Irrational business decisions advisers don't even know they're making

We've all witnessed the rise of behavioral finance, which uses psychological theories to provide explanations for why people make irrational financial decisions. It's intriguing to try to understand just why clients sometimes make poor financial choices. But what if advisers shined a similar light on themselves as business owners? It's possible you sometimes make irrational choices when it comes to managing your firm. Let's look at a few examples, applying what I like to call behavioral practice management. “I just don't have enough time — but I refuse to delegate.” Take the solo practitioners who say they never have enough time but continue to do everything themselves. They want to free up their schedules to grow the business, conduct analysis, prospect more or simply work fewer hours, yet they resist hiring staff. Instead, they opt to handle it all singlehandedly, from completing client paperwork and scheduling appointments to preparing plans and analyzing investment performance. Clearly, the right support staff can do certain administrative work as well or better than advisers can. The highest-producing advisers and firms recognize the important (and cost-effective) contributions support staff can make. Most would agree that, in cases where an adviser wants to free up his or her time, choosing to do administrative work isn't the most logical move. “I can't say no to unprofitable clients.” There's widespread industry debate about pruning unprofitable clients. Some advisers say that keeping clients you make little or no profit on is illogical. Others maintain that some of the clients they're told they should prune are the very same ones who helped them reach their current level of success, and they owe it to those clients to maintain the relationship. Both sides have a point. But there shouldn't be any debate over taking on new clients who will be unprofitable for the firm. I'm not referring to the kids of wealthy clients. I'm talking about people whom you should refer to another firm but don't. Often, advisers simply can't find the words to send prospects elsewhere, even when another adviser would embrace them as “A” clients. Some might argue that you never know who will have money in the future. But aren't the odds analogous to winning a lottery? What would your reaction be if your clients told you their retirement plan was to win the lottery? Knowing that potential new clients will be unprofitable and taking them on anyway seems like a pretty irrational decision. “I'm okay without a continuity plan.” Everyone agrees that it is in clients' best interest to have a continuity plan in place, just in case. Unfortunately, it's all too common for advisers to operate without one. Many claim they haven't been able to find a good continuity partner. Of course, what most advisers look for is someone exactly like themselves — the closer the match, the better. And when that perfect individual fails to materialize, continuity planning is put on the back burner indefinitely. Financial planners see the dire consequences when a client passes away without having created an estate plan. So why do they ignore their own need for a plan? “My skill managing money is all I need to grow my business.” At some firms, the growth strategy consists of a single factor: the adviser's ability to “run money.” Thanks to the adviser's acumen, clients' accounts will grow spectacularly, leading to more referrals and a thriving practice. Money management skills are important, no doubt. But no manager, however savvy, consistently outperforms the market over the long term. What's your business plan when the market takes a turn you didn't expect? Don't get me wrong: Behavioral practice management is far from scientific. But studying the decisions you make as a business owner can have a significant impact on your firm's bottom line — just as your clients' financial choices, both good and bad, affect their portfolios and progress toward their goals. Joni Youngwirth is managing principal of practice management at Commonwealth Financial Network.