Four Life Stages of an Advice Business

Four Life Stages of an Advice Business

When I was much younger, I used to sail boats up in Gosford. They were called Sabots, small, snub-nosed craft which at first I sailed with another kid, then later on my own.

One of the first lessons I learned in sailing was around equipment. You see, these little boats ended more complicated than I realized.

Certain types of equipment were right for heavy weather, other types for light winds and a whole bunch in between.

If I’m honest I was a bit of a one-trick pony when it came to sailing, and it wasn’t a good trick. I soon gave up.

It wasn’t later the right equipment lesson dawned on me fully.

Businesses are the same. Different challenges demand different growth strategies. The issues comes when the owners of those businesses are like twelve-year-old me in the Sabot, wondering why what worked before doesn’t anymore.

I’ve found that the key to unlocking this problem – the wind selection of growing your business – lies in knowing what stage at.

The diagram below should explain it all, but let me go through it.

The life of an advice business generally goes through four stages. This isn’t exclusive to advice firms; it’s just that I’m talking about the model in terms of advisors.

The bottom level is startup.


These are the initial thralls of a new venture.

Often this is about survival. It may be tough to get clients, hard to build momentum and it’s usually about one or two people with a vision to create something.

At times it might seem like the business is never going to kick start but here’s the thing; consistent efforts directed in the right way means this kind of business kind of kicks in earlier than most people realize, though unfortunately sometimes later then many people’s persistence allows.

Where should the focus be in a startup?

It’s mostly about revenue. That’s what matters. Get enough revenue in to pay the bills. Like air when you’re exercising hard, you just need to get enough in so you can catch breath and move onto the second phase.

The second phase is stability.


This is where your business gets its’ head above water. There’s still not huge amounts of profit, but there’s enough that the pressure’s off and, in most cases, the clarity of thinking starts to develop once the financial pressure eases.

Here’s the important thing; at this phase the focus (if you want to progress up the pyramid) has to stop being about just revenue. It’s got to become about the profit.

That means the right kind of clients. The kind of clients who are going to buy into your offer, agree to engage the way you designed them to, and pay a fee at least30 percent higher than your cost to deliver.

If you get this right, this is the point at which you start looking back at some of the pricing decisions you made at the earlier phase and realizing you may have undercharged.

A word of warning here, although many mature businesses no longer consider themselves to be startups, the reality is, often they still behave as if they’re starting out. It’s still about the revenue.

The bottom line is this; if you continue to focus just on revenue and nothing more, it’s inevitable you’ll yourself with a capacity issue. I see this so often, so it’s a point worth making.

If you manage to get past stability, you’re at the next phase. This is what I call leading.


Leading is where you have stepped above most other advice firms. In many ways you’ve become an actual business. You’ve got systems & processes, a team underneath you and your focus has changed.

If you’re an advisor in this kind of business, you’re focused has likely become time. More specifically, maximizing the amount of time you have to coach your team, work on the business or do the stuff you love.

That means removing the dependence on you, being even more selective about the clients you want to take on board, hiring the right people and spending time building the infrastructure.

Advisers who nail this usually shift into a different mindset. It’s no longer just about the right kind of client. It’s about the personal time required to manage this situation?

Again, failing to make this switch, even if you’re still taking on board profitable clients, you’re going to get dragged back.

The final phase is rare, hallowed turf when it comes to advice firms, because so few get there. This is what I call leveraged.


What’s leveraged? Well it’s the point at which your business has become almost like a franchise, by another name.

Your systems and processes are so well developed that you could pick them up, drop them into another business (whether it’s acquired or started from scratch) and repeat the success you previously had with minor, maybe even no tweaks.

It’s the point at which, maybe you as an advisor are no longer actively involved in training staff. In actual fact, the quality of your staff at below a certain level is less important than the quality of their training.

This is the end game, because if you can create this you’ve got a business that represents the future of advice.

That’s it! If you know where you are, it should make it easier to work out what you should be doing.

If you don’t know where you are, then it’s entirely possible you could unknowingly be the barrier to your business making the step up.

Stewart Bell
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Stewart Bell is founder and business coach at Audere Coaching & Consulting, a practice management firm specialising in business improvement and innovation for professional ... Click for full bio

Building a Better Index With Strategic Beta

Building a Better Index With Strategic Beta

Written by: Yazann Romahi, Chief Investment Officer of Quantitative Beta Strategies and Lead Portfolio Manager of JPMorgan Diversified Return International Equity ETF at J.P. Morgan Asset Management

With the global economy warming up, but political uncertainty remaining a constant, it’s more important than ever for investors to position their global portfolios to navigate long-term market volatility. That’s where the power of diversification comes in, says Yazann Romahi, Chief Investment Officer of Quantitative Beta Strategies at J.P. Morgan Asset Management and Lead Portfolio Manager of JPMorgan Diversified Return International Equity ETF (JPIN).

Not all diversified portfolios are alike  


In their search for diversification, many investors turn to passive index ETFs, which track a market cap-weighted index. But these funds aren’t always the most effective way to steer a steady course through volatile markets—and there are two key reasons why.

First, traditional market cap-weighted indices are actually less diversified than investors may think. For example, in the S&P 500, the top 10% of stocks account for half the volatility of the index. Within sectors, while you might assume that sector risk is distributed across the ten major sectors fairly evenly, it is a surprise to many that at any point in time, one sector can be as high as 50% of the risk.

Second, cap-weighted indices come with some inherent weaknesses, including exposure to unrewarded risk concentrations and overvalued securities. So, while these indices provide investors with exposure to the equity risk premium and long-term capital growth, as is the case with any other investment, investors can also experience painful downturns, which increase volatility and reduce long-term performance. For investors seeking equity exposure with broader diversification—and potentially lower volatility—strategic beta indices may be better positioned to deliver the goods.

How do we define strategic beta?


Strategic beta refers to a growing group of indices and the investment products that track them. Most of these indices ultimately aim to enhance returns or reduce risk relative to a traditional market cap-weighted benchmark.

Building on decades of proven research and insights, J.P. Morgan’s strategic beta ETFs track diversified factor indices designed to capture most of the market upside, while providing less volatility in down markets compared to a market cap-weighted index. Rather than constructing an index based on market capitalization—with the largest regions, sectors and companies representing the largest portion of the index—our strategic beta indices aim to allocate based on maximizing diversification along every dimension—sectors, regions and factors. The index therefore seeks to improve risk-adjusted returns by tackling the overexposure to risk concentrations and overvalued securities that come as part of the package with traditional passive index investing.

So, how do you build a better index?


As one of just a few ETF providers that combine alternatively-weighted and factor-oriented indices, our disciplined index methodology is designed to target better risk-adjusted returns through a two-step process.

First, we seek to maximize diversification across the risk dimension. This essentially means that we look to ensure risk is more evenly spread across regions and sectors, which balances the index’s inherent concentrations. As uncontrolled risk concentrations are unlikely to be rewarded over the longer term, we believe investors should strive for maximum diversification when constructing a core equity exposure.

Second, we seek to maximize diversification across the return dimension. Research shows that there are a number of sources of equity returns beyond growth itself. These include risk exposures such as value, size, momentum and quality (or low volatility). When creating a diversified factor index in partnership with FTSE Russell, we seek to build up the constituents with exposure to these factors. We therefore select securities through a bottom-up stock filter, scoring each company based on a combination of these return factors to determine whether it is included in the index. These factors provide access to a broader, more diversifying source of equity returns as they inherently deliver low correlation to one another, providing diversification in the return dimension.

So, whereas traditional passive indices allow market cap to dictate allocations, the diversified factor index seeks to ensure that we minimize concentration to any source of risk—whether it be region, sector or source of return.

How are you currently weighted versus the market cap-weighted index, and how have your under-   and over-weights enhanced risk-return profiles?


Crucially, our weightings don’t reflect specific views on sectors or regions and are instead, by design, the point of maximal diversification. It is important to remember that market cap-weighted indices typically carry a lot of concentration risk—for example, at various points in time, a single sector can explain half the risk of the index when left unmanaged. At the moment, three sectors explain two-thirds of the risk of the FTSE Developed ex-NA Index—these being financials, consumer goods and industrials. In contrast, the FTSE Developed ex-NA Diversified Factor Index—or strategic beta index, which JPMorgan Diversified Return International Equity ETF (JPIN) tracks—is explicitly designed to maintain balance and therefore these sector allocations range from 8% to 12%. In the short term, any concentrated portfolio can of course outperform a more diversified one, if the concentrated bet paid off.

Investing wholly in a single stock may outperform over short-term periods. At other times, it may significantly underperform an index. However, it is well understood that an investor is better off diversifying across lots of stocks for better risk-adjusted long-term gains. The same applies here. From a pure return perspective, if financials, for example, account for half of a cap-weighted index in terms of market cap and have a strong run over the short term, of course, this index would outperform over this period. Over the long run, however, it is fairly uncontroversial to suggest that the more broadly diversified index could achieve better risk-adjusted returns.

Seeking a smoother ride in international equity markets?


For investors targeting enhanced diversification through a core international equity portfolio, JPMorgan Diversified Return International Equity ETF (JPIN) targets lower volatility by tracking an index that more evenly distributes risk, enabling them to get invested—and stay invested.

Learn more about JPIN and J.P. Morgan’s suite of strategic beta ETFs here.

Call 1-844-4JPM-ETF or visit www.jpmorganetfs.com to obtain a prospectus. Carefully consider the investment objectives and risks as well as charges and expenses of the ETF before investing. The summary and full prospectuses contain this and other information about the ETF. Read them carefully before investing.

 

J.P. Morgan Asset Management
Empowering Better Decisions
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See how ETFs differ from other investment vehicles, learn how to evaluate them, and discover how ETFs can be used effectively to achieve a diversity of investment strategies. ... Click for full bio