#21: Benchmarking vs. Best Practices

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How To Make Better Business Decisions

Growth is a double-edged sword. On one hand, it elevates your business and bolsters revenue. But on the other hand, it requires a change in process, procedures, personnel, and more to get it right. Most people focus on the positive aspects of growth without leaning into those difficult methods and systems that allow the business to sustain that type of increase.

When we completed our merger, we combined two similar firms, Hefty Wealth Partners and Oak Point. Both integrated highly-specialized client service models, technology stacks, investment management platforms, and, of course, running a business. Both had strong leadership with certified financial planning professionals dedicated to comprehensive planning. At the start, both firms likely thought that they did things a little better than the other. 

But this is where the fun, and stress, started. It became time to make decisions on how to blend these two unique, yet comparable firms. Today, we are going to take you behind the scenes of the merger to illuminate the power and peril of decision making in business. Ready to get started? Let’s raise the curtain. 

What Brought You Here, Won’t Get You There

The lesson above is something we learned the hard way. 

When the two firms got together, both agreed to select a single process moving forward. After all, we weren’t two separate companies anymore. We needed to decide on one way to build the client experience, manage investments, conduct goal reviews, and more. 

At first, evaluating which team did what best made sense. If a client service strategy from Hefty performed better, why not have the new company adopt that model? While it looked good on paper, we found a crucial limitation. The tools and techniques that brought success to each firm couldn’t support the larger infrastructure of the newly merged team. 

What Hefty and Oak Point did individually to each reach managing over $200 million in assets had no way to support a firm double that size, and couldn’t handle the massive growth spike that occurred not over a year later. 

Let’s imagine this scenario from a different perspective. Picture two good-sized families, about 5-6 people each, coming together and arguing about which 2,000 square-foot house they should all live in. They will soon find out they are asking the wrong question. In reality, neither house is large enough to support their needs, so they should sell their houses, and come together to build a much larger one.

It took several arguments, stress, and sleepless nights to come to the conclusion right in front of our faces: build something new. 

While both firms came in with excellent models, we needed to construct something different that would support future growth. How did we manage to discover the right path forward? Let’s take a look. 

Trust A Task-Force

It was time for the founders to stop arguing over choices (or offloading them to staffers), and come up with a new solution. Decision-making couldn’t and shouldn’t be between the founders behind closed doors. These choices need to be made by the team. With this breakthrough, the task forces were initiated. 

Task forces are an essential component of our growth strategy. We tap into our teammates’ intellectual capital across job functions, seniority, and location to establish a collaborative and team-oriented atmosphere, a value we still hold today. One team managed the goal review process, another worked on investment performance reports, and still more in client service. 

We created small teams, each member with distinct experience at different levels in their careers. Our investment performance task force, for example, comprised of a veteran wealth partner from Michigan, a para-planner from Indiana, and a financial advisor from Texas. 

This task-force mentality is still alive and well today. We view it as a crucial method for growth and development, but there are a couple of things to remember:

  • As a task force, you make choices for people/partners who aren’t involved in the process.
  • You have to be comfortable adopting process improvements decided by a separate group of partners in a task force. 

While this method presents some challenges, we found that a spirit of partnership and cooperation prevails. It’s how we’ve been able to build these sophisticated and dynamic models from scratch. 

Don’t Be Fooled By Opinions, Use Benchmarks Instead

When looking through reference points, keep these two ideas in mind: there are numbers, and there are opinions. 

Someone once said that opinions are like feet. Everybody’s got them, and they all stink. While the reality is that not all opinions are terrible, they’re often not much more than a hunch, or a guess based on feeling. One person might guess that we should spend a lot of money on TV ads. Another person guesses that social media is the right answer. Another still says all advertising is a waste of time and money. Allocating time, money, and staff resources based on opinions, won’t likely yield the results you want and need. 

Leaders always have to make decisions without every piece of data. Given that, you need to attain more objective information alongside team opinions. Our team faced a critical set of decision-making choices in the summer of 2019. As a reminder, our original merger, Oak Point and Hefty started Credent Wealth with around $400 million in assets. Through mergers, acquisitions, and organic growth, we reached a billion dollars within the first 16 months. That was a lot of growth in a really short period.

Fortunately, we did realize we were driving with a blindfold on and decided to get some education. There are numerous resources with information about the wealth management industry that we tapped into.

  • Staffing and compensation surveys
  • Pricing and service information
  • Product analysis
  • White papers
  • Technology surveys
  • Investment reports

We certainly encourage you to seek out and analyze this information to compare your business to a target peer group. But be careful about using averages. After all, who wants to be average?

It’s critical to compare yourself to the top quartile, or if the data breaks down even finer, compare yourself to the top decile, so that you don’t accidentally set the bar too low.

In our search, we found an information gap. According to Barons in September of 2019, there were 12,993 SEC-registered RIA firms. Investment News reported in the same month that only 338 of those firms managed more than a billion dollars. In other words, less than 3% of firms were bigger than us. 

Keep in mind that most of the data came from the vast majority of firms that operate on a smaller scale. The available surveys and reports provided some information but weren’t entirely relevant to hit our next growth goal: moving from one billion dollars to three billion dollars. 

How did we navigate around this missing data? First, we identified a target peer group. In other words, we said we want to be like a firm that is at least three times our size, which grows organically as well as through marketing and advertising. 

By narrowing down the benchmark set, it blocked out all the other noise. It’s important to get the rest of that data out of your way, so you can focus on raising the bar for yourself. 

Then, we assigned different projects to people on our executive team. Someone looked at fee schedules and ADV’s. Another person had org charts and department structure. Just like the goal review process task force, we broke up the work among several people who brought their work back to the group. Once we had the right information about the target peer group, we were able to compare our current situation to theirs, as well as identify gaps and create solutions. 

A stark realization for us was a missing layer of management in the organization chart. Using this benchmark research allowed us to build a strategic plan to present to the partners. The plan involves spending a lot of money on people, processes, and technology, to enable continued growth. But because it was based on data and not opinions, the board and our partners were willing to make this large investment.

Managing Organizational Complexity

The real difference between big and small investment advisors is a direct result of their ability to manage organizational complexity. The decision-making process that worked in a smaller firm can be a bottleneck as the organization grows. The task forces that we landed on helped to break the bottleneck by decentralizing decisions, including diverse input from across the firm and speeding things up.

Ed Cole once said that people are impressed with your success, but they’re impacted by your failures. Since we learn a lot when somebody tells us what didn’t work, we pulled back the curtain a little bit today.

If you want to grow your firm and be part of an organization that can propagate a mission to serve clients with excellence, we encourage you to consider looking into Credent Wealth.

For more information on this fascinating topic, download our white paper called Decision-Making in Large Wealth Management Firms below.

Further reading