee focused on process engineering. The committee consists of an owner, a wealth manager, a member of the technology staff, one person from operations and a technical consultant. An operations analyst--also an employee--coordinates the committee's work and tracks the implementation of its recommendations. Each department in the company participates to ensure firm-wide input to the process. "The standardizations committee represents everybody in the firm," LeBlanc says. "That avoids the problem of developing a solution that pleases the wealth managers but not the client service staff."
The group meets for 90 minutes each week and is working its way through a host of internal procedures. One of the first tasks the committee considered was standardizing the actions required when a client dies. A death requires responses from several departments within the firm, and the standardization committee developed a process to avoid overlooking any of those steps. "When a client dies, we have to do multiple things that fall under wealth management, technology and client services," says LeBlanc. "The committee developed in Junxure what we call an action sequence that says do the following things when somebody passes away. That includes getting date-of-death valuations on the portfolio, addressing statements to the executor, removing the client's e-mail address from mass mailings, and so on. When you're all in a room together as a committee and start brainstorming, it's amazing how much detail you can come up with, especially when you have all the different operational areas together."
The prospect of process re-engineering can be daunting, but it's possible to implement changes gradually. Friedman recommends that managers identify their inefficient processes, rank them by the projected payoff from the productivity improvements, and then work their way down the list. Prioritizing the list also eliminates the risk of taking on more concurrent process engineering projects than the firm can manage successfully. Katz suggests that advisors draw a flow chart that illustrates the firm's activities: prospecting, initial client meetings, planning, trading and execution, etc. The goal is to see where each activity starts, where it goes, and who handles it. "When you see this information, you begin to understand where it's flowing or not flowing," says Katz. "The next thing is have your staff write job descriptions--a breakdown of what they do and how they do it. You overlay that information with the flow chart, and you get to see where holes are. You can see where people are performing jobs and you don't have a box for it or if there is a box for which no one feels responsible."
An option Deena Katz cites for larger firms is to hire a chief operating officer who will be responsible for process management. That's an expensive proposition, but one that appears to gaining adherents among large independents. Additionally, firms of any size can investigate practice management advice available from their suppliers and outside consultants, such as the business strategy and planning services offered by Schwab Institutional's GrowthPoint program. Whatever method or resource a firm uses, though, designing a process to resolve operational and procedural bottlenecks is bound to improve productivity and profitability.
Ed McCarthy, CFP, is a freelance writer in Pascoag, R.I.