BEST-MANAGED FIRMS: THE BUSINESS OF SERVING CLIENTS

Transcription

1 BEST-MANAGED FIRMS: THE BUSINESS OF SERVING CLIENTS Productivity in a high-touch business

2 BEST-MANAGED FIRMS: THE BUSINESS OF SERVING CLIENTS About Schwab Market Knowledge Tools (MKT) Based on Charles Schwab s leadership position in the registered investment advisor (RIA) marketplace (more than 5,000 advisors and over 20 years), we are in a position to observe and see what works in successful advisory fi rms. Through Schwab s proprietary benchmarking and in-depth qualitative research with successful fi rms, we are able to discover and share best practices. This white paper is part of the Schwab Market Knowledge Tools series, an ongoing program of industry research reports, white papers and guides from Charles Schwab designed to keep investment advisors on the forefront of trends and competitive challenges facing the industry today. Offered exclusively to Charles Schwab s valued clients, the MKT program delivers the kind of relevant and timely information needed for future business planning.

3 EXECUTIVE SUMMARY EXECUTIVE SUMMARY This report is a comprehensive examination of the key factors behind the noteworthy performance achieved by the most successful firms in Charles Schwab s 2007 RIA Benchmarking Study. The top 20 percent of qualifying RIA firms in the study in terms of productivity, profitability and revenue growth what Charles Schwab calls Best-Managed Firms are nearly 75 percent more productive in revenue per professional and enjoy 19 percentage points higher operating income and 12 percentage points higher annual revenue growth. In interviews with principals at 30 of these firms, we discussed the circumstances surrounding their firms results. Best-Managed Firms report that their ability to provide the high-touch, high-quality client advisory services inherent to the RIA model is key to their success, and client loyalty indicators support that claim. What makes these firms stand out is that they deliver this level of client service while building efficient, profitable and scalable businesses. Although some observers may believe these two objectives are mutually exclusive, Best-Managed Firms demonstrate that these two goals in fact reinforce each other. What is their secret? By managing their people, processes and technology, Best-Managed Firms can focus and leverage their unique core strengths across the firm, centralize functional resources for efficiency, and bring to bear their best talents and resources to benefit the client. Contrary to long-held beliefs about the advisory business, this paper demonstrates that: A high-touch wealth management business can be scalable. The client experience can be standardized without sacrificing client service. Principals need not be the sole managers of client relationships. A focus on growth can complement a focus on clients. Investment in technology and staff functions can add to the bottom line. 1 EXECUTIVE SUMMARY 2 INTRODUCTION AND KEY FINDINGS 5 WHAT MAKES A BEST-MANAGED FIRM 9 FIVE KEY PRACTICE AREAS 11 FINANCIAL ADVICE AND INVESTMENT MANAGEMENT 18 RELATIONSHIP MANAGEMENT 24 OPERATIONS AND CLIENT SUPPORT 31 STRATEGY AND PLANNING 37 MARKETING AND BUSINESS DEVELOPMENT 44 CONCLUSION 46 APPENDICES 1

4 BEST-MANAGED FIRMS: THE BUSINESS OF SERVING CLIENTS INTRODUCTION AND KEY FINDINGS Charles Schwab s examination of the 647 firms in the 2007 RIA Benchmarking Study reveals that, compared with other firms, the top 20 percent of qualifying 1 RIA firms in the study in terms of productivity, profitability and revenue growth what Charles Schwab calls Best-Managed Firms demonstrate remarkable performance. These firms are nearly 75 percent more productive in terms of revenue per professional and enjoy 19 percentage points higher operating income and 12 percentage points higher annual revenue growth. We analyzed the benchmarking study data to find the drivers of this remarkable performance. But numbers tell only part of the Best-Managed Firms story. To get a holistic understanding of the Best-Managed Firms performance, we also conducted extensive interviews with 30 of those firms to uncover what the principals say accounts for their firms results. Strengthening the practice to focus on the client Most advisory firms have two primary objectives: to deliver high levels of service and to build an enduring, profitable and scalable business. Yet some advisors may see an inherent conflict between personalized, high-touch advisory services and increased levels of automation, centralization or standardization in the practice. Best-Managed Firms appear to succeed at both. They tell us that the primary focus of their business is delivering the best results and highest level of service for their clients, and, in fact, service levels appear to be on par with their peers. Their ability to retain clients and attract new assets from existing clients supports this assertion. Best-Managed Firms net new asset fl ows from existing clients is 3.1 percent annually compared with 0.8 percent for other fi rms. They also showed similarly high client retention with both groups at 97 percent annually. 2 1 Qualifying fi rms had at least $1 million in revenue. See Appendix A for Methodology.

5 INTRODUCTION AND KEY FINDINGS Our analysis of Best-Managed Firms demonstrates that achieving these two objectives is the secret to sustaining growth while keeping clients engaged and loyal. By building productivity and efficiency into their business practices and culture, they bring the best their firm has to offer to each client. The hospitality industry follows a similar model. Well-known luxury hotel chains have built their brand and their business on delivering outstanding, individualized service, and they are able to do so on a grand scale. But only through carefully refined processes, staff training and technology implementations can these firms deliver the consistent, high level of service their loyal customers have come to expect. Drivers of success Best-Managed Firms represent a range of business models, levels of assets under management (AUM) and philosophies. Despite this diversity, our research reveals common success factors across all of these firms. Best-Managed Firms: Align the practice to play to core strengths: Best-Managed Firms are crystal clear about their core competencies and what they do best. They emphasize these strengths in running their firms and serving their clients. This self-awareness and understanding is the beacon that guides their strategic decisions and planning. By following this path, Best-Managed Firms are able to play to the sweet spot of their unique core strengths and competitive advantage. Make the client relationship firmwide: Best-Managed Firms strive to create a consistent client experience across different advisors and different teams. As these firms grow, they break the natural inclination to follow the model that pairs clients with just one advisor rather than with a team of professionals. In this way, many Best-Managed Firms are able to deliver to clients what one advisor calls a firmwide experience, rather than service that relies strictly on one or two individuals. As a result, these firms told us that they are better able to set and meet client expectations, streamline communications, reinforce firm value and increase their clients engagement with the firm. Centralize resources and functions to maximize productivity and consistency: Successful fi rms institutionalize key functions to make resources available fi rmwide. In other words, they centralize the implementation of investment management, fi nancial advice, and operations and client support functions, making them available across different relationship teams. Become process dependent: Best-Managed Firms carefully define best practices and engineer processes to drive efficiency and consistency across the firm. Initial implementation starts in the back office, 3

6 BEST-MANAGED FIRMS: THE BUSINESS OF SERVING CLIENTS as that is where significant time is spent, but it moves to the middle and front office, as firms grow and mature. Once processes are well defined, firms apply technology to implement and automate them firmwide, reducing costs. Make growth a priority: Best-Managed Firms make a long-term commitment to planning and business development. By developing operational efficiencies, they can gain the capacity to focus on growth. By documenting and implementing workflows and centralizing resources, the time and unique skills of principals and key staff members are freed up to engage in new client development. Commit to long-term planning: Successful firms take the time to reflect on their business, set goals and plan their strategic programs and marketing efforts. Planning helps keep firms nimble and flexible, positioning them to take advantage of different business and growth opportunities. In addition, these firms take a thoughtful approach to long-term firm strategies such as new products and services, staffing, ownership transitions, and business contingency plans, benefiting clients by nurturing an enduring relationship. Maximizing talent, defining process and leveraging technology Best-Managed Firms told us that efforts designed to improve firm productivity do not detract from the client experience, but rather can enhance it. They accomplish this by: People: Every firm we talked to credits their success to hiring and retaining the best people, and they structure their organizations with clear roles and responsibilities to get maximum value from the talents and expertise of their principals and key staff. Process: Best-Managed Firms define repeatable, scalable processes that help standardize execution across the firm. Often these processes incorporate best practices that streamline workflows and help ensure best-in-class execution. Technology: Best-Managed Firms use technology such as rebalancing tools, portfolio management and customer relationship management (CRM) systems to maximize efficiencies and automate processes firmwide. By strategically leveraging technology, firms can enhance even the most personal aspects of the advisory business. 4

7 INTRODUCTION AND KEY FINDINGS WHAT MAKES A BEST-MANAGED FIRM While interviews and analysis identify how Best-Managed Firms believe they obtained their remarkable results, this section draws on the benchmarking data to pinpoint performance differences observed in the data set. A key finding from our review is that no one business model or firm size dominated the Best-Managed Firms, suggesting that other factors drive firm performance. Productivity Based on revenues per professional, the median Best-Managed Firm reported $659,000 in productivity versus a median of $380,000 for other fi rms in the benchmarking study 73 percent more. As we looked more closely at related productivity measures for Best-Managed Firms, we uncovered the key differentiators that contributed to their higher revenues. (See Exhibit 1) More clients per professional The greatest contributor to productivity is effi cient client management. The median Best-Managed Firm manages 57 clients per professional (32 per total staff) compared with the median of 42 clients per professional (23 per total staff) for other fi rms. This 36 percent accounts for approximately half of the total revenue productivity difference equivalent to adding another two and a half hours to a typical eight-hour workday. Higher assets per client Another key driver of revenues that contributes to productivity is assets per client. The median for Best-Managed Firms is $1.56 million per client versus $1.34 million for other fi rms 16 percent higher. When higher assets per client and more clients per professional are combined, the result is a 78 percent higher assets managed per professional: $103 million per professional at Best-Managed Firms as opposed to $58 million in others. 5

8 BEST-MANAGED FIRMS: THE BUSINESS OF SERVING CLIENTS EXHIBIT 1: BEST-MANAGED FIRMS PRODUCTIVITY Revenue per Professional 2 (Median, $ thousands) Clients per Professional (Median) $380 $659 73% more % more a more typical pattern of declining basis point revenues as client assets increase. Profitability For Best-Managed Firms, higher productivity combined with expense control contributes to greater profi tability. Using standardized operating income as a comparison, Best- Managed Firms deliver 45 percent operating income at the median versus 26 percent for other fi rms in the benchmarking study. (See Exhibit 2) AUM per Professional (Median, $ millions) Best-Managed Firms Other Firms $58 78% more $103 This 78 percent difference seems to account for the entire productivity increase. Fewer staff but more clients, assets and revenues While median staffi ng of the Best-Managed Firms is similar to other fi rms, Best- Managed Firms manage considerably more clients and assets evidence of their higher productivity. At Best-Managed Firms, a median staff of nine manages 297 clients with $492 million in AUM as opposed to other fi rms, where a median staff of 10 manages 264 clients with $354 million in AUM. Maintained basis points on assets Interestingly, there is no difference in revenues expressed as basis points on assets here: Both groups of fi rms have a median value of 67 basis points. It is worth noting Best-Managed Firms are able to maintain that revenue level with a 16 percent larger client size, counter to Lower overall expenses With a similar number of staff handling more clients, assets and revenues, fi rm expenses are spread over a much larger revenue base. Best-Managed Firms experience similar direct expenses typically partner and professional pay at an average of 37.4 percent of revenue 6 2 Selection metric for Best-Managed Firms. See Appendix A.

9 WHAT MAKES A BEST-MANAGED FIRM versus 39.4 percent at other fi rms. While that is only a two point difference, they save 11 percentage points in overhead expenses at 27.3 percent of revenue versus 38.6 percent at other fi rms. Looking at the revenue and profi t equation another way, Best-Managed Firms generate 25 percent more revenue per client a median of $11,414 compared with $9,112 at other fi rms with more than twice the profi tability per client $3,641 compared with $1,797. This further demonstrates how both the revenue and productivity work together to help produce higher profi tability. EXHIBIT 2: BEST-MANAGED FIRMS PROFITABILITY Standardized Operating Margin 3 (Median, percent) Income per Principal (Median, $ thousands) Best-Managed Firms Other Firms $418 26% 45% 19 points higher 90% more $793 Higher principal income Enhanced profi tability drives greater partner incomes. We observed median partner income defi ned as base, bonus and profi t per principal at $793,000 versus $418,000 at other fi rms. This defi nition of income includes both profi ts distributed to partners and those retained and invested in the business. Revenue growth At the same time Best-Managed Firms produce signifi cant productivity and profi tability, they also grow fi rm revenues at a median annual rate of 31 percent compared with 19 percent for other fi rms in the benchmarking study. (See Exhibit 3) Organic growth is the primary driver Increased organic growth defi ned as asset fl ows from new and existing clients is the primary driver of overall faster revenue growth, not market performance. Best-Managed Firms grew AUM overall at a median annual rate of 28 percent compared with 18 percent for all other fi rms. Looking at organic growth only, Best-Managed Firms AUM grew at a median of 19 percent annually versus 10 percent for all other fi rms. Our analysis indicates that increased organic growth accounts for 85 percent of the difference in overall average annual AUM growth between Best-Managed Firms and other fi rms while increased market performance 3 Selection metric for Best-Managed Firms. See Appendix A. 7

10 BEST-MANAGED FIRMS: THE BUSINESS OF SERVING CLIENTS EXHIBIT 3: BEST-MANAGED FIRMS REVENUE GROWTH Annual Revenue Growth 4 (Median, ) 19% 31% 12 points more accounts for only 15 percent of the difference. (Please see Appendix B for composite fi nancial and operating data.) Annual AUM Growth (Median, ) 18% 28% 10 points more Annual Organic AUM Growth (Median, ) 10% 9 points more 19% Best-Managed Firms Other Firms 8 4 Selection metric for Best-Managed Firms. See Appendix A.

11 FIVE KEY PRACTICE AREAS FIVE KEY PRACTICE AREAS This report examines how Best-Managed Firms seek to deliver results for their clients while maximizing efficiencies and profitability in their business. We analyze how these firms leverage best practices in managing people and organizational roles, processes and technology across key business areas of their practice. Stages of evolution No two firms are alike in terms of focus, number of employees, style, management or assets under management, among other factors. This is certainly the case with the Best-Managed Firms: Each one takes a unique path to higher profitability, revenue growth and productivity. This report describes best practices observed in different phases: Stage 1 (smaller fi rms typically with fewer than fi ve employees), Stage 2 (midsize fi rms with between fi ve and 15 employees) and Stage 3 (larger fi rms with more than 15 employees). These groupings are an analytical tool we use to help illustrate differences in the fi rms evolutionary progression in terms of sophistication, size, maturity and ability to scale. (See Exhibit 4) The stages are not grades or commentary on a fi rm s model being a Best-Managed Firm does not mean a fi rm is Stage 3 in every category. For example, although a Stage 3 classifi cation for one fi rm may be right, it may not be appropriate or attainable for other fi rms that are smaller or have a different business model. In fact, none of the Best-Managed Firms are Stage 3 in every business area. Rather, the stages are meant to refl ect the individuality of all fi rms, illustrate an evolutionary progression in best practices and make the Best- Managed Firms stories relevant to the reader. 9

12 BEST-MANAGED FIRMS: THE BUSINESS OF SERVING CLIENTS EXHIBIT 4: STAGES OF EVOLUTION THROUGH THE PRACTICE AREAS FINANCIAL ADVICE & INVESTMENT MANAGEMENT RELATIONSHIP MANAGEMENT OPERATIONS & CLIENT SUPPORT STRATEGY & PLANNING MARKETING & BUSINESS DEVELOPMENT Note: Defi nitions of each stage vary by business area. STAGE 1 Typically a small fi rm with fewer than 5 employees STAGE 2 Typically a midsize fi rm with 5 15 employees STAGE 3 Typically a large fi rm with 15+ employees PEOPLE PROCESS TECHNOLOGY EFFICIENCY SOPHISTICATION SCALABILITY MATURITY INCREASING 10

13 FINANCIAL ADVICE AND INVESTMENT MANAGEMENT FINANCIAL ADVICE AND INVESTMENT MANAGEMENT Creating a Scalable, High-Touch Service Business The practices covered in the next three sections Financial Advice and Investment Management, Relationship Management, and Operations and Client Support form the core of an advisory firm s business. These areas are particularly important for two reasons. First, it is in these parts of the business where firms execute and deliver financial advisory services. Second, these areas are where firms make the majority of their investments in staffing, basic infrastructure and technology. Improving efficiency and productivity in these areas has the most profound impact on a firm s profitability. Best-Managed Firms report that they provide, and even enhance, high-touch, high-quality advisory services while improving the productivity, scalability and effi ciency of their operations. They excel in both areas, and our analysis shows that effi ciency and high-quality service support each other. Moreover, all the fi rms we talked to said one thing in particular was instrumental to their success: outstanding people. Best-Managed Firms structure their organizations with clear roles and responsibilities to maximize the time, talents and expertise of their principals and key staff. All fi rms acknowledge that without a strategy to maximize their staff what many in the industry call human capital delivering the desired level of client service and optimizing operational effi ciency would be extremely diffi cult. Financial Advice and Investment Management The Best-Managed Firms we interviewed achieve a high level of productivity in the implementation of fi nancial advice and investment management. For example, they manage nearly twice the AUM per professional as other fi rms $103 million AUM versus $58 million AUM. At the same time, they seek to leverage the best investment 11

14 BEST-MANAGED FIRMS: THE BUSINESS OF SERVING CLIENTS expertise their fi rm has to offer to implement and even customize their strategy for every client. One of the things I think has made us successful is that we ve separated investment management from financial consulting. This tiered approach helps to put a firewall between short-term client emotion and wise long-term investment decisions. Douglas Kreps, Fort Pitt Capital Group To accomplish this feat, they pool investment staff with carefully defi ned roles as a resource for all fi rm investment management, effectively cutting out duplication of roles and responsibilities. They report they are able to roll out investment strategies to all clients rather than to a smaller number of clients assigned to separate, siloed investment teams. In this example, while investment professionals make decisions for the fi rm, portfolio managers implement them across a large group of clients. To support this strategy, fi rms use technology such as CRM systems, trading and portfolio management systems, model portfolios, and rebalancing tools to effi ciently deliver and execute advice and investment management services across large groups of clients. Define processes to help free principals time Approaches to portfolio management vary across the Best-Managed Firms, but these firms all carefully consider how their principals add value to the firm and design processes to support and leverage their principals strengths. These firms report that core processes are documented and well understood by those expected to execute them. As a result, principals are freed up to focus on parts of the practice that need their attention, knowing that their staff can make decisions in situations that would otherwise have needed their opinion. Likewise, investment management can be accomplished in many different ways depending upon firm style. For example, some firms focus on applying their individually held investing approach to create value for clients, so security selection is central to their process. Other firms choose to leverage the vast array of existing external research or third-party managers and focus their value-add on delivering asset allocation or integrated wealth management. Best-Managed Firms avoid duplicating processes. By documenting its investing processes to make them clear and repeatable, a fi rm can execute them more effi ciently. For instance, it is more effi cient 12

15 FINANCIAL ADVICE AND INVESTMENT MANAGEMENT for a central investment management committee to meet and formulate a comprehensive investment strategy and then delegate its execution. Additionally, as we will discuss later, many fi rms use portfolio rebalancing technologies fi rmwide to save effort and cost. As illustrated in the best practices chart at the end of this section, processes evolve with the size of the fi rm. We observed that at around 100 clients, fi rms transition from simple tracking tools to more comprehensive technology solutions, and principals start to group clients with similar risk and goal profi les. Firms begin to create effi ciencies by automating the investment process with model portfolios that are manually customized, with client-specifi c requirements and guidelines to meet their unique needs. As for the time-consuming process of preparing client fi nancial plans, it is typically more cost-effective for smaller fi rms to standardize the process across all clients, while larger fi rms can focus on client-specifi c or topical planning. In the most scalable approaches, wealth management fi rms align quarterly client plan reviews with themes such as tax planning in the fourth quarter or insurance reviews in the fi rst quarter, making the intellectual content of these discussions reusable from client to client. Specialize key investment management roles Thoughtful design of organizational structure across the business is a hallmark of Best- Managed Firms. These firms structure their investment and advice teams to maximize efficiencies and the individual strengths of their employees. In general, our analysis reveals that when it comes to investment management, the larger the firm, the more specialized the roles staff play. Typically, in smaller firms, principals function as both portfolio manager and relationship manager. After the security selections have been made, the most successful firms tend to find ways to relieve their principals of day-to-day investment management duties. Midsize firms delegate portfolio management responsibilities to junior staff and para-planners, often asking them to recommend trades, but design a workflow that requires the principals to review and approve their work. Stage 3 Best-Managed Firms have the highest degree of specialization, with dedicated portfolio managers and planning staff. In these firms, there is often complete separation of portfolio and security analysis from relationship management roles. Although relationship managers stay engaged by functioning as decision-making members of the investment management committee, it is rare to find relationship managers still 13

16 BEST-MANAGED FIRMS: THE BUSINESS OF SERVING CLIENTS actively engaged in security analysis unless that is the core competency they brought to their firm. Our research finds that if one principal has deep security expertise, that principal tends to spend 80 percent or more of their time on that function, often becoming the chief investment officer and retaining only a few personally managed portfolios. Each of our clients has a customized portfolio, so we spent over a year and a half building the technology piece. The main benefit is that automation allows us to take our best thinking and execute it on behalf of each client s customized preferences. John Burns, Burns Advisory Group Leverage technology to create plans and portfolios Technology plays a pivotal role in supporting portfolio management and investment planning. When implemented properly, technology can reduce the time and cost required to perform basic functions, enabling fi rms to gain effi ciencies and scale their fi nancial advice and investment management processes to serve multiple clients. A major issue for all advisory fi rms, including Best-Managed Firms, is how to manage the balance between the effi ciencies of model portfolios and customized portfolios. Technology helps them deliver portfolios and plans that can be mass-customized to groups or even individual clients. Smaller fi rms at the $100 million or 100-client threshold keep their planning technology simple, often using standard spreadsheet tools. Larger fi rms go further, purchasing more advanced planning technology for more scalability. And Stage 3 fi rms implement their unique approach with more customized planning applications that may integrate data from other systems. An example of custom planning applications is a tool Vector Wealth Management developed. Built using Microsoft Excel, this tool captures salient facts about a client s assets and models projected income streams given basic assumptions. Once a baseline income is established, the data are transferred to another proprietary tool that specifi es the use of each asset. The investment policy for these assets is established according to the amount of income they must produce in a specifi ed time frame. These tools make it easy for the portfolio manager to use the information to plan how to invest those assets specifi cally. At quarterly review time, it is simple to run an analysis of how the assets are doing compared to the plan initially established for those assets. 14

17 FINANCIAL ADVICE AND INVESTMENT MANAGEMENT Use trade order and portfolio management tools Most Best-Managed Firms we interviewed use model or core portfolios and are considering adding an automated portfolio rebalancing tool if they have not already. Some fi rms estimate they require only half the resources that would otherwise have been needed to recommend and approve trades, typically saving one or two full-time staff members. For example, at Burns Advisory Group, one full-time trader can do what they have observed usually takes two or three to accomplish. Trade order management tools are also used with rebalancing applications to execute specific instructions automatically, thereby streamlining the process of aggregating and submitting trades. The study found that some Stage 3 firms use custom-built, rules-based add-ons to their trading systems, allowing them to automate even the special portfolio customization that other firms tackle manually. For example, one fi rm incorporates intelligence from relationship managers about specifi c client needs into the portfolio tools. Specifi c restrictions or instructions are entered into their CRM system, which is integrated with their trade order management system. If a client calls with a request to withdraw $40,000, a notifi cation can be put into the custom CRM system that feeds the trade order management system. If any cash is generated as a result of a position sale during the month, the cash does not get reinvested. Instead, it sits in the account until needed in effect suspending buy orders for that account for the rest of the month. Similarly, exceptions can be managed by the system. For instance, if a client places a restriction on selling shares of a security bequeathed by a family member, a warning will be generated in the system preventing the sale of those shares for that account. Building custom applications is expensive, sometimes costing hundreds of thousands of dollars. To justify the expense, a simple break-even analysis would compare the cost of the salary and benefi ts of a portfolio manager against the cost of the investment in technology. It is important to note that a high level of automation does not require customized applications. Many off-the-shelf applications can deliver automation and customized capabilities. Either way, a fi rm can implement a system that optimizes operations by reducing erroneous trades and cutting down on the time-consuming process of constantly keeping the whole team informed of changing client needs. 15

18 BEST-MANAGED FIRMS: THE BUSINESS OF SERVING CLIENTS EXHIBIT 5: FINANCIAL ADVICE AND INVESTMENT MANAGEMENT BEST PRACTICES STAGE 1 STAGE 2 STAGE 3 PEOPLE Principals serve as portfolio manager and relationship manager Rely on junior team members or para-planners to assist portfolio managers Use principals to review and approve trades Employ dedicated portfolio managers and planning staff Hire dedicated CIO (may be a principal who turns client responsibilities over to others) Financial Planning Standardize plans across all clients Focus on client-specifi c issues Plan content themed to time of year, e.g., Q4 tax planning, Q1 insurance PROCESS Portfolio Construction Customize portfolios manually Create model portfolios with manual special-needs overlay Produce mass-customized portfolios Automate customization by managing client instructions with technology TECHNOLOGY Financial Planning Rebalancing/ Trade Generation Execute custom plans using spreadsheets or similar tools Use portfolio management system or spreadsheets May use off-the-shelf planning technology Use trade order management tools Use rebalancing tools Either use custom planning applications or enterprise versions of off-the-shelf solutions Implement rules-based trading systems customized to fi t the fi rm s needs 16

19 FIRM PROFILE: SMITH & HOWARD WEALTH MANAGEMENT We ve built our fi rm on the benefi ts of asset allocation versus manager selection. We don t go in selling returns or best manager selection. For us, it s all about asset allocation as the total package, so we outsource research and security selection to other money managers. That allows us to focus on asset allocation, which is more efficient and better leverages our talents. Frederick Wright and Tim Agnew, principals, Smith & Howard Wealth Management Making investment management scalable It didn t take principals Frederick Wright and Tim Agnew long to realize the extensive amount of work required to construct portfolios customized to each client s objectives. They were meeting with clients and creating portfolios that were customized, in fact, to a desired return and risk level. Then they began to see trends 10 different clients with the same time horizon and risk tolerance and the opportunity to gain economies of scale in investment management strategies. That s when they began to look closely at what they needed to make a scalable business that could grow without incurring excessive overhead. Recognizing that the firm s strength was in asset allocation, they transitioned from monitoring stocks and funds to focusing their energy on creating the appropriate mix for clients based on their needs and their appetite for risk. By emphasizing asset allocation, they decided to outsource research and security selection to other money managers, mutual funds and ETFs, which was more efficient for them and better leveraged their talents. At first, they were concerned that clients wouldn t see added value in just doing asset allocation. But they countered that concern by establishing an ongoing yearly performance benchmark to show clients how successful their asset allocation decisions are a decision that they report has paid off and differentiated them from other firms. Today, in addition to adding value on the asset allocation decisions they make, the firm also delivers total wealth management services to clients including retirement planning, tax planning and estate planning. With this new focus, Smith & Howard Wealth Management has revised their marketing materials to emphasize the value they provide. The principals emphasize that their model doesn t require mass customized portfolios and rules-based trading systems, because they are focused on adding value through comprehensive wealth management services rather than through pure money management. Smith & Howard implement their investment management strategy by: Segmenting clients and creating model portfolios for each segment After switching their focus from security selection to asset allocation, the fi rm created different model portfolios with similar holdings but different weightings. They determined that most clients fell into one of four different models. So, they vary the weighting of stocks versus bonds and alternatives across the different models but hold the same funds or ETFs for each client. It s just a matter of how they mix them. Smith & Howard knows, for example, that one client has 5 percent of a particular fund and another has 8 percent because they are more aggressive. Automating portfolio rebalancing and creating benchmarks Smith & Howard automates portfolio rebalancing and is currently confi guring it to differentiate the tax status of different accounts. They also established an ongoing yearly performance benchmark to show clients the performance of their asset allocation decisions. 17

20 BEST-MANAGED FIRMS: THE BUSINESS OF SERVING CLIENTS RELATIONSHIP MANAGEMENT Best-Managed Firms told us that a superior client experience is extremely important. Clients look to advisors for counsel on important financial decisions that shape their lives. Trust and loyalty are paramount, and managing the client relationship is central to keeping them invested in an enduring partnership with the firm. Consistent service, combined with a strong communications strategy built on two-way communications, forms the foundation of solid relationships. These strategies also help improve satisfaction and generate referrals. Typically, principals spend the majority of their time on high-touch relationship management. There are face-to-face meetings to schedule, phone calls to return and a steady stream of issues to manage. How can advisors make this high-touch process scalable and efficient? The most sophisticated fi rms widen relationship management responsibilities to include teams or staff resources organized around designated functions, delivering a fi rmwide experience rather than specifi c individuals to serve clients. This approach brings in principals where they add the highest value, freeing up their time for strategic leadership of the fi rm all while providing clients the highest levels of service. The client can benefit from service and advice delivered by the combined resources and knowledge of the firm. The firm realizes the benefits as well, applying the expertise of its relationship management or support personnel to every client. Deliver consistent, appropriate levels of service Many firms we spoke with segment clients into high-touch and lowertouch groups, depending on the clients investment preferences and profile. Smaller firms told us they tend to schedule annual meetings 18

21 RELATIONSHIP MANAGEMENT with clients and principals and follow up throughout the year with quarterly phone calls targeted to each client s unique situation. Our research indicates that as firms grow beyond 100 clients, they start to segment their clients by both asset level and client preferences, and they schedule communication at different intervals based on each segment s needs and investment preferences. Transition to a centralized relationship management function When it comes to relationship management, many fi rms struggle with structuring an organization that emphasizes productivity and scalability while at the same time delivering the best service levels. Our study reveals that in smaller Stage 1 fi rms, the principals are the primary point of contact. Larger fi rms start to move the client relationship management responsibilities from the principals to other advisors. In the most scalable models, client relationships aren t owned by a principal, but by a senior advisor who can quarterback the relationship. This approach allows less experienced team members to handle what they can, delegate other tasks to a centralized operational group, and rely on the principal and senior professionals only as needed. This fl exible service model allows for staff with different skill sets to be leveraged when appropriate. The result is that the client receives a fi rm experience. For example, the fi rm may rotate principals in client meetings to reinforce that they are being served by the fi rm rather than by individual members of the fi rm. Jack Calhoun of Capital Directions summed it up: We want clients to have a fi rm experience not a Jack experience or a Dennis experience. So we work very hard to not have any type of silos. We want lots of expertise spread throughout the organization, and the appropriate gatekeepers to channel people to whomever can best handle their issue. Brian Friedman, GHP Investment Advisers Maximize the expertise of the principals Best-Managed Firms know their principals time is better spent focusing on the most important client and fi rm-leadership issues or on business development. The more sophisticated the fi rm, the more they leverage junior staff to handle day-to-day relationship management issues. Building effi ciencies by delegating routine relationship management tasks to junior staff is important, but even more crucial is knowing when and how to leverage the principal. Best-Managed Firms report that 19

22 BEST-MANAGED FIRMS: THE BUSINESS OF SERVING CLIENTS they make sure principals are involved when money is in transition and at critical junctures in the life cycle of the client relationship. In general, principals are very good at identifying what one study participant called moments of truth. Making time for relationship management is a priority because it s core to who we are. Providing close, consultative relationships means that our processes and workflow have to be automated or handed off to better-equipped people. Dennis Covington, Capital Directions Whether it is a life event like the death of a spouse or the sale of a business, these issues require the counsel of the principal and should not be left for junior staff. Best-Managed Firms know when to bring in the right fi rm personnel to handle them. Some have used an outside facilitator to create a common understanding of what might be the important issues in the service of their clients. Use CRM to centralize client information Firms we spoke with cite a range of benefi ts for using a CRM system in their businesses. The most common is the centralization of clients vital information, which provides employees access to client data and helps them manage different pieces of the relationship. This enhanced visibility into client information vastly improves service levels and data accuracy. Additionally, automated workfl ows streamline processes and reduce manual tasks, which can improve adherence to regulatory and compliance requirements. Best-Managed Firms report that leveraging this technology improves staff effi ciency while strengthening their competitive position. Consolidating all client information in one central location so it is accessible to everyone in the fi rm requires an integrated technology infrastructure, and integrating data from a variety of different sources is no small feat. Depending on fi rm size, the solutions Best-Managed Firms use to meet this challenge range from tracking client contact information in Microsoft Outlook to consolidating client information from disparate applications in their CRM systems. Our analysis found that the infl ection point for deploying a CRM solution designed specifi cally for fi nancial advisors is approximately 100 clients. Firms with fewer than 100 clients can use basic CRM applications for tracking client profi le information and leads, but they do not usually use it to automate workfl ows or as a central archive of their client documents or other data. 20

23 RELATIONSHIP MANAGEMENT Firms with more than 100 clients tend to use CRM systems to segment their client base, automate workfl ow processes and facilitate communications. At this stage, many Best-Managed Firms also scan client documents to make them available to staff electronically via their CRM or a document management system. The most advanced CRM users typically the Stage 3 fi rms in our research rely on the system as the centralized hub for managing client relationships and offi ce processes, increasing their effi ciency and ability to scale operations. These systems are integrated with portfolio management systems, trading systems or other tools. They have been customized to incorporate performance reports and optimized workfl ow processes such as account opening or fund transfers. CRM technology brings the ability to retain the individuality and complexity of each client and retain and manage all the moving parts of the client relationship. Thomas Fee, Vector Wealth Management 21

24 BEST-MANAGED FIRMS: THE BUSINESS OF SERVING CLIENTS EXHIBIT 6: RELATIONSHIP MANAGEMENT BEST PRACTICES STAGE 1 STAGE 2 STAGE 3 PEOPLE Principals are the primary point of contact Rely on senior advisors as primary points of contact seeking support from principals as needed Rotate principals in client meetings to emphasize clients fi rmwide relationship PROCESS Conduct annual client meetings with principals Follow up with targeted quarterly calls Segment clients and provide a different frequency of interaction for each segment Increasing sophistication of segmentation TECHNOLOGY Track basic client contact information in desktop contact software Use CRM across the fi rm to track the client relationship Use some automated workfl ow capabilities Automate mailings Use CRM as the hub for managing relationships Store key client documents electronically Manage relationships with CRM workfl ows Use CRM to manage proactive client communications 22

25 FIRM PROFILE: VECTOR WEALTH MANAGEMENT This is and always will be a personal services business. The question to me is how do we create firms that hold this belief while creating a relationship that transcends one individual in the firm. I see the silo as the absolute enemy of this objective. We want our processes to be driven from the firm, not from the advisor. Part of this is not allowing an employee to be dedicated to a specific advisor. Thomas Fee, principal, managing partner, Vector Wealth Management Centralizing relationship management for scale without sacrificing the personalized client experience Soon after Thomas Fee founded Vector Wealth Management, a client asked a question that would turn out to be the catalyst for creating his firm s relationship management model: Tom, I love what you re doing. But, what would happen if you weren t around any more? That question motivated Fee to create a different kind of firm one that could be more scalable and break away from the models of the past. He divided the firm into three groups Advance Planning and Client Service (APCS), the Portfolio Management Group (PMG) and the Advisory Group (AG) making APCS responsible for managing most client contact, with PMG taking on portfolio implementation. Now every client has a primary client service (APCS) contact with a designated backup, but no APCS member works exclusively with any single advisor, ensuring that processes don t start to develop in silos. All processes are standardized and documented in an electronic manual. This helps accelerate employee training, reduce errors and ensure consistent service to all clients. Technology plays a supporting role in making this centralized approach work. The firm s custom-built application tracks clients assets and helps determine pre- and post-retirement investment policies. By investing time in the up-front work of getting clients set up in the tool, the firm reduces work later in preparing for client reviews. This tool also populates their portfolio management database. PMG follows the guidelines of the investment committee to execute asset allocation in the client s portfolios and ongoing review and rebalancing. The investment policy-level information from the firm s custom-built planning application provides connectivity between the client needs as articulated by the advisor and the way portfolio management team executes against the needs without having to continually check back with the advisors. Vector Wealth Management implements their relationship management strategy by: Enabling scalability through technology The firm achieves scalability through systems and technology, whether it is a customized CRM system, proprietary applications, rebalancing tools or accounting software. As Thomas Fee states, the firm leverages these tools to create tremendous efficiencies around the wealth management process without diluting the absolute uniqueness of our clients financial lives. The net result is that we can concentrate our time building a deeper understanding of their personal financial desires. Institutionalizing their client experience The fi rm centralizes core functional areas to deliver a consistent client experience and has put systems in place, including a repository of detailed client information and logged processes. While an advisor is responsible for a group of clients, anyone in the fi rm can get rapidly up to speed on any client and address most issues as they occur. Migrating clients to the firm s market view When a client comes in, the firm evaluates their holdings to determine whether anything may run contrary to their investment policy. Each client s individualized investment policy, segmented by time frame, is detailed by the Portfolio Management Group for these clients portfolios. Using automated rebalancing, the firm makes adjustments as needed, does the first review and presents to the advisor for approval. 23

26 BEST-MANAGED FIRMS: THE BUSINESS OF SERVING CLIENTS OPERATIONS AND CLIENT SUPPORT The back-office function is critical to any financial advisory business and is important in unlocking operational efficiency, scalability and consistency in client service. Our research reveals that Best-Managed Firms combine technology and the development of standardized processes across the entire firm to drive dramatically improved productivity. In fact, the benchmarking data shows that in spite of overall stronger growth rates, only half as many of the Best-Managed Firms (7 percent versus 16 percent of others) reported maintaining quality client service while growing as a barrier to their firm s growth potential. (See Exhibit 7) Not surprisingly, managing human capital also plays a major role in driving growth while maintaining client service. Best-Managed Firms in all three stages carefully regulate principals time in this functional area. Support specialists manage much of the day-to-day execution so principals can focus on other areas of the business. This transition from a principal-focused to a firmwide operation, where experiences are standardized and tasks are proactively transitioned away from principals, is a critical, if sometimes gradual, evolution. According to Best-Managed Firms, the firmwide approach means clients receive more accurate, responsive and efficient service. With the right processes, organizational structure and technologies in place, the firm as a whole can participate in delivering excellent service. Create firmwide processes Establishing and documenting processes for back-office operations is standard for the Best-Managed Firms interviewed, ranging from Stage 1 firms that document only core services to Stage 3 firms that go so far as to eliminate one-off exceptions that cannot be managed by their rules-based systems. 24

27 OPERATIONS AND CLIENT SUPPORT By documenting processes, firms gain greater control over their operations, setting standards for staff about how things should be done and reducing questions that would otherwise need principal input. This also enables firms to measure and benchmark performance at a firm, group or even individual staff member level. Some processes that firms typically standardize include quarter-end processes, reporting, billing, data reconciliation, setting up new accounts and handling life events such as a death or a marriage. The most scalable models, observed in Stage 3 firms, eliminate one-off process variations across clients or client teams. The best example of this is billing. For instance, a firm can set up their billing process, a feature generally found in their portfolio management system, to automatically calculate a discount for clients of a certain size. Other examples include routine client service and new-client onboarding. In one firm, each client service team is expected to operate according to a specified procedure so each member can cover for anyone else on the team when needed. In another firm, there is a 13-step client onboarding process. This clearly documented process enables anyone to pick up where someone else left off without missing a step. As processes are documented, variations can be built in to accommodate different segments. For example, more profitable EXHIBIT 7: PERCEIVED BARRIERS TO GROWTH Which issues pose a barrier to growth? Maintaining Quality Client Service (Percent of firms) 7% less than half Best-Managed Firms Other Firms clients can receive higher-touch service such as more frequent reporting. Another interesting technique is staging blocks of major operational work such as statement preparation throughout the quarter to reduce quarter end processing time constraints. For example, one Best-Managed Firm splits clients into three groups with staggered quarter ends so activities are spaced out and staff is not overwhelmed. Use technology to automate processes Using technology to streamline internal processes is essential to achieving scale. By combining technology with process 16% We customize and document every aspect of our processes and workflow. Everything that happens is in the system what happened, who did it and then check it off when it s done. John Burns, Burns Advisory Group 25

28 BEST-MANAGED FIRMS: THE BUSINESS OF SERVING CLIENTS improvements, firms can standardize how work gets done and automate routine functions. Typical software packages address not only trading, portfolio accounting and reconciliation, but also client-related workflows through CRM systems. If we can spend $100,000 on technology and not need an additional person, the $100,000 has a very high return we can get 10 percent more productivity. Wally Obermeyer, Obermeyer Asset Management Company Best-Managed Firms leverage technology to make both general service workflows and the labor-intensive reporting processes more scalable. Firms benefit from standardized processes or workflows in a number of ways. Technology, such as CRM systems, serves to embed a firm s optimized processes and the associated efficiencies in its day-to-day operations. These documented workflows and processes can also aid regulatory compliance. They create an audit trail that tracks client communications, stores client documents and records transactions. Technology usage typically expands with the size of the firm. Smaller firms may rely on paper files, calendar and contact management programs, and spreadsheets for tracking tasks, such as meetings, business development, scheduling trading or even client birthdays. These firms may have a CRM solution, but they do not use it to track workflows. In our research, we observed that early Stage 3 firms typically start managing key processes such as account opening with CRM workflow tools. Also, they may begin to implement a paperless office to facilitate access to client files. Later, Stage 3 Best-Managed Firms often rely on CRM as the hub of their business and the central channel for everyone in the firm to access key client information and supporting documents. They have invested time and money in optimizing operational and client service processes, embedding them in workflow scripts in their CRM solutions. For instance, RegentAtlantic Capital has defined and automated 18 workflow processes such as cash withdrawal, account opening, new client onboarding and financial independence analysis and all of the steps for each of the processes. Also, CRM solutions can tightly integrate , document management and trading systems. Automate reporting In most cases, quarterly reporting takes 15 elapsed days past the end of the month to complete and requires at least three people each quarter. Industrywide, many firms gain efficiencies by outsourcing this function. 26

29 OPERATIONS AND CLIENT SUPPORT Best-Managed Firms maximize effi ciency with automatically generated reports, minimizing or eliminating one-off statement types. Firms with fewer than fi ve employees tend to manage quarter-end report processing using standard portfolio accounting systems. Larger fi rms with fi ve to 15 employees often create customized reports that integrate with their portfolio accounting systems, streamlining the process while retaining a unique fi rm statement. Firms in all stages report gains in effi ciency by assembling reporting components electronically, often including a letter from the principal that has been personalized via mail merge. Using a report packaging program to itemize, store and assemble all these components allows firms to electronically manage the time-intensive, manual post-printing work. Going a step further, the most sophisticated Stage 3 firms offer their clients a secure, Web-based portal for viewing reports, which, according to some firms, is quickly becoming a preferred method of delivery for their clients. It also significantly reduces the time and cost of printing, assembling and mailing reports. Invest in human capital Best-Managed Firms are strategic in how they approach fi nding, hiring and retaining staff. These fi rms understand that without the best-qualifi ed people, they would be handicapped in their efforts to deliver high-quality advisory services and manage operational effi ciencies. Best-Managed Firms recognize the value of hiring and retaining the best talent available, so they provide a career path and a highly competitive compensation model as incentive. They take a more progressive view of talent management. As a result, they are almost half as likely as other fi rms (14 percent compared with 22 percent) to view developing, motivating and retaining professionals as a barrier to growth. We have a very low staff turnover because we re willing to pay for great skills. Our staff s cumulative experience with clients is invaluable. Wally Obermeyer, Obermeyer Asset Management Company We ve also found that Best-Managed Firms often pay their employees in the upper quartile of the pay scale. 5 They believe that hiring at the high end of the pay scale attracts more versatile employees who can accept more responsibility, which in turn results in employees who want to stay and grow into new roles at the fi rm. (See Exhibit 8) They also mentioned a side benefi t: Retaining experienced employees cuts down on training costs associated with new staff and maximizes team effi ciency. 5 Charles Schwab s Creating an Effective Compensation Plan MKT,

30 BEST-MANAGED FIRMS: THE BUSINESS OF SERVING CLIENTS EXHIBIT 8: BEST-MANAGED FIRMS EMPLOYEE COMPENSATION 6 but may lead to differing processes across teams, which can erode efficiencies over time. 28 $ Thousands % Relationship Manager 48% Investment Planner Best-Managed Firms Other Firms 62% Business Development 30% Operations & Administration Centralize client service functions as the firm grows 6 Median employee compensation includes salary and bonus pay. All advisory fi rms struggle with the question of how to provide client support in a way that best serves client needs while maximizing productivity, consistency and the ability to scale. What is better, a silo approach that assigns clients to a specifi c service team or a more centralized organization dedicated to client service management? Firms with client service teams of two or three core members are typically led by a principal whom clients view as their primary point of contact. This has the value of continuity for clients and team members, This silo approach may also limit improvements to the bottom line, because once the team is at capacity, a new team has to be created to serve more clients, and finding experienced professionals to start a new team is often difficult. One strategy we observed that avoids this limitation is to have a dedicated team member who is constantly auditing different teams to identify best practices that can be shared with other teams. Many of the larger Best-Managed Firms create a centralized service organization with clearly defined roles and responsibilities. As a result, clients get a consistent level of service while the organization benefits from efficiency and potential to build scale. As the firm grows, it creates scale by adapting roles and progressively delegating to professional or administrative staff. We observed that principals are more productive if supported by staff assigned to key account management tasks. This model of pooled resources does, however, require a technology infrastructure that can take the place of dedicated team members who, because they are assigned to specific client accounts, have key client information in their heads what one adviser calls the cranial retention effect. While it may take more management time to organize this larger team, the payoff is higher productivity per staff member.

31 OPERATIONS AND CLIENT SUPPORT EXHIBIT 9: OPERATIONS AND CLIENT SUPPORT BEST PRACTICES STAGE 1 STAGE 2 STAGE 3 Rely on administrative staff Use professional staff to support principals for key account tasks Centralize specialized and scalable tasks, e.g., trading, operations PEOPLE Share professional staff across teams Avoid creating team silos with different practices Use CRM to track service details Delegate specifi c roles to dedicated managers with no client responsibilities Document core service processes Segment service by client type Establish and document all processes PROCESS Assign a lead for each group of clients Spread out tasks to reduce workload peaks, e.g., different quarter-end reports for different clients Eliminate process exceptions that cannot be programmed into rules-based systems Give all staff access to centralized repositories of client information TECHNOLOGY Report Creation Rely on paper files May have a CRM, but don t use it to track tasks Start to track key tasks centrally Create customized reports Build on portfolio management systems to streamline the process Use workfl ow tools to track processes Access key documents via CRM Report Distribution Manage quarter-end reporting manually Electronically assemble reporting components Use Web-based reports for most clients Use standard reports from portfolio accounting system 29

32 FIRM PROFILE: BURNS ADVISORY GROUP We have a written process for every aspect of our operations and workfl ow. So, we can provide scale across the board and accountability from A to Z. And I mean everything from A to Z. We re now perfectly positioned to handle virtually anything that comes our way. John Burns, principal, Burns Advisory Group Optimizing productivity through process improvements and staff accountability For the Burns Advisory Group, it s all about commitment to a process. It s critical to commit to a process, get it on paper, make people accountable for it and continually improve it. It allows you to grow your capabilities as well as your ability to do good work, notes principal John Burns. The firm plans five years out and strives to behave like a larger firm would. By ramping up technology and delegating portfolio management activities, the principals can focus on running and planning the business. The principals realized that if they wanted to grow, they had to start looking at the firm as a business, rather than building it one client at a time. And that meant having processes in places to develop their staff s skills both technical and people skills so that clients experience relationships with everyone across the firm, not just with the principals. After reviewing their client base, the firm broke it down into what they call tier planning. They identified about 40 clients that generate a very large percentage of their income as well as second, third and fourth tiers. After segmenting their client base, they built specific service models for each category of clients and assigned the right staff to them. This made it much easier for the firm to provide the different levels of service larger clients require compared to smaller ones. As a result of this segmentation, the firm is able to focus its efforts and expand offerings for higher-service clients, efficiently scaling what they do and who they do it for. Burns commented on how his firm has benefited from defining and deploying processes: The interesting thing is that our A-level client has changed dramatically from 2003 to today. But we re able to attract and retain a higher level of client. We are better at articulating everything from process to sales communications pieces. The Burns Advisory Group implements their operations and client support strategy by: Segmenting clients and building service models for each segment The fi rm segments clients into different tiers of service, builds specifi c service models for each category of clients, and assigns the appropriate staff to them. This process allows them to decide who does or does not receive quarterly paper reports. The fi rm has established multiple documented processes for all related core activities. Using processes to change how clients are served The Burns Advisory Group has refined the client onboarding process to ensure it is as efficient as possible. They have developed a process and technology platform that elevates their services from what they term the lowest common denominator wirehouse approach, thus differentiating their offer from the competition. Using technology to automate processes across the firm The firm has created workflows in its CRM system to automate previously manual processes. Integration between their portfolio management and CRM systems gives advisors a consolidated view of important client information, including contact and account information, as well as performance data. Going paperless with electronic publishing In addition to storing all client files electronically, the firm now makes client statements available online. This trims production time and printing and mailing costs, and clients appreciate the convenience of Web access to their statements, again distinguishing the firm from its peers. 30

33 STRATEGY AND PLANNING STRATEGY AND PLANNING Investing in the Future of the Firm The practices covered in the next two sections Strategy and Planning and Marketing and Business Development are important investments in the future of a firm. Though not front of mind in day-to-day operations, strategy, planning and growth are critical to long-term success. Carving out time is not always easy, and progress in this area requires discipline in execution. As described in the first section of the paper, Best-Managed Firms are able to free up principals time by streamlining operations and formalizing a firmwide approach to relationship management. As a result, principals are able to invest this time in planning for the future and business development. Strategy and Planning Even when the profi ts and resources of all fi rms are being stretched thin, Best-Managed Firms continue to push forward with strategic planning. Just as they counsel their clients, Best-Managed Firms understand that planning can help sustain the health of their own fi rm in economic downturns and chaotic market climates. In our interviews, we observed that Best-Managed Firms develop a disciplined structure around their planning processes and keep their staff involved and accountable for results. In this way, they can be thoughtful about the fi rm s goals and how to achieve them. Best-Managed Firms leverage strategy and planning as part of the business growth engine. Our research shows that they are more likely than their peers to plan for growth. In our benchmarking data, Best- Managed Firms say they are half as likely as other fi rms to view growth-plan development as a barrier to success (10 percent versus 21 percent). Fourteen percent of Best-Managed Firms say following a strategy for marketing their fi rm is a barrier to success compared with more than a quarter (26 percent) of other fi rms. (See Exhibit 10) 31

34 BEST-MANAGED FIRMS: THE BUSINESS OF SERVING CLIENTS EXHIBIT 10: PERCEIVED BARRIERS TO GROWTH Which issues pose a barrier to growth? Planning for Growth (Percent of firms) 10% less than half 21% Developing Strategy for Marketing Firm (Percent of firms) 14% about half Best-Managed Firms Other Firms In addition, the fi rms we talked to for this report stressed the importance of dedicating time to succession planning to secure the future of client relationships and their employees. Plan on planning 26% Formulating a business strategy and plan is the essential fi rst step for any business. For many fi rms, planning is limited to budgets and growth projections over a one- to threeyear horizon. Few develop detailed strategies After the success of achieving our vision, we know how important it is to continually step back and define where we want to be. Colin Higgins, The Golub Group and write them down. And fewer still plan more than three years out. Best-Managed Firms distinguish themselves by their ability to pause, plan and prioritize. They have a vision of where they want to be in three, fi ve or ten years. They align people, processes and technology to achieve both strategy development and planning goals. Because informal processes and communications are suffi cient to help coordinate the activities of a small group of people, smaller fi rms tend to have less formalized planning processes. In fact, several smaller fi rms we spoke to said they are sensitive to making their process too onerous. They keep their small groups of staff on the same page with direct communication and coordinated planning. Remaining flexible and opportunistic is more important for some firms than having a thoroughly documented plan. However, as a firm grows, the challenges of keeping everyone aligned increase, and processes often need to evolve beyond those initially established. Some firms recognize this challenge and reach out for the perspectives of external coaches or facilitators. For example, one firm hired an external coach who helped them compile a list of milestones and tactical items on which to focus. Larger fi rms that want to sustain a high growth rate typically require more involved plans and have more sophisticated planning 32

35 STRATEGY AND PLANNING processes. Planning is important for several reasons: Capital investments need to be sequenced and prioritized, hiring requires lead time, and business development takes thoughtful planning and employee buy-in. The larger Best-Managed Firms have carefully planned meetings with pre-work assigned for many participants. These fi rms report that as they grow, planning and formal meetings become more necessary to ensure consistency of vision, to share thought processes and to provide a forum for ideas from those closest to the day-to-day operations of the fi rm. Motivate staff to execute the plan It takes people to make a plan come alive and succeed. Best-Managed Firms establish a clear process for governance, assign responsibility for specific tasks and align results with incentive plans. They keep the plan on track by monitoring results, evaluating the efficiency of the process and recalibrating as necessary. Again, fi rm size can defi ne the approach to implementing the strategy. The larger the fi rm, the more diffi cult it is for the principals to know who is on point for each initiative. Having a defi ned methodology for measuring results and monitoring tasks helps eliminate uncertainties in managing a larger team and reinforces individual accountability. Some fi rms leverage practices found in larger corporations and adapt them to their environment. They encourage bottom-up thinking from the staff and spread responsibilities across the fi rm by core area. By giving everyone a say and making employees responsible, they can establish key metrics for specifi c goals and reward achievements in each business area across the fi rm. The only asset this firm really has is the people that work for it. So, if that s your asset, you grow, protect and guard it by giving people opportunities, allowing them to take some risks, and potentially getting some payoff. Chris Cordaro, RegentAtlantic Capital For example, at The Golub Group, all employees have quarterly goals, and 20 percent of the fi rm s profi ts are carved out for bonuses based on achievement of these goals. Across the fi rm, everyone qualifi es for a performance bonus based on company success. Bonuses are also available for extraordinary individual achievements, and each individual management group has its own set of goals. For instance, in their Private Client group, metrics such as number of outbound calls, number of referrals from existing clients and total new assets are 33

36 BEST-MANAGED FIRMS: THE BUSINESS OF SERVING CLIENTS measured for each person with goals set according to responsibility. Smaller fi rms tend to share the strategy and planning responsibilities among the principals and reward individuals for accomplishing the specifi c goals they have been assigned. The smallest fi rms, typically with fewer than fi ve employees, offer incentives based on the overall performance of the fi rm rather than on meeting specifi c goals. The goal is to align staff with a common purpose where roles and accountabilities often need to be fl exible. Regardless of size, advisory fi rms following best practices should clearly defi ne objectives and establish personal incentives aligned with specifi c goals. We combine revenue data from QuickBooks with CRM data on how much clients are utilizing our services to see the true profitability of each client. Then we use the data to drive tactical and strategic decisions on what to change in the business. Chris Cordaro, RegentAtlantic Capital they can leverage to identify issues, develop solutions and track implementation. By identifying best practices and areas of opportunity, fi rms can quickly capture and share information to drive improvements for the whole fi rm. The most sophisticated fi rms harvest information on client profi tability, retention rates, growth in new assets and existing clients and portfolio performance. This gives fi rms visibility and insight into the operational performance of their fi rm at the level of the individual client, client segment, relationship manager or service team. These fi rms collect the data by integrating their core systems, such as accounting software and a CRM system. This enables calculations such as average client profi tability or average time spent by staff member on an account. The data can be used to make policy decisions on pricing, staff assignment and training, target segments, and growth trajectories, to name a few. In comparison, smaller fi rms often do not need anything more complex than a spreadsheet to manage their strategic development and planning. Use business intelligence strategically While technology is not central to the strategy and planning process, the most sophisticated fi rms integrate different systems to provide business intelligence 34

37 STRATEGY AND PLANNING EXHIBIT 11: STRATEGY AND PLANNING BEST PRACTICES STAGE 1 STAGE 2 STAGE 3 Communicating the Plan Principals collaborate on vision, strategy and decision making Senior leaders share responsibilities Incorporate bottom-up thinking from across the firm Set firmwide responsibilities PEOPLE Communicate final written plan Incentives Reward everyone for fi rm performance Link individual bonuses to individual goals Set key metrics for bonuses Establish bonuses for achievement in each core area PROCESS Planning Meet annually on strategy May not document their strategic plan Conduct extensive strategy review annually Document a strategic plan Schedule quarterly meetings to measure progress May utilize external consultant as facilitator Schedule all-hands retreats for planning Assign pre-work for attendees Prioritize executive committee s plan Monitor progress with monthly reports Time Horizon Plan tactics and budget annually Plan and set goals for a three-year horizon Focus on components critical to strategic success Fix short-term problems quickly Think long term and plan proactively TECHNOLOGY Planning Use spreadsheets to project revenues and set budgets View technology and business intelligence as a critical part of strategy and planning Mine data in firm systems to help shape firm strategy Use historical performance data to support three-year planning and goal setting 35

38 FIRM PROFILE: THE GOLUB GROUP All our decisions along the way were based on three premises: Where do we want to be, how do we want to get there, and what steps do we need to take. Colin Higgins, president, The Golub Group Making rigorous, thoughtful planning part of the corporate culture Careful planning has always been a key focus of The Golub Group. Even before opening the firm, the principals sat down and talked about what they wanted it to look like in 10 years in terms of revenue, assets under management, head count, products, market served and geography. Three years later, they realized everything on their 10-year plan either had already been or would soon be achieved. That s when it crystallized for them: If they hadn t defined their future so clearly, they wouldn t have known how to bring it to fruition. After deciding that tracking business performance metrics was going to be a key focus for the firm, they identified the drivers that lead to growth and profitability, making them visible throughout the firm. They held everybody accountable by tying compensation and bonuses to achieving those goals. In hindsight, they are quick to admit that it s easier to do when there are five people in the firm rather than 20. It just means more attention needs to be paid to planning processes. The firm meets annually to set the vision for a rolling five-to-ten-year horizon. Usually scheduled in Q4, they spend about 10 hours per person or hours per team defining what they want the firm to look like in terms of products, people, location, AUM and management team, just as they did when they started the firm. The management team identifies the top five issues and sets specific firmwide deliverables as quarterly objectives. This plan and associated goals are set in stone. They maintain a rolling 36-month financial forecast for AUM, new assets and fee assumptions, which is updated quarterly and used to set budgets and predict headcount. The team also checks in regularly at monthly board meetings, leadership team meetings, weekly manager and team meetings, and monthly all-hands meetings. As the firm grows, so does their commitment to focus on their vision, mission and goals. As president Colin Higgins puts it, The key is to stick to your core strengths it s very easy to get distracted, take on new things and new people. The Golub Group implements their strategic development and planning by: Scheduling regular meetings and monitoring plan progress Partners meet annually to set the vision for a five-to-ten-year horizon. After the top five issues are identified, the firm establishes specific firmwide deliverables as quarterly objectives. They maintain the momentum with monthly board and leadership team meetings, weekly manager and team meetings, and monthly all-hands meetings. Institutionalizing measurement and tracking of achievements One of the firm s most important decisions was to develop metrics to track retention rates, growth in assets from new and existing clients, and portfolio performance. Using these metrics, each manager meets monthly with employees to review progress toward goals and determine where help is needed. Rewarding achievement of goals Goals are established, measured and communicated by senior management to each group. The Golub Group dedicates 20 percent of the fi rm profi ts to employee incentives to encourage staff to meet goals:» Firmwide goals for everyone based on firm success» Group goals designed to motivate teams. For example, the Private Client group is evaluated on the number of outbound calls, the number of referrals and additional assets gathered» Individual, discretionary goals designed to reward efforts above and beyond group goals. For example, one group leader redefi ned the client service experience turning a good program into a great one 36

39 MARKETING AND BUSINESS DEVELOPMENT MARKETING AND BUSINESS DEVELOPMENT Interestingly, when asked to cite their firms top three success factors, Best-Managed Firms rarely mention business development directly, in spite of their success compared with other firms in generating revenue from referrals. So why are these firms so much more successful at generating new business? The Best-Managed Firms we talked with make building a culture that supports new business a priority and specifi cally plan for it. They structure their organization to allow principals to cultivate new growth opportunities. Other fi rms are more than twice as likely as Best- Managed Firms to view insuffi cient time invested in marketing and business development as a barrier to growth (26 percent versus 54 percent). Best-Managed Firms are about a third as likely than other fi rms to view accountability for business development as a growth barrier (12 percent compared with 30 percent). (See Exhibit 12) Firms successful in attracting new business foster organic growth through a structured approach to marketing and business development that centers on referrals. Referrals are the largest, most reliable and cost-effective source of new clients for fi nancial advisors. In fact, the benchmarking data shows that referrals account for 88 percent of new client business. What stands out is the fact that Best-Managed Firms are growing nearly 50 percent faster from referral sources than other fi rms. Best-Managed Firms obtain more than half of their 20.6 percent growth in total assets from existing clients and their referrals. (See Exhibit 13) These same two categories add up to only about 5 percent for other fi rms. Given the results, it is not surprising that Best-Managed Firms are far less likely than other fi rms to consider business development a major barrier. 37

40 BEST-MANAGED FIRMS: THE BUSINESS OF SERVING CLIENTS EXHIBIT 12: PERCEIVED BARRIERS TO GROWTH Which issues pose a barrier to growth? Time Invested in Business Development (Percent of firms) 26% less than half Accountability for Business Development (Percent of firms) 12% about a third 30% Best-Managed Firms Other Firms 54% Leverage partners time effectively Best-Managed Firms leverage partners skills and time effectively. They free up principals to focus their efforts on business development by fostering and leveraging close working relationships. In their eyes, referrals, or business development, is part of the role of a principal. Align organizational structure with business development There is a lot of discussion today about the need for dedicated business development staff. Our key takeaway from studying the most successful fi rms is that there is no defi nitive right or wrong answer to this issue. Some fi rms have dedicated business development offi cers, while others have hired them in the past and later determined there was not a good fi t. Depending on the style of the fi rm, a dedicated business development offi cer role may or may not work. The key is knowing who is best at business development in the fi rm and structuring their work so they can allocate adequate time to this activity. When it comes to business development, the benchmarking data did not point to an ideal organizational structure. As Best-Managed Firms evolve, they increasingly free up their principals time to focus on big-picture business development. Our study reveals that once fi rms reach $75 million to $200 million per principal, they typically start involving junior staff or external marketing and business development resources to help with prospecting and day-to-day tactical execution of marketing initiatives. To develop a cohesive marketing plan that supports the business objectives, our analysis reveals that some Stage 3 fi rms hire full-time, in-house marketing professionals. This addition to the team augments business development and coordinates prospecting and client retention activities, thus relieving principals from this responsibility. 38

41 MARKETING AND BUSINESS DEVELOPMENT EXHIBIT 13: BEST-MANAGED FIRMS SOURCES OF ORGANIC GROWTH Average annual asset growth excluding market performance BEST-MANAGED FIRMS OTHER FIRMS Asset growth by source: Existing clients 3.1% -0.8% Client referrals 7.3% 5.9% Professional referrals 7.5% 4.2% All other sources 2.7% 1.5% Total 20.6% 10.8% Carefully define a prospect-toclose process Our analysis identifi ed a clear evolution of the business development process or sales cycle in Best-Managed Firms. Their processes encompass strategies from learning to say no to prospects that don t fi t their ideal client profi le model to implementing a documented business development process. They also include developing a centers of infl uence (COI) strategy with other businesses, and integrating the fi rm s vision, values and core competencies into all marketing and business development efforts. key to effi ciency in business development rests on clearly defi ned, repeatable business processes and workfl ows. Having a set process institutionalizes a fi rm s ability to appropriately and effi ciently leverage the business development offi cer s or principal s time to sell the company s core strengths to the right prospect. If you don t document it or have a process for it, then you probably shouldn t be doing it. We document everything, and that s what gives us the consistency in our business development. Mike Dixon, Dixon Financial Services The primary lesson from the most successful fi rms, no matter what their size, is that the 39

42 BEST-MANAGED FIRMS: THE BUSINESS OF SERVING CLIENTS Use technology strategically to boost business development Leveraging technology to maximize effi ciencies across the fi rm is a mantra for Best-Managed Firms. The marketing and business development function is no exception. CRM solutions play a key role in helping fi rms track communications and marketing activities, segment clients, and automate business development workfl ows and processes. It used to be that only I would speak with prospective clients, and I would return most client calls. Now the team handles at least 90 percent of the client activity, so my time is better spent, and we have a better distribution of workload. Mike Dixon, Dixon Financial Services The top performing fi rms leverage technology to automate and institutionalize their unique business development processes fi rmwide. CRM tools help these fi rms segment and manage their client base and prospects, helping yield better-qualifi ed leads. Workfl ow tools help track processes and assign responsibilities. Sophisticated systems can enable accurate, up-to-date measurement of key metrics, including tracking which clients or affi liated COI fi rms provide the best referrals and monitoring the performance of the individuals responsible for closing business. Best-Managed Firms take this data and adjust course to achieve the best results. Best-Managed Firms in this study use CRM tools to manage contacts and prospects in varying degrees of sophistication. Stage 1 fi rms use their CRM system to manage contacts and communications, while Stage 2 fi rms, with $75 million to $200 million per principal, rely on it to manage prospect workfl ows from initial contact right through to the close of a deal. They also use technology to automate other tasks like generating proposals. Stage 3 fi rms, with as little as $400 million AUM, implement custom or proprietary CRM workfl ows that can integrate with other applications to measure program success. It is no surprise that the most sophisticated fi rms leverage another key technology: a Web site for clients and prospects. It can be a very effi cient vehicle to communicate with current clients, market to prospects and attract qualifi ed leads. 40

43 MARKETING AND BUSINESS DEVELOPMENT EXHIBIT 14: MARKETING AND BUSINESS DEVELOPMENT BEST PRACTICES STAGE 1 STAGE 2 STAGE 3 PEOPLE Principals function as sole business development engine in addition to everything else they do Free up principals for business development May get external marketing help Principals supported by full-time, in-house marketing professionals Junior staff also supports business development Learn to say no to prospects that don t fi t their strategy Implement a well-documented, repeatable process Align vision, values and core competencies PROCESS Document process for client referrals includes tracking, thanking and goals Incorporate these ideas in all marketing materials and programs May have a COI strategy TECHNOLOGY Use Microsoft Outlook or CRM to keep track of contacts and prospects, tasks and/or follow up items May have a very basic template-based fi rm Web site Manage prospecting workfl ow with CRM Use sales tools, e.g., automated proposal generation Use Web site as marketing tool Use custom CRM workfl ows that refl ect fi rm-specifi c processes Have Web sites tailored for prospects and clients 41

44 FIRM PROFILE: REGENTATLANTIC CAPITAL The most important realization we had was the importance of making a commitment to growing the fi rm at a meaningful, sustainable rate. And the way to do that and continue to provide a very high-quality service is by getting the best people. Chris Cordaro, principal, RegentAtlantic Capital Hiring right: not just for growth, but for productivity and efficiency RegentAtlantic Capital was a year and a half into their merger and acquisition strategy when they hired a CEO to run the process. In the midst of assessing the situation, the new CEO noted that their organization consisted of two extremes: high-level professionals and low-level administrative staff. The firm needed mid-level staff to bridge this gap and free up the principals time, so they hired three young, capable professionals. It soon became clear it was the right decision. As principal Chris Cordaro put it, Wow! This is really how we re going to best leverage our time and grow. It wasn t long before their M&A strategy was retired and replaced with an organic growth model that maximized their human capital to leverage the principals. The firm found that the ideal candidate for this key mid-level role has about five years experience and a CFP or other advanced designation such as a CPA, MBA or CSA demonstrating their commitment to professional growth. The firm says it is the hardest position to fill since the individual is tasked with both organizing the client implementation workflow and doing all the hands-on technical work. At the same time, they re offered the opportunity to become a wealth manager, so they re also tasked with maintaining and developing new client relationships. Financial advisors become wealth managers when they have responsibility for enough client relationships to prove themselves. Cordaro encourages his staff to put him out of a job. I tell my advisors, Any one of my clients you develop a better relationship with than I have with them is yours. That creates an incentive for them to get to know my clients well so I can leverage my time as best as possible. Any time they talk with a client or deliver a service, the better off we all are. As a result, the firm proactively seeks the best and the brightest. Sometimes that can mean an aggressive battle for good talent, especially when the person they ve targeted is already working for another firm. I view it as key to our firm s survival. When candidates see how we provide our people with plenty of opportunities to grow with the firm, we get the high-caliber professionals we re looking for, Cordaro says. RegentAtlantic Capital implements its business development strategy by: Hiring and mentoring the best RegentAtlantic used headhunters to recruit top talent from other firms, bringing in mid-level professionals to free up the principals. New staff members are tasked with putting their boss out of a job encouraging them to think bigger and do more. Rewarding staff for business development results The firm builds targets into bonuses: 75 percent of the bonus is based on results achieved such as new client goals, new revenue goals, new profit margin goals and client retention goals. The other 25 percent is awarded for activities that drive results, such as number of networking appointments set, press releases published and speaking engagements performed. Staff is rewarded based on revenue they bring in as opposed to assets to discourage discounting. Establishing and monitoring goals All goals are set in stone at the beginning of the year, and payouts are tied to reaching them. If the goals aren t met, neither are the estimated payouts. Progress is reported during monthly all-hands meetings, so everyone knows where the firm is relative to the established goals. Documenting processes Each workflow item gets booked in the firm s CRM system. There are 18 different process workflows, and each one has a number of tasks that need to be performed before it is completed. (See Exhibit 15) 42

45 EXHIBIT 15: REGENTATLANTIC CAPITAL CREATING A PROSPECT OPPORTUNITY Establish Opportunity in CRM Open opportunity, including estimated close date, revenue potential, referral source and service offering desired, e.g., wealth management, fi nancial consulting. Set Follow-Up Set next follow-up date in Microsoft Outlook for relationship manager outreach and link to CRM record. Update CRM Contact Record Review and verify all contact details as a result of the outreach, including , newsletter receipt flag and source of referral. Update all professional relationships, e.g., attorney, CPA. Schedule Next Steps Record all phone calls and conversations in CRM. Set appropriate next steps, e.g., meeting in person, create proposal document. Designate Prospect Type Based on information received, code prospect s tier in CRM, e.g., Prospect Top Tier. Schedule Follow-Up Marketing Activities Send invitation to prospect for upcoming events/ seminars and include on mailing list for articles of interest. 43

46 BEST-MANAGED FIRMS: THE BUSINESS OF SERVING CLIENTS CONCLUSION Best-Managed Firms report that delivering the high-touch, high-quality advisory services that earn their clients trust and loyalty goes hand in hand with building efficiencies and productivity in their business. They demonstrate that an efficient, well-run practice focused on their strengths is the foundation for an enduring, productive partnership between the advisor and the client. It is, in fact, the secret to sustaining growth. We believe any firm, no matter what size, can learn from the experiences of the Best-Managed Firms in this report. Every firm has a different story to tell. Depending on the culture, service model and size of a firm, some of the measures discussed here may be more appropriate than others. But for every firm, the first step is for owners to set aside time to work on the business. This means truly understanding the capacity of the firm, the way work gets done, the productivity of the staff, and the sources of revenues and expenses. Based on this information, firms can identify areas to apply the practices examined here to improve the processes, organizational structures and technologies that are the lifeblood of the practice. For additional reading on Best-Managed Firms or to access other MKT reports, please visit schwabinstitutional.com/marketing. We also recommend the following MKT reports: Best Management Practices of Independent Advisory Firms: The Path to Profitable Growth (March 2004) Best-Managed Firms: It s About Time, Time Management and Organizational Effectiveness (March 2007) Best-Managed Firms: Recruiting and Retaining Top Talent (June 2007) If you would like to provide feedback on this MKT report, please us at [email protected]. 44

47 45

48 BEST-MANAGED FIRMS: THE BUSINESS OF SERVING CLIENTS APPENDIX A: METHODOLOGY Charles Schwab s research into advisory firms defines a standard of excellence and provides guidelines for achieving that standard. The starting point for this year s Best-Managed Firms MKT is the 2007 RIA Benchmarking Study, a detailed compilation of self-reported firm data on a wide range of relevant topics, including asset and revenue growth, sources of growth and new clients, products and pricing, organizational structure, and profit and loss. This study focused on 647 advisory firms that custody their assets with Charles Schwab, including firms of various sizes and business models, representing more than $256 billion AUM. Of those, 370 firms had at least $100 million in AUM, and 109 firms had over $500 million. As a basis for the research in this paper, Charles Schwab put these firms through a screening based on the following criteria: Minimum 2006 revenue of $1 million Minimum 2006 fee-based revenue of 75 percent Minimum of two professional staff Full data reported for Best-Managed Firms selection criteria After the screening criteria were applied, 208 of the original 647 were left in the pool of fi rms to be ranked. Three ranking algorithms operating income percentage, revenue per professional and three-year revenue compound annual growth rate (CAGR) were individually applied to all 208 firms. Firms were ranked independently on each metric then sorted by the total of the three ranking scores. We identified the firms in the top 20 percent of the combined performance results as Best-Managed Firms. 46

49 APPENDIX A: METHODOLOGY A quantitative selection of top firms The fi rms we selected to interview all demonstrated success on three performance metrics: Productivity We defined productivity by dividing total firm revenue by the number of professional staff defined as the principals and staff excluding back-office and administrative staff. While the total staffing of a firm contributes to revenues, we focused on professional staff, as they are typically a more significant expense driver, so revenue per professional would be expected to align more closely with firm profits. Profitability To form a basis of comparison on profitability, we used standardized operating margin. Our profitability measure standardized the level of partner base and bonus expense at $200,000 per principal, which leveled the playing field on individual firm decisions about partner compensation as base versus profit sharing. The profit and loss detail included in the Appendix leaves partner base and bonus as reported; however, a line is included for standardized profitability. Revenue growth Rounding out overall fi rm performance, we measured the compound annual growth rate from 2003 through Growth is included as a counterbalance to profi tability, ensuring that a fi rm is not only currently profi table, but also investing in the future. Once the criteria were applied and Best- Managed Firms identified, there was interestingly no bias in business model or firm staffing in the top-ranking firms compared with other firms. This provides support for the role of firm practices as a contributing factor in levels of performance observed. The data on business model and staffing show: Best-Managed Firms had a median of nine total staff while all other fi rms had 10 (average of 14.8 vs. 14.5). Both groups had the same proportion of self-defi ned money manager fi rms (28 percent) and wealth manager fi rms (72 percent). 47

50 BEST-MANAGED FIRMS: THE BUSINESS OF SERVING CLIENTS APPENDIX B: BEST-MANAGED FIRMS INCOME STATEMENTS Average Common-Sized Income Statement 2006 Best-Managed Firms Other Firms $25 $100MM Revenue Asset management fees $5,461, % $2,958, % $392, % Planning and consulting $201, % $172, % $16, % Securities commissions $4, % $21, % $4, % Insurance commissions $42, % $19, % $6, % Other revenues $43, % $42, % $8, % Total revenue $5,753, % $3,215, % $428, % Direct expenses Professional salaries Owner $1,003, % $629, % $143, % Nonowner $479, % $384, % $31, % Professional bonus Owner $250, % $114, % $11, % Nonowner $129, % $86, % $1, % Commissions paid $49, % $15, % $3, % Fees paid for referred business $237, % $36, % $1, % Total direct expenses $2,150, % $1,266, % $193, % Gross profit $3,602, % $1,948, % $234, % Overhead expenses Back-offi ce and admin salary and bonus $431, % $342, % $36, % Retirement benefi ts Owner $65, % $40, % $10, % Nonowner $58, % $31, % $1, % Health insurance $83, % $87, % $7, % Payroll taxes $107, % $80, % $10, % Marketing and business dev. expenses $117, % $56, % $12, % Offi ce rent $153, % $134, % $24, % IT (equipment and outsourcing) $84, % $57, % $7, % Non-IT equipment $24, % $15, % $2, % Non-IT outsourcing $59, % $36, % $3, % Offi ce expenses $55, % $46, % $6, % Utilities $29, % $24, % $5, % Professional services $58, % $42, % $6, % Travel and auto $62, % $38, % $7, % Training and education $21, % $24, % $3, % Business insurance $36, % $29, % $4, % Depreciation and amortization $51, % $38, % $3, % Taxes and licenses $15, % $21, % $1, % Other overhead $55, % $93, % $12, % Total overhead expenses $1,572, % $1,241, % $169, % Operating Income $2,030, % $706, % $65, % Standardized Operating Income 1 $2,461, % $785, % $64, % Other income or expenses Other income $41, % $8, % $1, % Other expenses $38, % $27, % $2, % Total other income or expenses $2, % ($19,036) -0.6% ($936) -0.2% Profit before tax $2,033, % $687, % $64, % Profit sharing Profi t sharing, owner $915, % $295, % $27, % Profi t sharing, nonowner $36, % $22, % $ % Total profit sharing $952, % $317, % $27, % 48 1 Standardized Operating Income is based on a single level of per principal base and bonus applied to every fi rm within a group. This level is $100,000 for fi rms in the $25 $100MM group, $150,000 for the $100 $250MM group, and $200,000 for every other group including Best-Managed Firms and Other Firms. Note: Percent values are the average of the percent of revenues value for each fi rm within the group. Dollar values are this average percent value multiplied by the average revenues for the group.

51 APPENDIX B: BEST-MANAGED FIRMS INCOME STATEMENTS Average Common-Sized Income Statement 2006 $100 $250MM $250 $500MM $500MM $1B $1B + $1,101, % $2,144, % $3,598, % $9,411, % $34, % $60, % $250, % $1,192, % $9, % $37, % $23, % 0.0% $15, % $19, % $53, % $56, % $20, % $29, % $172, % $46, % $1,182, % $2,291, % $4,097, % $10,706, % $284, % $515, % $797, % $1,634, % $121, % $248, % $507, % $1,477, % $33, % $53, % $216, % $641, % $19, % $47, % $129, % $294, % $12, % $7, % $ % $ % $10, % $66, % $101, % $114, % $480, % $938, % $1,753, % $4,162, % $701, % $1,353, % $2,343, % $6,543, % $98, % $242, % $390, % $1,232, % $23, % $36, % $21, % $124, % $11, % $21, % $49, % $126, % $27, % $59, % $91, % $222, % $29, % $52, % $105, % $280, % $23, % $37, % $48, % $193, % $51, % $91, % $151, % $431, % $18, % $47, % $57, % $207, % $6, % $10, % $24, % $18, % $14, % $15, % $36, % $108, % $14, % $32, % $51, % $143, % $10, % $17, % $28, % $53, % $19, % $28, % $59, % $116, % $16, % $25, % $47, % $117, % $9, % $17, % $27, % $55, % $11, % $22, % $30, % $75, % $8, % $29, % $39, % $155, % $5, % $10, % $9, % $56, % $42, % $41, % $84, % $148, % $441, % $841, % $1,354, % $3,870, % $260, % $511, % $989, % $2,673, % $289, % $555, % $1,350, % $3,575, % $4, % $6, % $17, % $33, % $6, % $17, % $54, % $63, % ($1,719) -0.1% ($11,270) -0.5% ($36,866) -0.9% ($30,068) -0.3% $258, % $500, % $952, % $2,643, % $141, % $192, % $317, % $657, % $3, % $20, % $15, % $24, % $144, % $213, % $333, % $682, % 49

52 BEST-MANAGED FIRMS: THE BUSINESS OF SERVING CLIENTS APPENDIX C: BEST-MANAGED FIRMS PERFORMANCE RATIOS Best-Managed Firms Average Performance Ratios 2006 Other Firms $25 $100MM $100 $250MM $250 $500MM $500MM $1B Firm overview AUM ($MM) $956 $563 $58 $164 $363 $687 $2,330 Total revenue ($) $5,753,346 $3,215,315 $428,659 $1,182,245 $2,291,153 $4,097,499 $10,706,750 Clients Gross profi t margin 63% 61% 55% 59% 59% 57% 61% Operating income 35% 22% 15% 22% 22% 24% 25% Standardized operating income 1 43% 24% 15% 25% 24% 33% 33% Operating income ($) $2,030,705 $706,742 $65,367 $260,179 $511,492 $989,007 $2,673,360 Pretax income per owner 2 $967,632 $517,757 $202,079 $346,996 $540,731 $737,596 $921,454 $1B + Staff headcount Principal Relationship manager Investment and planning Business development Total professionals Administration and support Grand total (all staff) Productivity Clients per professional Clients per staff (total headcount) Revenue per professional ($) $745,082 $425,115 $247,160 $380,802 $462,023 $432,998 $530,247 Revenue per staff (total headcount) ($) $414,138 $230,379 $152,007 $227,226 $241,713 $241,232 $274,220 AUM per professional ($MM) $120 $68 $33 $53 $75 $86 $130 AUM per staff (total headcount) ($MM) $69 $37 $21 $31 $39 $47 $73 Revenue per client ($) $17,451 $11,890 $5,793 $10,305 $10,299 $12,886 $36,163 AUM per client ($) $3,196,408 $2,397,393 $722,682 $1,272,354 $1,974,788 $2,532,104 $8,611,059 Operating profi t per client ($) $5,950 $2,557 $933 $2,267 $2,404 $4,665 $5, Standardized Operating Income is based on a single level of per principal base and bonus applied to every fi rm within a group. This level is $100,000 for fi rms in the $25 $100MM group, $150,000 for the $100 $250MM group, and $200,000 for every other group including Best-Managed Firms and Other Firms. 2 Pretax Income per Owner is the total of all principal base and bonus pay plus fi rm pretax profi t, divided by the number of principals. Note: The data shown are calculated for each fi rm independently, and then the median or average of that value taken across all fi rms for each line item.

53 APPENDIX C: BEST-MANAGED FIRMS PERFORMANCE RATIOS Best-Managed Firms Median Performance Ratios 2006 Other Firms $25 $100MM $100 $250MM $250 $500MM $500MM $1B Firm overview AUM ($MM) $492 $354 $59 $160 $359 $658 $1,833 Total revenue ($) $2,842,288 $2,154,719 $400,600 $1,090,000 $2,199,828 $3,724,326 $8,222,775 Clients Gross profi t margin 67% 61% 55% 60% 59% 59% 65% Operating income 37% 22% 8% 20% 21% 25% 22% Standardized operating income 1 45% 26% 22% 26% 27% 32% 33% Operating income ($) $1,005,638 $442,231 $28,572 $179,848 $410,654 $914,153 $2,042,506 Pretax income per owner 2 $793,098 $417,766 $184,060 $326,688 $438,268 $525,000 $705,916 $1B + Staff headcount Principal Relationship manager Investment and planning Business development Total professionals Administration and support Grand total (all staff) Productivity Clients per professional Clients per staff (total headcount) Revenue per professional ($) $658,905 $379,500 $228,000 $345,792 $429,952 $387,260 $522,960 Revenue per staff (total headcount) ($) $360,500 $218,361 $132,500 $204,250 $218,222 $235,294 $268,331 AUM per professional ($MM) $103 $58 $28 $50 $69 $82 $104 AUM per staff (total headcount) ($MM) $50 $32 $17 $28 $33 $43 $54 Revenue per client ($) $11,414 $9,112 $4,416 $8,163 $7,653 $10,336 $16,464 AUM per client ($) $1,557,786 $1,335,425 $587,719 $1,093,074 $1,273,154 $1,900,141 $3,635,739 Operating profi t per client ($) $3,641 $1,797 $456 $1,411 $1,563 $2,351 $4,291 3 Median of Total Professionals and Median of Grand Total (All Staff) does not equal the sum of the medians of each role taken independently. 51

54 BEST-MANAGED FIRMS: THE BUSINESS OF SERVING CLIENTS APPENDIX D: FIRMS INTERVIEWED Thank you to the fi rms listed below for their participation and insight they shared during interviews for this project. Firm Name Balasa Dinverno Foltz, LLC Bell Investment Advisors, Inc. Bingham, Osborn & Scarborough, LLC Burns Advisory Group Capital Directions Capital Investment Advisors, Inc. Conway Jarvis, LLC Diamond Hill Capital Management Dixon Financial Services, Inc. Fort Pitt Capital Group, Inc. Foundation Resource Management Geneva Investment Mgmt of Chicago, LLC GHP Investment Advisors, Inc. Highline Wealth Management, LLC HTG Investment Advisors, Inc. Kochis Fitz (now part of Aspiriant) LBMC Investment Advisors, LLC Manchester Capital Management Moneta Group Investment Advisors, LLC Obermeyer Asset Management Company Plancorp, Inc. RegentAtlantic Capital, LLC Schaefer Financial Management Smith & Howard Wealth Management St. Denis J Villere & Co., LLC Symons Capital Management, Inc. TCI Wealth Management, Inc. The Golub Group Vector Wealth Management, LLC Location Itasca, IL Oakland, CA San Francisco, CA Oklahoma City, OK Atlanta, GA Atlanta, GA Seattle, WA Columbus, OH Lafayette, CA Pittsburgh, PA Little Rock, AR Chicago, IL Denver, CO Bethesda, MD New Canaan, CT San Francisco, CA Brentwood, TN Manchester, VT Clayton, MO Aspen, CO St. Louis, MO Morristown, NJ Englewood, CO Atlanta, GA New Orleans, LA Pittsburgh, PA Tucson, AZ San Mateo, CA Minneapolis, MN 52

55

56 The Report was produced by Charles Schwab & Co. Inc. ( Schwab ) for general informational purposes only and is intended for independent investment advisory fi rms. It is not intended for use by investors in evaluating or selecting investment advisors. This Report is not a recommendation of, referral to, or solicitation on behalf of any investment advisor, whether or not named or described in the Report. Investment advisory fi rms named and described in this Report are not affi liated with, and their employees and agents are not employees, agents or representatives of Schwab. This Report is not intended to provide fi nancial, investment or tax advice. The Report relates solely to the business enterprise management practices of the independent investment advisory fi rms that participated in the study and were interviewed for the Report. The study did not measure or assess the participating fi rms investment performance, service levels or client satisfaction. The study did not independently verify the survey responses or information conveyed in the interviews. Consequently, Schwab makes no representations about the accuracy of the information in the Report. In addition, the experience and practices of the fi rms discussed in the Report may not be representative of other fi rms Charles Schwab & Co., Inc. All rights reserved. HNW ( ) MKT (04/09) The mention of products created by third-party fi rms is not, and should not be construed as a recommendation, endorsement or sponsorship by Schwab. These fi rms are not affi liated with or an employee of Schwab. You must decide whether to implement these products and their appropriateness for you or your fi rm.