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Practice Management

You Do Realize This is a People Business, Don’t You?

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Bankers sometimes have a hard time understanding why their industry has satisfaction ratings right down there with utilities, cell carriers and bankrupt airlines. Maybe it’s because they sometimes have more in common with these business models than they would really care to admit. Companies and industries that score poorly in customer satisfaction tend to treat customers like replaceable cogs in their profit machine, rather than empowered consumers with unmet needs and lots of alternatives.

Source: flickr.com via David on Pinterest

David Armano has an amazing knack for boiling down sometimes complex concepts to compelling and easy to grasp infographics. And while the one above was intended to depict a much broader economic view, I think it works just as well in the narrower context of financial services.

It’s not a Wonderful Life any more

Financial institutions have long since evolved from the folksy image of It’s a Wonderful Life‘s Bailey Building and Loan. Competitive forces drove the financial industry to embrace consolidation, standardized underwriting, securitization, more consolidation, credit cards, ATMs, broader product offerings, specialized segmentation, data analytics, even more consolidation, and countless other changes. Over the long run, much of it was good, and the industry has improved efficiency and profitability over time.

But somewhere along the way, too many institutions (and too many advisors) came to believe in that seductive fiction that has fooled so many other industries– that customers are easily locked in with real or perceived monopolies, contracts, terms and conditions, EULAs, whatever– and that the path to profitability is to leverage that servitude with a cascade of new (and usually involuntary) revenue streams from the indentured.

Many bankers are truly puzzled by the virulent public reaction to their attempts to defray the costs of delivering deposit accounts. After all, they have cost accounting on their side. It has been a well-known fact amongst bank executives for at least 25 years that most checking accounts are unprofitable in a fully-loaded cost analysis. A similar Pareto Principle has long existed across client cohorts as well– the “vital few” subsidize the “trivial many”.

Why recapturing costs alone doesn’t work:

So why not focus on reducing the unprofitability of a large percentage of your clients? Managing the cost to serve is a very real issue for most firms, and I am a firm believer in the need to focus marketing efforts on clients who have a high probability of being profitable in reasonable amount of time.

What I think most firms and advisors misunderstand is that many clients at every tier actually are willing to pay more– if they receive something of value in exchange. And here’s where it get’s a little tricky– the clients get to decide what provides value and what does not– and not every client will choose the same things.

What does work:

This is where data analytics can really add the most value. Finding clients who will willingly choose to consume additional services for additional cost. (If you do it right, you can add $5 in revenue for every $1 in added cost.)

Firms that really do it right focus their efforts across all of the client segments, not just on reducing unprofitability in the lower tiers. Further improving the profitability of the top 20-25% of your clients can improve their subsidization of the masses and reduce the temptation to annoy the majority of your clients. (Banks and checking accounts may have been the original “freemium” business model.)

Let’s go back to the airlines. The ones thriving, both in customer satisfaction scores and in profitability, are improving the customer experience for all of their clients while they simultaneously raise the bar for their most profitable clientele. Doing only the latter creates ill will that will never be offset by increased profitability for the subsidizers.

You do realize that this is a people business, don’t you?

…and They Don’t Hire Advisors Very Well Either

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In my February 25th post They Can Always Spend More… I referenced several massive financial failures of the rich and famous. Forbes continued the hit parade yesterday in Robert Laura’s article What Broke Athletes And Celebrities Can Teach Retirees:

The statistics are startling:  Sports Illustrated estimates that 78% of former National Football League players are bankrupt or under financial stress within two years of retirement.  An estimated 60% percent of former National Basketball Association players are broke within five years of retirement, and recently a host of MLB players fell victim to an alleged ponzi scheme at the hands of Robert Allen Stanford.

Laura offers this advice for retirees:

If they’re not meeting expectations or able to illustrate the value they add to your relationship, then start shopping for a free agent.

How many of your clients are shopping for a free agent right now?

In countless surveys, “I don’t hear from my advisor often enough” is typically the top reason clients leave or consider leaving their advisor.

In my February 14th post How Sticky Are Your Relationships? I noted that Valentine’s day was a great day to reach out to your clients (just like any other day).

Today is Leap Day, truly a quadrennial opportunity to reach out and keep yourself off of the free agent list.

Why Your Team Is Not Successful

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Struggling to understand why your team is not successful?

As a leader, it’s your job to figure out the answers. Here are five questions to ask yourself:

  1. Is everyone on the team clear about the team’s overall goal and their specific objectives?
  2. Do each member’s objectives tie out to the overall team goal?
  3. Does every member of the team have the ability and the drive to achieve their objectives?
  4. Is everyone held accountable for achieving their objectives?
  5. Does your culture support and encourage constant learning, growth and adjustment?

Is everyone on the team clear about the team’s overall goal and their specific objectives?

A survey conducted by the consulting firm Partners in Leadership found that 84% of respondents “indicated that changing priorities create confusion around the key results the organization needs to achieve“ (emphasis mine). Everyone on your team needs to have a consistent answer to the question “What are our overarching goals?” Otherwise, everyone is not “rowing in the same direction”, as the saying goes.

Do each member’s objectives tie out to the overall team goal?

False success is worse than clear failure. Failure is important, healthy and good. Failure teaches you what did not work if you are brave enough to embrace the lessons learned and make adjustments in the future (see below). False success comes from creating individual victories for the members of your team that don’t add up to team success. Individuals should have goals that are highly aligned with things within their control (sales, audit results, client satisfaction, etc.), but they should also be aligned with the goals and needs of the entire team or organization. There is no real victory in celebrating a bunch of individual “winners” if it doesn’t add up to a team win. Chicago Bulls coach Phil Jackson’s goal was not for Michael Jordan to necessarily average 35 points a game, it was for the Bulls to win the NBA championship.

Does every member of the team have the ability and the drive to achieve their objectives?

It’s important to be brutally honest about the ability (skill) and drive (will) of each member of the team. Skill without will is worthless, and you will be doing the rest of your team a favor by separating those players from your team. Will without skill is preferable, but not everyone can be trained to do the job adequately. Think about moving these players to a role to which they may be better suited.

Is everyone held accountable for achieving their objectives?

Nothing hurts team morale and undermines top performers’ discretionary effort than seeing those around them fail to be held accountable for underperformance. Ensuring accountability without devolving into finger pointing is an art well covered in the book The Oz Principle: Getting Results Through Individual and Organizational Accountability.

Does your culture support and encourage constant learning, growth and adjustment?

Ray Dalio, the founder of acclaimed hedge fund Bridgewater Associates, has written and shares freely an amazing piece of managerial advice which he titles, simply: Principles. It is available in its entirety from the firm’s website. It is a treasure trove of quotables (sure to be shared in future posts), but the relevant advice here is in a section he calls “To Get the Culture Right…”

Create a Culture in Which It Is OK to Make Mistakes

but Unacceptable Not to Identify, Analyze, and Learn From Them

If you can answer yes to each of those questions, your team is surely on its way to success.

Are You Using Technology to Engage and Collaborate With Your Clients?

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I created this blog to explore the intersection of leadership, advice and technology to improve the lives of financial advisors and their clients. Leadership is a critical element for any organization, and there are many great sources to tap for inspiration and further exploration.

But setting leadership aside for the moment, I have lately found myself thinking more deeply on how technology can enhance the advisor/client relationship– and how rarely it actually does.

In my last post, I reflected on banking as the second oldest profession in the world; and for much of the industry’s history it was not what we would call today a very “scalable platform”. It was a person to person business, and despite much innovation, in many respects it still is. Especially in the high net worth and ultra high net worth space.

Technology has been employed on a very large scale in transaction processing, record-keeping, funds transfer and numerous back office functions for analytics, risk management and compliance. But front office investments in technology have all too often been focused on cutting costs or improving advisor productivity. Good for shareholders, but what about the client experience?

Dodd-Frank and other legislation is quickly pushing compliance spending to the top of the priority list. A 2011 survey by Aite Group and Wall Street & Technology found the 25% of CIOs ranked compliance their top priority– up from 10% in 2010.

As tablets move into the workplace, the traditional advisor/client face to face conversations are moving to more collaborative “shoulder to shoulder” conversations, and many firms and advisors are not prepared for what I believe is truly a seismic shift.

Financial technology firm Balance Financial had a blog post entitled “What Facebook Taught Us About Personal Finance Tech“. The post described some of the challenges advisors and firms face:

Again, personal finance is a naturally collaborative chore.  Even more, professional financial services rely on collaboration.  If you are a financial advisor or CPA, you must interact and engage with your client to deliver services.  You have to get to know your clients, collect information, stay informed of changes to their life and find ways to stay relevant in an ever changing world. 

In the future, look for tools and solutions that use technology to help make the naturally engaging & collaborative process of professional financial services more efficient and rewarding.  The most powerful technology being developed today makes the natural interaction and communication between humans more transparent, more efficient and more frequent. 

I first learned of Balance Financial at Finovate 2011, and I recently had the chance to sit down with Balance CEO Devin Miller to learn more about how his company is using technology to improve the lives of advisors and their clients.

It seems like so much of the recent innovation in the financial industry has been to empower the do it yourself investor and borrower. I think that’s a really good and healthy thing for the industry, but so many clients don’t want to do it all themselves. They want a trusted advisor, but they don’t want to give up the cutting edge technology to get it.

In order to retain and win clients and assets in 2012 and beyond, advisors will need to engage and collaborate more with their clients. Technology can be a great enabler when it’s designed with the right end in mind.

How are you using technology to engage and collaborate with your clients?

Does Your Team Have What It Takes To Thrive In A New Era?

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In January of 2010 John Kim of Heidrick & Struggles wrote in a blog piece What bank leaders do you need post-crisis?:

There may be little agreement about precisely where we stand in terms of economic recovery generally or financial services recovery specifically, but one thing is certain. When the inevitable recovery gets into full swing the financial services firms that already have in place the skills and the teams to take advantage of it will far outdistance their competitors.

Now, more than two years later, the recovery picture is a little more clear, if not exactly in full swing. The rate of bank failures has been dramatically reduced but the long-predicted consolidation wave has so far been more of a gentle tide. As the economic recovery continues at an almost imperceptible pace– particularly jobs and housing prices– financial firms are challenged to find attractive avenues for revenue growth.

New regulations further complicate the picture, on everything from trading to lending to deposits, and there are still literally thousands of new rules to be written over the next few years.

So what kind of leadership do these challenges demand? I think Kim saw that pretty clearly too:

Before the economic meltdown, the top leaders of financial institutions often fell into one of two types. There was the charismatic personality who motivated, inspired or in some cases dictated through force of his own presence. And there was the hands-on, detail-oriented operator who drove performance through results and significant attention to detail.

Today’s leader needs to be a combination of both types. The operational skills and shrewd judgment of the detail-oriented leader will be needed to achieve focus, leverage strengths, work out bad assets, closely manage risk, and interact more closely with regulators and government. The strategic vision and inspirational ability of the charismatic leader will be needed to take the institution from strength to strength and into appropriate new areas, especially when the economy heats up again. 

About a year ago I gave a talk about the state of the banking industry and how its recovery was linked to the overall economic recovery. Someone in the audience asked how, seemingly, only a handful of banks were smart enough to avoid the ills that plagued so many competitors?

I replied that that was not the question, in my mind. The question was, why did so many firms forget thousands of years of history?

The banks who set themselves apart during the crisis stuck with principals tested over millenia. After all, banking is the second oldest profession in the world. You know, quaint notions like verifying borrowers’ recurring cash flow and insisting on a margin of safety on collateral values. These firms understood that lending was, at its core, a risk management activity (see my post on Why Bankers Need to Think Like Private Equity Investors).

So, how is your team prepared for this new era?

Again, from John Kim’s piece:

These teams will need to be able to make the right decisions rapidly…

They will also break complicated issues down to simple components. No matter how complex a market, a strategy, or other issue appears, the leadership team should be able to frame it in terms of banking fundamentals: liquidity, capital, credit risk, operational risk and cost control.

One of their toughest challenges will be to lead culture change. A renewed focus on core competencies and subsequent growth into adjacent areas will require a new culture, especially at institutions that sought to play across many areas.

Is your team prepared for the new era, or are they still fighting the last war?

What’s the Talent Density of Your Team?

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Even though some of the business decisions that Netflix management has made recently have not been well received, I still think that many of the firm’s cultural attributes are worth studying.

As Netflix is back in the news again with a new DVD plan, I thought of CEO Reed Hastings’ words in a 2009 slide presentation:

“The actual company values, as opposed to the nice-sounding  values, are shown by who gets rewarded, promoted, or let go.”

“Actual company values are the behaviors and skills that are valued in fellow employees”

The presentation goes on to describe in some detail the nine behaviors that are particularly valued by Netflix (Judgment, Communication, Impact, Curiosity, Innovation, Courage, Passion, Honesty and Selflessness); and details the firm’s uniquely demanding standards for high performance and other aspects of its culture.

But the part I found most interesting was the view that turns on its head the conventional wisdom that growing firms must add significant processes and procedures to deal with increasing complexity, simply because it’s “Time to grow up”.

Instead, Hastings sees the root cause as the decline of “talent density”, as the percentage of high performance employees typically falls with total employment growth. Exacerbating the problem, the increased focus on process actually drives more talent out of the company, as they feel stifled by the bureaucracy and process orientation.

The solution, Hastings says, is to increase talent density faster than business complexity.

” Avoid Chaos as you grow with Ever More High Performance People —

not with Rules”

Not that Hastings advocates absolute freedom from rules. In fact, he lays out two types of necessary rules– those around moral, ethical and legal issues, and those that prevent irrevocable disaster (it remains to be seen whether the public relations flap over the company’s price increases are irrevocable).

Financial firms operate in highly regulated environments, and the inherent financial leverage makes the cost of some errors unacceptable. This means a higher degree of process orientation and policy compliance than many industries, but I don’t think this negates the idea that financial firms should also focus on increasing their talent density.

Especially critical, in my view, is the concept that a company’s actual values are demonstrated by “who gets rewarded, promoted, or let go”.

While firms must reward results more than efforts, leaders have a responsibility to shape the culture of their firm by also celebrating and rewarding the skills and behaviors that led to those results, and sharing those to help improve others’ performance.

I have seen managers who act like hostages to data. “I have to give Joe the big sales award. He hit his numbers, even though he fell into that one big sale at the end of the year.”

Your incentive plans have to be driven by financial results, but if they force you to reward results while being blind to the requisite underlying skills and behaviors, you need to rewrite your plans.

Top performers want to be rewarded on results, but they also want a clear vision of how their skills and behaviors are expected to be applied to get those results.

It’s the leader’s job to set that vision and apply the rewards appropriately.

If you don’t, you will eventually help another firm increase its talent density. With your former talent.

What’s the talent density of your team?

Nine Reasons Managers Struggle

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Reposted from: Leading Blog: A Leadership Blog: Nine Reasons Managers Struggle.

I will have to check my network, it sounds like we may have worked with some of the same people…

If I could add a tenth reason, I would suggest:

They are on an endless quest for the ‘holy grail’. They spend an inordinate amount of time and energy seeking the magic strategy, business model, product, technology, employee, consultant, marketing campaign (or lately, social media strategy/campaign/expert) that possesses the missing secret sauce for success. Great managers execute, first and foremost– often with less than ideal capital, experience, staffing, etc. Not that managers shouldn’t seek to improve all of those things, but those efforts must not overtake the imperative to execute.

From the original post:

_______________________________________________________

Nine Reasons Managers Struggle.
Former CEO and president of Verison (sic) Wireless Denny Strigl explores nine specific behaviors that leaders do and don’t do to make the serious performer, marginal performers, or failures. In  “Managers, can you hear me now?”  he says it’s all about behavior.
  1. Managers Fail to Build Trust and Integrity. The three major qualities of trust are integrity, openness, and respect. Trust always begins with the manager. Do you say and do things that erode trust?
  2. They Have the Wrong Focus. Focus all your energy on achieving results. Allow nothing to distract you. As the manager, you are the force that keeps your team focused on results. Continually reinforce the Four Fundamentals– growing revenue, getting new customers, keeping existing customers, eliminating costs– and what’s important, unnecessary activities will always creep in. Do you feel you are wasting time, effort, and money by focusing on things that don’t matter in getting results?
  3. They Don’t Model or Build Accountability.  The best way to get people who work for you to be accountable is to show them that you are accountable. Do you have a tendency to blame others or look for excuses? Do you talk about accountability and reward it?
  4. They Fail to Consistently Reinforce What’s Important. Managers are the first to get bored with their message. The people who work for you perform their best when what you say is consistent and frequent. Do you have a core performance message that you constantly talk about with your employees?
  5. They Over-rely on Consensus.  Consensus managers seldom survive long in their jobs. To get buy-in from everyone will likely produce a watered-down version of the original decision or action.
  6. They Focus on Being Popular. Leadership should never be a popularity contest. Managers who try to be popular often lose their focus and waste energy.
  7. They Get Caught Up in Their Self-Importance. Given all the benefits of your position, it would be easy to become absorbed with yourself. On any given day, you might think it really is “all about me.”  Do you have a high need to gain admiration, be in the spotlight and get public accolades?
  8. They Put Their Heads in the Sand. The best managers not only want to hear about problems, but encourage their employees to tell them when they encounter problems or issues they feel are not right. Good managers want open, honest, direct, and specific communication regardless of the information being presented.
  9. They Fix Problems, Not Causes.  Unless the manager fixes the cause of the problems they encounter, valuable time will be spent fixing the same problem over and over again.

Why Bankers Need to Think Like Private Fixed Income Investors

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Banks are in the business of taking and managing risks. Get that wrong and you go out of business, and there are many recent examples.

I have sometimes worked with advisors who view loans as just another product to sell. This type of advisor also tends to view anyone in the credit underwriting and approval process as being in the “business prevention department”. In these situations I try to explain how lending literally involves transferring some of the firm’s capital to a client, on which we expect a return of principal and a return on principal over time.

No matter how much profit the client makes as a result of a loan, a lender’s best case is getting a full return of principal, plus the contractual interest, and not a penny more.

$1 million loan x 2.00% spread = $20,000 of pre-tax, pre-provision revenue

The lender’s worst case is a complete loss of principal and expected interest, plus collection and litigation costs.

The firm that charges off that $1 million loan needs $50 million of new loans to get back to even.

And that excludes income taxes, labor or overhead costs needed to originate the loan, any loan loss reserves set aside, the cost of funds raised to lend out or any time-value of that money (i.e., liquidity issuance premium).

With that kind of mismatched upside/downside risk, it is necessary to view lending like the private fixed income investment that it truly is.

How advisors should think like fixed income investors:

  • They must seek an attractive risk-adjusted after-tax return on capital
  • They should expect low loss rates and low volatility of returns
  • They have to achieve these goals through disciplined management of controlled risks
  • Borrowers typically do not have public debt ratings, so individual underwriting must be performed
  • Borrowers typically do not have established market values, so risk-adjusted pricing must developed
  • Bankers must mitigate these risks through disciplined underwriting, appropriate credit structure and active portfolio monitoring and management.

Advisors that balance the needs of their clients with the long-term health of their firm win in the long run.