By Amy E. Buttell
The financial and stock market crisis exposed a critical vulnerability in financial planning practices: too many planners aren't engaging in sound business planning practices to gain visibility into their practices and the outside economic environment, endangering their businesses in a time of economic distress.
Scenario planning is a strategic planning method that focuses on entertaining a wide variety of business-specific and economic options. It is a strategy to help you and your practice expand your horizons and respond more quickly to changing conditions.
Scenario planning is often used by larger corporations to map out what the future might be within a specific industry or where the global economy is going to go, according to Paul Shoemaker, research director of the Mack Center for Technological Innovation and adjunct professor of marketing at the Wharton School of Business.
"Scenario planning differs from 'what if' analysis in that you look at multiple issues, multiple what ifs," says Shoemaker. "You look at contingencies in combination, such as what if the economy experiences deflation, there are regulatory changes that affect a financial planning practice and problems with the business succession plan?"
The power of scenario planning is that although people are pretty good at identifying the possible risks that a family or business faces, they get blindsided by confluences of multiple things moving against them, according to Shoemaker.
"Scenario planning allows you to draw a broader envelope around the uncertainties and look at them in combination and recognize that sometimes these uncertainties are correlated so that they are not independent of each other," he says.
And this is exactly what happened for many planners in the most recent economic crisis. Not only the stock market, but the entire economy went south, affecting a firm's revenues and client base, while at the same time, lending to small businesses dried up. When the market was down 40 percent, revenues were likely down the same amount-a scenario few could have predicted. At the same time, clients were panicking and perhaps more reluctant than usual to spend money on fee-based financial planning services.
Run the Business Like a Business
What to do? Plan, plan, plan, says Alan Goldfarb, CFP®, AIF®, director of financial strategies at Weaver Tidwell Wealth Management, part of a CPA firm in Dallas.
"We plan and we run the business like a business, as opposed to being an entrepreneurial shop, because we're part of an accounting firm," says Goldfarb. "We build a contingency plan into our business plan and we do business planning. We do budget meetings. We do annual retreats, and we have sub-committees within the firm on marketing, investments and research. How much are we going to spend on those? If we have to cut back, what do we cut back on? We also spend a lot of time discussing how we can raise revenues when everyone else is losing revenue."
Karl Frank, CFP®, president of A&I Financial Services LLC in Englewood, Colo., agrees that budgeting discipline is a top priority and that within budgeting, envisioning different scenarios for revenues and expenses is key.
"We look at the top-line items-expenses that are part of our overhead-and then we go person by person inside the office and ask each one what they think our revenues will be," he says. "We forecast based on that and create a baseline case. I think this is what saved our fanny here in 2009."
Rethinking Compensation Models
In the face of economic uncertainty, compensation models are under siege, requiring planners to think outside the box about how their practices will generate the kind of revenue in the future that they not only need to run their business, but build a retirement plan and emergency cushion for themselves, says Mark Matson, president of Matson Money in Cincinnati.
"You have to envision, 'The revenue-generation model that I have now seems great, but what if it doesn't work in the future?' The percentage of assets model was so profitable that it became a space where everyone wanted a piece of it," says Matson.
The assets under management model, which has a high percentage of fixed expenses, is experiencing fee pressure, according to Matson.
"With the market crash, a lot of advisers saw their profits dry up," he says. "So they have to think about a more sustainable model, and as part of that, they need to get their own finances on a sounder basis-reduce debt, build up retirement funds, get a walk-away fund so you have more flexibility."
Who Are Your Future Clients?
Besides budgeting and revenue generation, think creatively when it comes to how your client relationships help move your business forward. Think about your ideal client in five, 10 and 20 years. Figure out the steps you need to take to best appeal to that client. Consider diversifying into new areas of financial planning, creating clear goals and objectives around each target market and exit strategies if those plans don't work out.
For Craig Hydahl, CFP®, CDFATM, and Robert Imparato Jr., CFP®, partners at R.I.C.H. Planning Group LLC in Woodbridge, N.J., this means diversifying into divorce financial planning. After working with a couple of clients going through divorce, Hydahl and Imparato decided to approach it more systematically.
"At Robert's suggestion, I sat down with three or four divorce attorneys and asked them about the role that financial planners can play in the divorce process," says Hydahl. "They all said it's a huge area. Robert and I decided that we really liked this area, and we asked ourselves, 'Where do we want to be in five years?'"
The partners couldn't simply determine that a percentage of their revenue would come from divorcing clients in five years, so they planned it out in one-, three- and five-year increments with a specific game plan for each milestone.
"We decided we wanted to have good relationships with 50 attorneys by the end of five years, to the point where they would pick up the phone and consult with us on a regular basis," says Hydahl. "Dividing that by five, we decided to work on acquiring 10 relationships a year, which was a specific, simple and realistic plan."
Walk the Walk
While financial planners are good at using scenario planning techniques when advising their clients, they aren't as good at employing it with their own businesses, says Mark Palmer, managing director of business consulting at Charles Schwab Advisor Services. Planners are juggling multiple big-picture issues, including liquidity, revenues, staff and business succession planning.
"Many businesses are having liquidity issues, so they need to rebuild revenues and drive costs down," says Palmer. "At the same time, it's a business based on relationships, based on people. That's a core value proposition, and at the same time, the greatest expense of the practice."
For many planners, the key issue is analyzing how they spend their time. They should maximize their time recruiting new clients and dealing with key clients, and delegate tasks anyone can perform, such as updating client records, sending out routine e-mails and dealing with everyday client requests.
And when it comes to decisions such as buying new technology, adding staff or cutting expenses, remember that the firm's overall strategy should drive every decision. According to Palmer, advisers should ask themselves: "Who do you serve? What is your target client base? What are their unique needs and how do you serve them better than the competition?"
Amy Buttell is a freelance writer and regulator contributor to Practice Management Solutions.