The following is an edited transcript of a webcast, “How to Add Profitable Services to Your Business,” held Sept. 17. It was moderated by InvestmentNews deputy editor Greg Crawford and reporter Liz Skinner.
InvestmentNews: Should you offer estate planning, tax planning or other services that are not core to your advisory business? Today, we're going to be talking about what you need to think about, such as what benchmarks you can use to determine whether a service that you're offering is going to be profitable. John, what is the first question that advisers need to ask themselves when they're thinking of taking this road?
Mr. Anderson: The biggest concern that we all have is how to increase additional revenue, and work even more tightly and closely with our clients. What we've got to start with is taking a deep look at our own book of business first and trying to understand exactly what the clients are looking for. So to me, it really starts with client segmentation. It's a challenge for a lot of advisers out there. Unfortunately, when we do segmentation, we do it based on what is important to us, not what is important to the client. We look at the revenue that is generated by the client. In other words, if they've got $1 million and above, they're an A client; $750,000 to $1 million is a B client, and so on.
What we've found is that a client who is 50 years old and has $1 million invested with you, and a couple who are in their 80s who are living off their million dollars in retirement, have absolutely nothing in common other than the million dollars. In other words, if our segmentation shows that a majority of our clients are concerned about outliving their retirement income or their retirement assets, or if they're worried about stock option transactions and making sure that they execute at the highest price for the best value, etc. — if we start looking at the segmentation of our client base, we're going to find that there are probably needs that are unmet today in the service offering that we have. We look at the segmentation based on what they're reading, what they're listening to, how they're talking. This allows us to look at additional services that we can offer, whether they're for profit or an ancillary service. It doesn't make sense to add a product or a service if our clients aren't going to use it.
DOES IT FIT YOUR BRAND?
InvestmentNews: Jim, when you're coaching advisers and having a discussion around new potential revenue streams, are there other kinds of initial issues that advisers need to be thinking about?
Mr. Harris: If you're going to offer a new service — whether it is tax planning, estate planning or whatever — make sure that it really correlates with your brand. Obviously, that's extremely important and that is how we all differentiate ourselves from the other advisers out there.
InvestmentNews: Now, Jim, you have 12 rules of engagement, if you will, that can provide a road map or at least give people some ideas of the other issues that they'll need to work through when they're thinking about adding a service. Could you walk us through those?
Mr. Harris. Absolutely. The first one is, “Does this new service support your current brand as a professional practice?” So I've already mentioned that, but No. 2 on the list is, “Will this new service attract more of your ideal clients?” Obviously, we want to be profitable when we add new services. It's imperative that if we add this new service, it attracts the right types of clients. The third one, “Does your practice currently have the capacity to deliver this service professionally?” Obviously, you want to protect your brand and make sure that you are able to deliver the new service in an extremely professional way that not only supports your brand, but also attracts those ideal clients to your practice.
The fourth one is, “Who in your practice is going to be responsible for the implementation and the delivery of this service?” Now, of course, some of you may be individual practitioners. Some of you may have a whole staff to which you can delegate the different portions of that service. It's really key that you think these things through beforehand and, of course, make sure that you do have the capacity.
The fifth item that I have on the list is, “Can the new service be delivered systematically through a repeatable process?” Obviously, as a financial practice management coach, I'm big on having systems to be able to do almost anything within your practice. If you are going to offer a new service, and if you can develop all of the systems into a repeatable process, it will give you the ability to gauge the amount of time, energy and resources that you are going to have to put out there to be able to deliver the service.
That brings me to No. 6: “Can the investment of your practice resources for this service be accurately valued?” That is one of the reasons why it is important to see if it can be systematized, because it makes it a lot easier to be able to value the actual cost of delivering the services.
This relates to whether you are a fee-only adviser or a hybrid that does some commission work and some fee-based work. Do you do retainer services and put fee-for-service for the course of the year or do you charge by the hour? All of those need to be taken into account when you're determining whether or not you want to offer the service, as well as whether you can accurately value what resources it is going to take to do it.
All of the above comes into No. 7, “Can you profitably monetize this service?” Are your ideal clients going to want this service? Are they going to be willing to pay for it? Should it be included as a value-added or is it more of the a la carte?
Then No. 8 is, “Can this service be effectively marketed to existing clients or just to new prospects?” Now, in working with advisers in the past, sometimes they have decided, “OK, I'm going to offer a new service, but I'm only going to do it to new clients as they come in the door, because I already have different service offerings, and I have them on different client service models.” Or they may say, “You know what? I'm going to open this up to everybody. When I do my reviews with my existing clients, I'm going to talk to them about the new service and figure out if it is right for them.”
IS IT FOR EVERYONE?
No. 9 goes along with No. 8, as well: “Should this service be offered to everyone or just a specific segmentation of your clientele?” Again, that goes back to what John was saying before. When you segment out your clients, you're going to be able to have a better, clearer idea which clients within your clientele are going to need and want those services. One of the key things for you to do as an adviser is to figure out, “OK, do I market it to everyone or do I market it to the specific segment of my clientele that I want?”
Now, I already mentioned No. 10, but I'm going to come back to it, because it is important. “Should the new service be offered as a value-added service or on a fee basis?” A lot of the advisers have a service model within which they say to a client, “Here are the services that you get by being one of my clients.” Then other advisers will say, “OK, I've got this list that I will provide you on an ongoing basis. However, if you want a professional estate plan done for yourself or some other service, then there may be an additional compensation that needs to come to the practice via some sort of fee.”
Then, I guess, it all boils down to No. 11 and No. 12. No. 11 is, “Will this service improve the overall client experience with our practice?” That almost goes back to my No. 1, as well. Does it fit into your brand? How is it going to affect the overall client experience? Have you figured out exactly how you are going to deliver this service so that they get that experience that we try to give to keep that client loyalty, turn those clients into referral advocates and basically be able to monetize the new service over a long period of time?
No. 12 is important because most of us are trying to build our practices into whatever our personal vision of success is. “Does this new service fit into your long-term vision of success for your practice?” I think that that's a key question that you all will need to ask yourselves.
THE PRIMARY FOCUS
InvestmentNews: Wes, you have had experience with adding a service and then figuring out whether it made sense for your business or not. From your perspective, what do you consider the real key issues that advisers need to figure out before they take that next step?
Mr. Bigler: I wish I would've had that list, Jim, before I did all of this. Yes, you have to start out with what business you are in; in other words, what is your primary focus? I'll just give you some pros and cons. In our example, we brought in an accounting practice and an estate-planning practice. I think the pros of that are, No. 1, you have an expert on-site. It was great to just walk down the hall, have that person there to answer questions, or even call into a meeting. You call in the attorney or the accountant, and it is a good fit.
No. 2, I think you have more control over your clients in that situation. I don't know if it's mentally or in reality, but it seems as if you have more control over your clients because you're looking at all aspects, not only the financial planning and the investment management. No. 3, you can pick up additional revenue, even though I think some of that is marginal. Then you can get some marketing out of the referrals.
On the con side, it's hard to go out and find attorneys and CPAs and say, “Let's work together as a financial planning firm,” when you already have your own attorney and CPA on staff. No. 2, it gets mingled with the clients. The clients start calling you about their 1099s and this IRS letter and, “Will you tell Jim about the tax return?” I think that all gets muddled, and we're not in the tax-planning business. We're in a different business, but they commingle all of that.
Then, what if you have a bad experience with one of the service people? It's hard to fire them, because they're part of your firm and part of your whole situation. Then I think you get into more management issues. Do they fit into your office culture? For example, “Oh, Mary is mad at Jim, and Jim took Doug's meeting room,” and you have all of those issues. Also, a management issue is whether you want to be landlord for other people's businesses? You have to look at that in this situation.
InvestmentNews: Now, Wes, you were offering tax- and estate-planning services, but you came to the conclusion that neither was profitable enough for the firm, and you decided to eliminate those. Can you kind of walk us through the decision-making process that you went through in determining that?
GETTING ONLY A PIECE
Mr. Bigler: Yes. I think it gets back to the No. 1 item that I mentioned at the start — what business are we in? We did not feel that we were in the accounting/estate-planning business, and the additional revenue was very marginal. Unless you really gear up — if you have a full-time attorney in the practice, you're only going to get a piece of that business. The same thing with the accounting business. You're only going to get a small piece of that, so, yes, it can be profitable. But is it worth the hassle factor of being a landlord, management issues and whether they fit into your culture? Now, I think it can work, and I've seen it work with other people. If you have a big, robust practice, you can garner a lot of referrals, but in our business, we wanted to be a master-of-one instead of a jack-of-all-trades.
InvestmentNews: John, when you're talking to advisers about potentially adding a service, to Wes' point, it can be profitable. But it does sound as though you need to have some level of scale to get the kind of revenue coming in the door to make that profitable. Are there benchmarks? Because you obviously have to come up with some sort of an extension of your business plan, some numbers, so that you can look in black and white at what it's going to take to A) add a service, and then B) have it become profitable. Are there measuring sticks that you use to help folks determine what they're going to need to do to add a service that is going to be profitable eventually? Are there timelines?
Mr. Anderson: It brings in a discussion about fees. I know fees are not the topic of the day, but I think ultimately, we really have to define what business we're in first. Are we a wealth manager that offers additional services or are we an investment management firm that is trying to add additional services? To me, when I look at the differentiation, the wealth manager offers a multitude of different services that his or her clients are asking for. When we do it that way, we're charging maybe a flat fee for the planning and maybe a very-low-cost fee for the investment services. What I've seen many times was that the adviser charged 100 basis points for everything, and it's different when you're adding additional services.
I think when we look at benchmarks, most of the advisers that we talk to who are talking about additional services — and really what that means is adding additional people — the question is, “How do we get enough revenue to pay for that additional expense?” Again, to Wes' point, I think that adding a CPA or adding an estate-planning attorney, unless you have some sizable scale, it's going to be very cost-prohibitive for the average adviser. Adding, however, a tax review process as a part of your overall service — meaning that you can go over the 1040 very quickly, and look for opportunities to save taxes on behalf of your client, and then send that client back to their existing CPA — establishes good will with that CPA. It brings additional revenue to that CPA, as well as additional referrals to you. I don't necessarily think that you have to add a huge infrastructure to add additional services that very quickly will pay for themselves.
InvestmentNews: Regarding a tax review service or an estate-planning review, is that something that you would charge another fee for, or would it be part of an overall fee?
Mr. Anderson: I would look at it and say, “If I'm a true wealth manager, my overall services would be for the planning aspect,” and then I would charge a smaller fee for the investment advisory. I would charge an hourly rate for the review process, whether it is an estate or a 1040 review. If I'm charging a 100-basis-point advisory fee, it would be harder, but I think that would probably be incorporated in that 100 basis points.
Mr. Harris: I believe that if you are a full-time wealth manager — and your expertise is in doing the typical financial plans or comprehensive financial plans, and managing the money — I'm going to recommend that you take a hard look at doing it as a separate fee, per hour or per project.
I had to interview quite a few attorneys before I found somebody with whom I was able to come up with a systematic way to work. Then I sat down and decided how to map out exactly what information I was going to be gathering, what kind of solutions I was going to be putting together.
What ended up happening was that I was able to profitably deliver the service, save my client a little bit on the actual cost because I charged a lower fee than what the attorney did per hour. But I made an agreement with the attorney that this is what I will do — this is what I will deliver to you for the client — so that basically, there were less hours that they would charge. It was a win-win all the way around, as well as for the attorney, because part of his job was already completed. That kept me from having to hire and bring on an attorney in my own office and have them on retainer.
InvestmentNews: We've talked a lot about estate planning and tax planning, which are kind of the natural services that advisers and wealth managers can add or offer. But beyond that, is there a development plan once you go through those 12 rules of engagement? Obviously, there's got to be some marketing around it and all of these ancillary tasks you need to do to develop that area of business so that it becomes profitable. How does that work, Jim?
Mr. Harris: You're going to have to develop the marketing materials. The implementation strategy needs to be in place, well-thought-out, so that you don't damage your brand. I think that drilling down between the lines of those 12 different items, a lot of those will spur the right kind of thought process to put it all together.
Mr. Anderson: I think that brings up a pretty good point that gets lost in our business. We typically hear marketing and sales, marketing and sales, as if they were the same thing. Marketing, to me, is something that has a strategy. Marketing has a plan. Marketing has tactics that are created. It has vision going forward. Sales is when you get in front of the person. When we think about creating a new offering or a new service, a new entity or a new relationship, I think that the thought, unfortunately, usually doesn't happen until the person walks in the door. If we develop a plan around, “Hey, this is the service,” if we understand the niche we're involved in, if we understand our clientele and what their needs really are, we're going to start talking like they talk. As they develop or as they express a need, you're going to be able to capture that language and put that into a plan in a way that you bounce it off some of your top clients. You maybe bounce it off an advisory board to make sure that this is a service that you're going to give and they're going to see value when you provide it, especially if you want to charge additional fees for it. Once you create the strategy and the plan, i.e., the marketing, then when you sit down in front of the client, i.e., the sales, I think it is going to become more of a natural offshoot of the conversation, rather than just springing it on somebody.
FINDING AN ASSOCIATE
InvestmentNews: Wes, what's your perspective on this question?
Mr. Bigler: I think you need to start out with finding the right people in the right places doing the right things. So you need to find the right attorney or estate planner or whatever you're trying to do before you do any of the marketing or anything like that. Then once you do that, once you start the marketing, there are a couple of things we found out. For new clients who didn't have a relationship, it was pretty easy to say, “Yes. That's no problem. I'm an attorney. But let's go with your CPA because we don't have one.” The older clients already had their relationships established, so it would take time for them to convert over, and eventually, they say, “Oh, well, we'll just let you all handle it all,” or they would end up saying, “No. We still like our person and we want to continue to work with them.” I think you have to set up everything first.
Mr. Anderson: I've seen this situation work a bit differently. Rather than acquiring the CPA or the attorney, there are a couple of firms that I know of that actually market themselves as three separate businesses under one roof, or three separate businesses working together. You have a CPA and an attorney, as well as a financial adviser, who have positioned themselves as, “We work together, but we're separate entities.” They're saying, how do we leverage each other without actually having ownership in each other? You get all of the benefits of a family office without having the overhead.
InvestmentNews: Jim, this is a comment from one of our listeners referring back to our discussion about wealth management. I think it speaks to what you were talking about on understanding what you're offering. The comment is, “Is it wealth management versus investment management, and what does wealth management mean to you?” To this audience member, wealth management means all of those components — taxes, asset protection, etc. I think, to your point, it's really important to ensure that you understand who you are and what you're offering before you even begin this discussion about adding services. That is essential, correct?
Mr. Harris: Absolutely. Personally, I hold myself out as a professional wealth manager. That means that I need to have the skills and the ability to deliver, at least to some degree, all of the above. Now, of course, I am not a CPA. I am not an estate-planning attorney. So what I've done is, as opposed to hiring those folks and bringing them in, I've spent a lot of time, effort and energy interviewing those folks — not for the sake of having them refer business to me, at least not in the beginning. I'm trying to find out, are you referral-worthy and are you somebody that I can work with and trust to do a fantastic job and provide the right service for the client?
It's one of those things that if you're going to hold yourself out as a wealth manager, I do believe that you need to make sure that you have the skills and the ability and the capacity, at least to some degree, to be able to service all of those areas. Obviously, if you are branding yourself as the portfolio manager and the money manager, you may not need to have as in-depth a level of skill and knowledge in those areas — and of course, then you can still find the CPA or the attorney with whom you feel comfortable.
InvestmentNews: Again, we've talked a lot about tax planning and estate planning. Are there other services that are natural extensions that clients are asking you about? What are the other services that advisers can think about adding that would make sense on some level?
Mr. Anderson: Probably one of the better models that I've seen is an adviser out in the Boston area whose daughter has joined the firm, and her specialty, her training and her focus is working with all of his clients' kids and grandkids on college education funding and early retirement planning. What she is doing is two things. No. 1 is that she is providing the service. It is an ancillary service to what the firm is. They're not charging additional costs unless there are assets to be delivered, but she is providing an ancillary service. But she is also maintaining relationships with the next generation. We all know that statistics say most advisers lose the client once the primary relationship goes away. She is building that second-generation relationship.
InvestmentNews: Do any of you have experience with advisers' charging extra for helping clients with their philanthropic needs in developing a plan for giving?
Mr. Bigler: I think that should just be part of their financial planning fee — their overall fee. That should be a value-added service. One area, though, that we haven't figured out yet is elder care — the kids taking care of the parents. What happens when that transition has to happen with the transfer to Medicare, transferring from their retirement home to a nursing home, and how to figure all of that out and how to help them with that?
Also, putting yourself out there as a person who can help with interested donors to create solutions on behalf of a nonprofit has really started to see a groundswell. We're seeing more and more people thinking about retirement, about leaving their own legacy. They're looking for solutions, and if you are the one that can help provide that solution, it's a fee from the nonprofit. It's also an opportunity maybe to manage the assets down the road whether it's for the institution or whether it's some of the donors.
InvestmentNews: As we close our discussion, could you give us one or two of the key conclusions on this critical issue of how to add profitable services to your practice? Jim, I'll put you on the spot.
Mr. Harris: I think the very first thing that you want to do, once you've done some of the preliminary things, is really ask yourself, do I have the capacity, the knowledge, the skills — or can I acquire those? Then secondly, if I do that, can I monetize it so that I can do it profitably?
Mr. Bigler: You have to sit down and determine what business you are in, and going back to John's initial comments on this, what is your market, what are your clients, what are their needs, and what are their desires and what do they want you to do for them? I would go and ask them, “What are you looking for us to do?” and then come up with your value proposition of how to take care of your clients. Now, if taking care of your clients means combining estate planning, a CPA, a charitable entity, and tying that into a large management office, then that's what you should do. I still think you can have a wealth management practice without tying it all in. But I think it can work being tied in, too, so you have to go back to what is the business you're in and what your clients want you to do for them.