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.
Alternative Beta Strategies: Alpha/Beta Separation Comes to Hedge Funds
Written by: Yazann Romahi, Chief Investment Officer of Quantitative Beta Strategies, J.P. Morgan Asset Management
A quiet revolution is taking place in the alternatives world. The idea of alpha/beta separation has finally made its way from traditional to alternative investing. This development brings with it a more transparent, liquid and cost-effective approach to accessing the “alternative beta” component of hedge fund return and a new means for benchmarking hedge fund managers.
The good news for investors is that the separation of hedge fund return into its components—rules-based alternative beta and active manager alpha—has the potential to shift investing as we know it. These advancements could democratize hedge funds and, at long last, make what are essentially hedge fund strategies available to all investors—even those who aren’t willing to hand over the hefty fees often associated with hedge fund investing.
A benchmark for alternatives
With respect to traditional equity investing, we have long accepted the idea that there is a market return, or beta—but this hasn’t always been the case. Investors used to assume that to make money in the stock markets, one needed to buy the right stocks and avoid the wrong ones. The idea of a market return independent of skilled stock selection seemed ridiculous to most market participants. Yet today, we would never invest in an active manager’s strategy without benchmarking it against its respective beta.
Interestingly, hedge fund managers have been held to a different standard. Investors have been much more willing to accept the notion that hedge fund strategy returns are pure alpha, and that their investment returns are based entirely on the skill of the fund manager. That notion explains why investors have been willing to accept a “two and twenty” fee structure just to access what has been perceived as one of the most sophisticated and powerful investment vehicles available.
In thinking about the concept of beta, consider its precise definition—the return achievable by taking on a systematic exposure to an economically compensated risk. In traditional long only equity investing, the traditional market beta has been further refined as a number of other risks have been identified that are commonly referred to as “strategic beta.” These include factors such as value, momentum, quality and size. But no one ever said that these risk factors must be long-only.
Over the past decade, as more hedge fund data became available, academics began to disaggregate hedge fund return into two components: compensation for a systematic exposure to a long/short type of risk (alternative beta), and an unexplained “manager alpha.” What they found is that a significant portion of hedge fund return can be attributed to alternative beta. That fact has turned the tables on how we look at hedge fund return. With the introduction of the alternative beta concept, hedge fund managers will have to state their results, not just in terms of total return, but also as excess return over an alternative beta benchmark.
Merger arbitrage—an alternative beta example
The merger arbitrage hedge fund style can be used to illustrate the alternative beta concept. In the case of merger arbitrage, the beta strategy would be the systematic process of going long every target company, while shorting its acquirer. There is an inherent return to this strategy because the target stock price typically does not immediately rise to the offer price upon the deal’s announcement. This creates an opportunity to purchase the stock at a discount prior to the deal’s completion. The premium that remains is compensation to the investor for bearing the risk that the deal may fail.
Active merger arbitrage managers can add value by choosing to invest in some deals while avoiding others. Therefore, their benchmark should be the “enter every deal” strategy, not cash. In fact, the beta strategy explains the majority of the return to the average merger arbitrage hedge fund. And it doesn’t stop there. Other hedge fund styles that can be explained using alternative beta include equity long/short, global macro, and event driven. Note that the beta strategy invests in the same securities, using the same long/short techniques as the hedge fund strategy. The difference is that the beta strategy is a rules-based version that can become the benchmark for the hedge fund strategy. After all, if a hedge fund strategy cannot beat its respective rules-based benchmark (net of fees), an investor may be wiser to stick to the beta strategy.
Implications for investors
What does all this mean for the end investor? Hedge funds have traditionally been the domain of sophisticated investors willing to pay high fees and sacrifice liquidity. Alpha/beta separation in the hedge fund world means that investors can finally choose whether to buy the active version of the hedge fund strategy or opt for the passive (beta) version. Hedge fund strategies can be effective portfolio diversifiers. Now, through alternative beta, virtually all investors can access what are essentially hedge fund strategies in a low cost, liquid, and fully transparent form. For investors who haven’t had prior access to hedge funds, this could be welcome news. Not only can investors look at an active hedge fund manager’s strategy and determine how it has done compared to the systematic beta equivalent, they can also invest in ETFs that encapsulate these systematic strategies.
When looking at one’s traditional balanced portfolio today, there are plenty of questions around whether the fixed income portion will achieve the same level of diversification it has provided in the past. After all, with yields still low, there is little income return. Additionally, the capital gains that came from interest rate declines are likely to reverse. With fixed income unlikely to adequately fulfill its traditional role in portfolios, there is a need to find an alternative source of diversification. This is where alternative strategies may help. For investors seeking to access diversifying strategies in liquid and low-cost vehicles, alternative beta strategies in ETF form are one option.
Looking for an alternative to enhance diversification in your portfolio?
For investors looking to further diversify their overall portfolio, JPMorgan Diversified Alternatives ETF (JPHF) seeks to increase diversification and reduce overall portfolio volatility through direct, diversified exposure to hedge fund strategies using a bottom-up, rules-based approach.
Learn more about JPHF and J.P. Morgan’s suite of 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.
- 1 of 1123