Author Archives: John Ndege

About John Ndege

Founder of Risk profiling software for financial advisers.

3 Lessons on Growing your Financial Advisory Practice from Warren Buffett

Warren BuffettI recently finished reading Warren Buffett’s Letters To Berkshire Hathaway Shareholders 1965-2013 as well as Michael Kitces’s recent blog posts about the threat of robo-advisors.  Having read these pieces it made me think….

What would Warren Buffet do if he were the owner of a financial advisory practice?

Many of the stories about Warren Buffet’s success focus on his investing prowess but little is dedicated to him as a business owner.  After reading his shareholder letters I’ve come to believe there is a lot the advisory community can learn because let’s face it – things are going to get tougher.

Competition from traditional advisors is rife. According to Cerulli Associates there are about 310,000 financial advisors of one type or another. In the U.S. there are about 5.2 million millionaires.  That makes about 17 millionaires for every advisor. Not exactly a lot when you factor in salaries for support staff, marketing and technology expenses. If we add robo-advisors on top it gets even more competitive.

So how can you grow your business using the wisdom of one of the greatest business owners of the 20th century? Let’s find out.

Lesson 1: “…producers of relatively undifferentiated goods in capital intensive businesses must earn inadequate returns except under conditions of tight supply or real shortage.” – 1978

When Buffett wrote these words he was talking about the textile industry and you are probably thinking financial advisory is not a “capital intensive” business but work with me for a second. Think about the cost to find, hire, train and support a new advisor. It’s certainly not cheap. Then think how long it takes for them to develop a book of business that supports them and generates profits? Is it a year or longer?

If we compare financial advisory to other service businesses such as software development consultancy, accounting, advertising you will find these other businesses tend to hire when they have too much work (meaning a new employee can usually earn their keep within 90 days). It’s a lot more transactional and easier to scale.

But with advisors hiring a new employee is more of an upfront investment, which pays off over a longer timeframe.  This is because advisors must build trust to win clients and that typically takes longer than completing a tax return or managing an ad campaign. Thus I believe within the service economy financial advisory is capital intensive.

If you agree with my logic then the only conclusion (given the large supply of advisors) is that differentiation is the key to growth.  As Kitces says “building a well diversified passive strategic portfolio is on it’s way to being totally commoditized”.  So if you fall into that group you must differentiate. This would require something that goes beyond portfolio-only solutions and is a lot more comprehensive or specific/niche.

So lesson number one from Buffett is differentiation.

Lesson 2: “The primary test of managerial economic performance is the achievement of a high earnings rate of equity capital employed.” – 1979

One of the most remarkable things about Buffett is that he chose one metric that matters for his business and stuck with it for years. In his case ROE/ROCE. Other metrics matter too but they are of secondary importance.

What’s the one metric that matters in your business and do you watch it on a weekly or monthly basis?

Let me give you another example. For Pocket Risk our one metric that matters is the % of customers who complete a questionnaire each month. This is because the value of Pocket Risk is in completed questionnaires advisors can assess and use to determine a financial plan. Customers who complete many questionnaires are happy and do not churn. We could have used a vanity metric like logins (which is higher) but value is not derived from logging in, it is derived from client engagement.

At first thought you may think AUM is your one metric that matters but we know that all AUM is not created equally. You will need to determine the metric or metrics that matter to your business. If I were an advisor I imagine it would be a formula that calculates the profit per customer (accounting for acquisition and support costs) on the front end and client churn on the backend.

So lesson number two from Buffett is find the metric or metrics (I doubt you need more than three) that are most important in your business and measure constantly. As Peter Drucker says “what gets measured gets managed”.

Lesson 3: “It is impossible to overstate the how valuable Ajit [Jain] is to Berkshire. Don’t worry about my health: worry about his.” – 2000

“If Charlie [Munger], I and Ajit [Jain] are ever in a sinking boat – and you can only save one of us – swim to Ajit.” – 2008

How many of your employees do you speak of in such terms? Buffett’s brilliance is also in his ability to find and nourish great people. Sure he wants them to be hard working, smart and honest but he also wants them to be self-directed. He wants them to have the mindset of a business owner. Micromanaging your team means you cannot scale therefore you cannot grow without adding layers of management. To avoid this you need your employees to have the mindset of a business owner.

Judging from his letters Buffett didn’t spend much time trying to train people to think this way, he found people who already had this mindset.  However, I think you can train people to think this way if you give them the power to make important decisions. You have to trust them. Trust however, has to be earned and you will probably need to do this over time.  Just remember there has never been a great organization without great people.

So lesson number three from Buffett is find employees with a business owner mindset who can be almost totally self-directing.

Concluding Thoughts 

Given Warren Buffett has been one of the most successful business owners in the 20th and early 21st century it pays to listen to his advice. As a financial advisor I encourage you to think more about differentiation, the one metric that matters in your business and improving your team.

I’d love to get your thoughts in the comments below. What do you think advisors can do to grow efficiently, effectively and sustainably in the years to come?

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Educating Your Clients About Risk [Free 6-Part Email Course]

Educate Clients About Risk

At Pocket Risk we like to create tools to help advisors do their jobs better. Every day we speak to advisors about risk and a common comment is the need to educate their clients. As a result we put together this free 6-part email course on educating clients about risk. Sign up below. We won’t spam you and you can unsubscribe at anytime.



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3 Ways Financial Advisors Can Win Generation X & Y Clients

Generation YLet’s get personal. I was previously an employee at Facebook and just like many other Silicon Valley employees I was offered equity in the business as part of my compensation. When the company IPO’d I suddenly had money to invest, along with many of my colleagues. I and many of my colleagues would qualify as great generation Y clients.

At the time there were endless conversations about what to do with this money. One of the first was whether to get a financial advisor, use a web-based investment service like Wealthfront or invest it ourselves.

Advisors were treated with deep suspicion. Numerous employees had already been contacted by big-name private wealth management firms via LinkedIn which left them feeling like a prize to be won rather than a client to be cared for. You can see this mentality in this New York Times article. Most people didn’t know the difference between a RIA, Broker-Dealer, Fee-only or Commission based advisor. So what do well educated people do when they are stuck? They ask a friend and read a book!

The most commonly referred book is Burton Malkiel’s “Random Walk Down Wall Street”. After reading this book everyone becomes deeply suspicious of active investing and fees. This naturally leads them to Modern Portfolio Theory, Vanguard and that unforgettable quote by John Bogle – “In investing, you get what you don’t pay for”.

I’ve critiqued Modern Portfolio Theory before, so I won’t go into it now but suffice to say, if advisors are going to succeed with Generation X & Y clients they need to short-circuit this fallacy that successful investing is simply about diversification and low fees. I’ll tell you what I think successful investing is about a little bit later.

So what about the web-based investment firms like Wealthfront? Don’t they bring the promise of an advisor with very low fees? To some extent yes but many in Generation X & Y are still of the opinion they can do the same thing in an Excel Spreadsheet minus the benefits of tax loss harvesting (although Michael Kitces has debunked these benefits somewhat).

So what’s an advisor to do? Here are three ways advisors can win Generation X & Y clients.

1. Short Circuit The Fallacy That Successful Investing Is Just About Diversification and Low Fees

Successful investing is about many things before diversification and fees. It involves planning and setting goals. It involves discipline. Spending less than you earn and staying the course. It involves education. Improving your financial IQ. When the next crash comes I like to wonder how many people will yank their money from the web-based investment managers because they had no plan, no discipline and no education. Here lies the unique selling point of advisors to Generation X & Y clients, their ability to act as a coach. To teach, to instruct, to challenge, to refuse. After all, investing is a means to an end right? And good advisors help make that clear.

2. Don’t Just Protect My Money, Make Me Money

When I speak to people in Generation Y they are very much in the accumulation phase. Once they know the basics of investing they want to learn how to make money not just park it into a mutual fund and stay the course. Increasingly they are turning to people like Todd Tresidder also known as the Financial Mentor to learn more about making money. I believe one of the most overlooked skills in our industry is the entrepreneurial skill of advisors. They have often set up their own businesses and become a success in their own right. Yet I see few advisors teaching entrepreneurial skills to their clients. An advisor who can help me increase my income not just protect a nest egg I have already built would be truly invaluable and unique.

3. Branding and Presentation

When I was growing up my mother said that I should always shine my shoes before I leave the house. I would be judged by their presentation. That was my mother’s generation, today we judge people by the quality of their website. It may seem small but it’s not. A bad brand and website turns people off and yet when I speak to advisors (every day) they often start our conversations by apologizing for the quality of their website. If it’s been on your to do list for a long time, get it done.

If there is one more thing I would add to the list it is marketing (which will be the subject of a much longer post to come soon). To conclude I sincerely believe advisors can capture Generation X & Y clients but they will have to significantly change the way they do business. The value of advisor to my generation is not in managing money it is in the coaching.

Image Credit – LinkedIn

List Of 58 Technology Tools For Financial Advisors

List of 58 Technology Tools For Financial AdvisorsSometimes you are looking for technology tools for your business and don’t want to spend the whole day “googling” around. So we polled some of our customers and asked our network for a list of technology they were using. This is what we heard (in no particular order).

Let me know if there are other tools worth adding.

Customer Relationship Management (CRM)

Morninstar Office
Sugar CRM
Microsoft Dynamics
Solve 360

Financial Planning Software

Money Guide Pro
Money Tree Software
eMoney Advisor
Finance Logix

File Sharing & Document Management

Google Drive
Office 365

Online Meeting Scheduling


Virtual Meetings


Social Media Management

Sprout Social

Email Archiving

Google Vault
Live Office

Newsletter Delivery

Vertical Response
Campaign Monitor
Constant Contact
Active Campaign


Google Apps
Office 365


Virtual PBX


Total Rebalance Expert
RedBlack Software / Rebalance Express

Password Management

Last Pass
Roboform Everywhere
Kaspersky Password Manager

Portfolio Stress Testing

Hidden Levers

Investment Policy Statements

IPS Advisor Pro

Data Gathering


Lastly a small plug for own risk tolerance questionnaire Pocket Risk.

Flicker Photo Credit

Skeptical Quotes From Financial Advisors On Risk Tolerance

Risk ToleranceOver the last 16 months I’ve spoken to 248 financial advisors about understanding their clients’ risk tolerance. Most see the importance of this task but occasionally you will find a skeptic. Someone who doubts the process will yield anything valuable. Below I share the most common quotes I hear from advisors.

“A person’s risk tolerance is largely irrelevant to the investing process. We invest on client’s needs and goals.”

We agree that investing should by needs driven. However,  we don’t think a person’s risk tolerance is largely irrelevant. Obviously we have our biases but let’s step back for a second. Understanding a client’s risk tolerance is not just about you. It’s also about a client understanding themselves and being better educated about risk. A client who is better educated about risk and return is more likely to stay the course. Less likely to want to buy at the top and sell at the bottom. For one this makes a client easier to manage. Additionally, understanding a client’s risk tolerance can tell you how many bumps in the road they can withstand. It’s all well and good to know a client needs a 8% annual return to meet their goals but if the volatility required to get them there sees them selling up then the are in serious trouble and so are you. Constructing the right financial plan is not just about the destination but the journey.

“A client’s risk tolerance changes depending on life events and market conditions so any measurement quickly becomes obsolete.”

We agree that a person’s risk tolerance can change, though it’s largely a fixed psychological construct. Major life events can see a shift but it doesn’t happen quickly and often. At Pocket Risk we usually recommend our customers test their client’s once a year. Recently there has been a body of work that says we need to distinguish a client’s risk perception from their risk tolerance. It’s something we are investigating at Pocket Risk and hope to write more about in the future. The argument goes that a person’s risk tolerance barely changes but their perception of risk fluctuates. So, if the market is doing well they think risk is low but when it is performing poorly the risk is high.

“I have a face to face discussion process that works well. Why do I need a questionnaire?”

Frankly, you don’t HAVE to have to use a questionnaire it just makes the process a whole lot easier. This is because it provides a consistent, objective and documentable measure of risk tolerance it helps standardize the approach across your firm and helps meet your compliance needs.

If you have any thoughts or comments on this I’d love to hear them.

Image Credit – Flickr

All Around The World Labor Is Loosing To Capital

EconomistEarlier this week I came across a great article in the Economist titled “Labour Pains”. It tells a story of something we already knew but were lacking statistics.  All around the world labor is loosing out to the power of capital. Technology in particular has caused this development while the impact of cheap foreign labor is probably oversold. For advisors and clients and those with capital it is critically important to maximize its utility to the full as the returns for labor start to diminish.

Enjoy the read….

ProVise: “The 3 Things Advisors Must Focus On To Be Successful” – Barron’s Top Advisor [INTERVIEW]

Ray FerraraI recently interviewed Ray Ferrara of ProVise Management Group LLC.  He is the President and CEO of a Barron’s ranked financial planning and investment firm based in Florida.

John: Can you give us some quick background on ProVise?

Ray: Sure, first and foremost ProVise is a financial planning firm. We do investment management but we view that as a subset of financial planning. We have 11 planners and work with about 780 families. In total we manage about $900 million. All of our team are well qualified professionals many of which have the CFP (Certified Financial Planner) designation.

John:  How did you become a financial advisor? What brought you to this industry?

Ray:  I have to go way back to tell that story. I graduated in 1970 with a degree in Zoology and went to work selling computers for IBM. A friend of mine was working in the investment business and persuaded me to get involved on a part time basis. By September 1971 it became my full time occupation where I worked for an investment firm. Eventually, I went on to start ProVise in 1986 and I haven’t looked back!

John: Barron’s recently ranked your firm as a top advisor. What distinguishes your firm from others?

Ray: Going back to what I said earlier I would emphasize we are a financial planning firm first and investment management is a subset of that. We form close relationships with our clients helping them bail out their children, deal with health issues and estate planning. Year over year we only loose about 3% of our client base and that includes those who pass away.

John: What would you say to those advisors who believe investment management is not a subset of financial planning?

Ray: I would gently and politely tell them that there is nothing wrong with specializing in investment management but that is not the same as financial planning.

John: What software, tools and techniques do you use to ensure you remain successful?

Ray: Technology is crucial to our business. It’s important that technology platforms are user friendly for clients and advisors. We use Portfolio Center for portfolio management and we use Junxure for our CRM. We also believe social media can play an important part in our business and are slowly doing more in that area.

John: Your firm has been very successful but what challenges do you face on a day-to-day basis?

Ray: You can be a financial planning genius and still fail if you cannot properly run your own business so that is important. Additionally there is always work trying to keep up with the regulators. That’s crucial. Finally as our company grows and scales its been important for us to hire the right people who share our values.

John: What software and tools do you think are missing in the industry?

Ray: Probably what is missing is a technology standard so all software can speak to each other.

John: Lastly, What do you think advisors need to focus on in the future to be successful? 

Ray: There are three things advisors need to focus on moving forward.

1) They must disclose conflict of interests.

2) They must maintain their level of education through something like the CFP designation, which has a continuing education element.

3) The must subscribe to a code of ethics that puts the client ahead of themselves and thus give a fiduciary standard of care. Advisors who do not do all three will fall behind those who do.

John: Thanks Ray, it’s been great speaking to you.

The Biggest Scam In The History Of Mankind [VIDEO]

Federal Reserve

The Federal Reserve, the Treasury, the entire banking system is a scam. At least according to Mike Maloney a self taught economist and gold bug. In this video he breaks down step by step why the entire financial system seems to enrich those at the top and rob those at the bottom.

I am not in the habit of sharing videos from crazy people and I am not starting now. There is a lot insight and value from Mike’s video. Check it out.