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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?

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:

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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.

How Sticky Are Your Relationships?

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It’s Valentine’s Day– have you told your clients lately how much you love them?

Yes, it’s already February the 14th, and you know what that means. Gentlemen, it’s the day to leave the office early to pick up some cellophane-wrapped flowers from the grocery store and grumble about the picked-over selection of torn cards and mismatched envelopes. Ladies, it’s the day to bask in the warm glow of your superior planning and thoughtfulness. I can neither confirm nor deny that these lighthearted stereotypes may possibly emanate from my own personal experiences…

It is also a great day to reach out to your clients.

By the way, so was January 13th. And January 26th. Or January 25th. Or last November 3rd.

Any day is a great day to reach out to your clients.

Whether you are self-employed or work for a large firm, whether you receive a direct commission or a flat salary, your book of clients is your practice. Your practice is only as valuable as the recurring revenue stream from your clients, and if you aren’t retaining your clients and adding new ones, you aren’t adding value.

Contact Increases Stickiness

I have seen scores of client research reports and I cannot recall one that didn’t show a positive correlation between advisor contact and client satisfaction and retention. To cite just a few recent examples:

  • The J.D. Power and Associates 2011 U.S. Full Service Investor Satisfaction StudySM found that one of the key best practices of client service was “Proactive advisor contact regarding new products and services or accounts four times in the past 12 months”.
  • The AdvisorImpact 2009 Client Index revealed that only 63% of clients strongly agreed with the statement “My advisor is proactive in managing our relationship.”, despite 80% of them describing that attribute as ‘critical’.
  • The VIP Forum‘s 2008 study Boosting Advisor Productivity reported that 80% of new business for advisors came by referral.
  • I recall a proprietary client satisfaction survey for a large U.S. financial institution that showed even clients who were contacted more often than they preferred were statistically more loyal than those who were not contacted.

What do I say?

Worried that you don’t have a concrete reason to call your clients? Many advisors are quite proficient at coming up with great excuses to avoid making proactive contact:

“I don’t have any news”

“The market has been too volatile/flat/unpredictable”

“I don’t want to upset the apple cart. If I call, it will just give them a chance to complain”

To some degree, it doesn’t much matter. In 2010 The Oechsli Institute discovered that less than half of financial advisors performed well at what they called Engagement Competencies, with only 46% scoring well with clients at “Caring more about me than just my investments”.

I once inherited a client that I could not seem to interest in meeting so I could get to know her and see if I could add any value. I made it a personal challenge to call her quarterly. I could never reach her, so I left her brief  voicemail messages saying that I was just checking in to see if everything was going OK and to call me if I could help in any way. Within a year I got a call from her saying she needed my help. She and her husband were selling their business and they really weren’t sure what to do with the $3 million they were getting in cash.

The surveys are right. I was very satisfied to get that call.

Even Better? Ask Questions.

Ask questions to understand your clients’ pain points, their unmet needs, their unrealized goals. Find out what’s keeping them awake at night and offer a solution. The current economic and market landscape offers endless possibilities. Questions can lead to actually giving advice, where the real stickiness begins.

In 2011, another VIP Forum study, Building Business Owner Loyalty showed a lift in client loyalty anywhere from 8% to 19% by providing advice around key personal financial issues. (Number one? Personal retirement planning.)

Regardless of how it goes with your significant other today, make this a day to improve your client relationships and improve the value of your practice. Just skip the torn card and grocery store flowers wrapped in cellophane. Not that I have any direct experience in that area…