FIRM MANAGEMENT
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Designing the Right Service Model to Fit Your Fee-Only Firm
By Scott MacKillop
The world used to be so simple. There were stockbrokers who sold securities for a commission and registered investment advisors who managed portfolios for a fee.
Boy, have times changed! Brokers are now often dually registered and provide portfolio management services for a fee. RIAs have greatly expanded the services they offer to include financial planning, behavioral coaching, estate planning, and/or tax management. And advisor compensation models now include hourly fees, flat fees, percentage of income or net worth-based fees, and performance-based fees.
I have watched these changes unfold over my 48-year career in financial services. The result is that advisors are confronted with a dizzying array of choices when deciding how to launch a new practice. And existing practices often find their current business model has not kept up with the times and needs a refresh.
This article provides a quick roadmap to help you navigate the new world and develop a service model to help you compete effectively in this rapidly evolving advice landscape. The temptation may be to try to provide every service a client might possibly need and offer a broad array of pricing options—but that would be a mistake. The key is knowing your target market and staying focused on serving its needs.
The Variables
There are six major topics you should consider in designing or tuning up your service model. Each is addressed separately below. No matter what the size of your firm or how long you have been in business, you need a plan in each area.
These days there are so many voices telling you what you should be doing to grow your business and thrive in this rapidly evolving world, the noise can be deafening. Staying focused on the topics identified below will help bring clarity to your mission.
Target Market. It all starts with the client. The universe of potential clients is huge and, more importantly, diverse. Trying to be everything to everybody is a recipe for disaster.
Prospects can be segmented in many ways:
- By asset level—mass affluent, ultra-high-net-worth, etc.
- By service model preference—family office model, online service, etc.
- By niche—local telephone company employees, recently graduated doctors, etc.
The more detailed you can be in identifying your ideal client, the better able you will be to design a service model tailored to their needs and differentiated enough to attract them.
Your ideal client may be determined by your own skill set and interests, your competitive environment, or a strong demand you have uncovered. Understanding their needs and preferences may be determined by your knowledge of that market, research you have done, or conversations you have had with members of your target market. In any case, expect that you may need to engage in some experimentation before you have the answer completely dialed in.
Products and Services. Once you have identified your ideal client, identify the types of products and services you will offer them. There are two aspects to this determination.
First, what products and services are appropriate for your target market? Each market segment has specific needs that are characteristic of it. For example, bill paying services may be appropriate for ultra-high-net-worth clients but not for mass affluent clients. Estate planning services may be appropriate for late career business owners but not for recently graduated doctors.
Second, you must determine which needs of your target market you will try to satisfy. For example, you may decide to focus on investment management and financial planning services but outsource tax and estate planning to strategic partners. This decision may be made based on your firm’s competence, your personal interests, or a desire to specialize.
Fee Structure. Industry surveys reveal most but not all advisors still charge an AUM-based fee. But fewer than half charge only an AUM-based fee. The alternatives include flat or subscription fees, hourly fees, project-based fees, a percentage of net worth or income, performance-based fees, and commissions.
The decision about how to charge for your services should be driven primarily by the needs and preferences of your target market. An AUM-based fee may work for clients in retirement but not for recently graduated doctors who have yet to accumulate any assets.
Having multiple fee schedules to address the varying needs of your clients is increasingly common. But balance the need for multiple fee schedules against the benefits of keeping things simple. Presenting potential clients with an array of choices can be overwhelming. Give thought to how you present fees to your prospects.
Once you decide the types of fees you will charge, you also need to decide the levels, minimums, and frequency of those fees. Again, start with the needs of your target market but also consider your competitive environment and your own profitability targets.
Don’t be afraid to charge a fair price given the value of your services and keep in mind it is easier to reduce fees after they are established than increase them.
Infrastructure. Once you decide who you will serve, what services you will provide, and how you will charge, you must determine how you will serve clients. There are many options.
Of course, you can do it all yourself, bring the technology and staff necessary to run your business in-house. But this requires you to devote a significant amount of your time to running your business rather than finding, meeting with, and serving clients.
Alternatively, you can selectively outsource functions you don’t want to manage in-house. For example, there are many turnkey asset management providers (TAMPs) that will manage portfolios for your clients on a discretionary basis and provide ancillary services like trading, billing, and performance reporting.
There are also technology platforms that allow advisors to maintain control over investment management decisions but will implement those decisions for the advisor. Advisors can easily send investment decisions through the platform to an experienced team that will trade and maintain the accounts, create performance reports, and calculate fees.
More recently, other outsourcing options have emerged. Advisors can now also outsource aspects of the financial planning process or back-office support.
Another option is to affiliate with an advisor group that provides a technology platform, TAMP-type services, along with marketing and compliance support.
Client Acquisition. Your client acquisition strategy should also be driven by the target market you choose to serve. Tailor your message to the needs and sensitivities of your targeted clients. Make it less about you and more about them.
Also, give thought to the best way to reach the audience you are trying to attract. A perfectly tailored message is of no use if no one reads it.
Inviting prospects to a dinner seminar at a local restaurant may still work in some markets but the options have greatly expanded. Social media, digital marketing, SEO, and content development and distribution are all available possibilities.
An entire industry of marketing support providers has developed over the past few years. Many of them are first rate. But screen them carefully to make sure the one you choose can deliver the results you are looking for.
And realize most marketing efforts take time to generate results. Have patience.
Compliance. The regulations applicable to financial advisors have gotten more complex over the years and regulators are more focused on independent advisors than they were in the past.
A regulatory problem can negatively impact your reputation and undo years of business-building effort. Make sure your compliance bases are well-covered.
There are many experienced compliance support firms available to assist you. Unless you have someone on staff who is very knowledgeable in this area, you should use one.
A Final Word
Addressing these six topics in an organized manner can help make the path forward clearer and easier to navigate. Just remember the world will continue to evolve, so you will need to revisit these topics periodically to keep your service model up to date.
Keep in mind you will encounter currents that try to drag you off course. Have the courage of your convictions and stay focused on executing your plan. Don’t be afraid to experiment with new ideas and, above all, stay focused on the needs of your clients.
Scott MacKillop, a strategic advisor at GeoWealth, is a 48-year veteran of the financial services industry and serves as an ambassador to the Institute for the Fiduciary Standard. He is a serial entrepreneur who has served as CEO or president of five asset management firms. He can be reached at scott.mackillop@geowealth.com.
image credit: Adobe Stock Images
