Diversification May Be A Wise Investment Practice...
But It's Lousy For Your Financial Planning Practice
From the time you entered into the financial services business, you've been told that diversification is good. And you can see the evidence with the explosion of mutual fund investing and the public's desire and financial professionals' advice for diversified portfolios. But the same concept in your own business will result in your working more hours, enjoying your work less, being less effective and never being able to streamline your business. In business, the "winning formula" is just the opposite--focus for the best results.
Remember the conglomerates of the 60's? They're gone. Just look what happens when large firms fail to focus--AT&T acquires NCR to get into the computer business, and loses a bundle. Kodak acquires Sterling Drug and spins it back to its shareholders 6 years later. Firms that focus on one business and do it very well have replaced the diversified conglomerates. Look at the corporate leaders of today and how they focus--Microsoft in consumer software, Cisco in Internet connectivity, Intel in chip manufacturing. These firms each have a narrow and focused strategy in one industry.
How do these historical examples translate into advice for your business? Pick a market in which to specialize and focus your entire business around that market. Be fanatical about it.
Here's my own practice as an example. I work with people age 60 and over. When my clients ask me to help their 40-year-old children with their finances, I refuse, and refer them to another planner. Yes, you may think I'm crazy to turn down business, but you'll see in a minute how much sense this makes.
By specializing in a particular niche, you get to understand how their mentality works so well, that you know what your prospects are thinking before they think it! I work all day with a segment of people that's concerned about protecting their assets. My expertise is built around that concern--the way I design investment portfolios, the approach I take in my appointments, how often I am in contact, and the products and services I offer.
My office is in the suburbs, where my prospects live. I am in a small office building with plenty of parking in the front. My office is on a well known street and easy to find. The location was picked to match my prospects' ease and comforts. The children of my prospects would probably find me more conveniently located downtown and be more impressed if I was in a high-rise office building with fancy wood on the walls. I cannot find a location that would be optimal for two different audiences. I cannot serve two masters optimally.
If I were to consult with a 40-year-old, he may want me to recommend some good aggressive growth funds for investment. Or he might want to know how to handle his stock options. I have no idea! That's not my business and it would be an incredibly inefficient use of my time to learn about products and service outside of my specialty. If I start working with people outside of my selected niche, I will soon be working more hours to become more expert in other areas, I will need to keep track of more products and develop a presentation for other services. I'd be working more hours, maybe need more staff, and probably earn less money. I would be far less efficient. The success in the financial services business is about the ability to use the same approach and same building blocks for every client.
That does not mean each of my clients gets treated the same. But it does mean that of the portion of their portfolios that contain stocks, they all own the same stocks. If they own fixed income instruments, you will find the same fixed income securities in every portfolio. Mr. Jones may have 60% of his money in equities and Mrs. Smith may have 30% in equities. But the equities they each own are the same because the building blocks I use are the same few for each client. And these building blocks fit well because each client is similar to the other.
But you may be concerned that the niche you select for your focus could decay and then you'll be out of business. That's not so if you do your homework up front:
- Select a niche you like working with
- Select a niche that has enough money to make your practice profitable
- Select a niche that takes action
- Select a niche that won't be comparing you to their choices on the Internet
If you see your niche changing over time, which you will be able to see early because of your specialization, then adjust your message or your approach. You will be more attuned and be able to react early because of your specialization.
Here's an example. Up until 1997, I used a seminar title that focused on increasing client's income. That message became less effective as people became accustomed to low rates (as compared to the early 80s) on CDs, bonds and other fixed income investments. Americans in general were much more interested in equity investing. So I shifted the focus of my message to include this new interest but also focused on the preservation of principal aspect desired by my prospects, and my attendance at my seminars popped right back up to previous levels.
If you want to diversify your clients portfolios, that may be fine. But your own business is a different context. To flourish, focus.