The importance of system

I've written many posts about checklists, but realize that I have neglected context for financial advisors. The issue was highlighted in a conversation I had with Andy Gluck.  “So, these checklists” he asked, “are they like work flow?” Well, yes, used one way.  It helped me realize I have been discussing the tool without discussing its place in the workshop.

Checklists are a component of a system, and the system is more important than the checklist. Each function a financial advisor determines is important to his practice needs a process. The process could be a checklist, or it could be more narrative and detailed. The critical idea is that each activity of importance to the practice be a documented process. I envision checklists as tools for implementing those processes, but your practice manual could simply be a collection of those checklists. What role they play is up to the individual practitioner.

A best practice approach recalls my days as the chief compliance officer. An investment firm's compliance system (whether broker/dealer or investment advisor) requires four P's for each regulation -- policy, person, process, and proof.

The policy describes how to address a particular situation. The situation in a compliance system is to satisfy a rule, but it doesn't have to necessarily be a problem. An upcoming client appointment would be a situation that needs preparation.

The person is the staff member who is responsible for carrying out that particular process. The process is the collection of tasks to implement the policy. The proof is the record that the process was completed. The proof could be checkmarks or initials on a paper form, an electronic signature or stamp in software, or a dated report.

The point is that all these must be coordinated and diligently executed to ensure the practice consistently produces the desired outcome.

Each element in the operation of a financial advisor’s practice should somehow have these four Ps documented and used.  The system can include a comprehensive explanation with rationale and steps, or it can simply be the checklist for carrying out the tasks. The form is less important than having a solid system, testing it and using it.

Without a system, too much is left to chance. The result -- what's done and how it's done – are almost guaranteed to be inconsistent. You hope things will be done the way you intend.  And, as the other members in my CEO learning group are fond of saying, hope is not a strategy. You would not be able to assure staff or clients of what to expect, and you cannot assure that the hoped-for outcome will be realized.

So, yes, Andy, work flow is a kind of checklist. It can be paper or electronic, comprehensive or specialized. As long as they are part of a system, you can be confident of producing consistent results. A well thought out, tested and document process, diligently and consistently implemented, is a hallmark of a successful financial advisor’s practice.



Top 10 Habits to Drop

In a recent article on Morningstar advisor, Allyson Lewis, author of The Seven Minute Difference, describes how to implement better practices by letting go of bad practices. It's worth a read.

I'm dedicated to helping financial advisors consistently do what's important, and this article has lots of good tips for accomplishing exactly that. Included in their practice management list is a reminder of the importance of something that I focus on, having repeatable systems and processes.

Lewis also names other productivity killers including telephones, e-mail, disorganization, unfinished tasks, lack of goals. I will go further than she does on a couple of the recommendations. The article jumps from mission and vision to 90 day goals. I think there's value in one-year, if not three- or five- year goals. David Allen refers to these as the 30,000 and 50,000 foot views of life.

Lewis also recommendations setting aside 30 minute blocks of time unbroken by phones or e-mail to work on projects and tasks.  I prefer the discipline of checking e-mail at specific times of the day, limiting it to three to five times over eight hours.

One item I especially appreciate is the recommendation on the importance of roles. Knowing who should do what, and dedicating time only to those activities that fit within your role, is a crucial time management discipline. With this article as inspiration, I may post some thoughts about roles as well.

Lewis has assembled some valuable tips in a quick read that's worth checking out.



Checklists: A Critical Tool for the Investment Fiduciary

Under most scenarios, a checklist is a good idea as part of a financial advisor's investment management process.  If you are serving as an investment fiduciary, a checklist is critical.  (And, if you are an investment advisor, you are a fiduciary.)  It may not be much of a stretch to say the investment advisor cannot fulfill fiduciary responsibilities without one.

Whether the fiduciary duty has been fulfilled cannot be evaluated by the outcome.  Markets do unpredictable things.  A good process can yield poor results if the market moves against you.  A competent fiduciary, then, must be evaluated on process.

Whether an investment advisor fulfilled those duties can only be confirmed by reviewing policies and verifying procedures.  Are the rules by which the investments are selected prudent and appropriate for the client?  If so, do the corresponding procedures effectively carry out those policies?  Then - and this is key - can you confirm the procedures were carried out?  A checklist can prove it.

Critical points of client assessment or steps in the process can be marked or initialed, documenting performance.  Not only will this assure that a financial advisor doesn't miss any critical steps, it can also serve as proof if it is later claimed that the fiduciary breached his duty.

One good example I have seen frequently, especially since the end of 2008, is a failure to update an Investment Policy Statement when there is a change in client circumstances.  When the market got volatile, many clients reconsidered their tolerance for risk.  Investment advisors responded by changing their portfolios to accommodate the new circumstances.  Reviews we conducted, however, revealed that many had failed to update the Investment Policy Statement, making it appear as though the portfolios were not invested appropriately.  Big deal?  Well, sort of.  If the client demanded a vastly more conservative portfolio, only to watch their accounts be left behind when the market subsequently rocketed back up 70% or so, they might complain their financial advisor caused them to miss a significant recovery.  The opposite would be much worse:  If the client was persuaded to gradually increase the risk in their portfolio as the market went up 70%, triggering a change in asset allocation, and we later experience another October 2008 - March 2009, the liability would be significantly greater.

A simple list "What to do when changing a client risk profile" could include items like a follow up letter for discussions of risk and the reminder to update and get signed a new IPS.

Much of the industry is moving toward a fiduciary standard.  Updating your client procedures with the judicious use of the right checklists will help make sure your practice keeps current.

I’m lost without my checklist!

A friend of mine recently closed his financial advisory business in New York and moved south, re-establishing his practice, and he described a great case study and the value of checklists.

His practice revolves around corporate benefits.  Recently, he received a call from a business prospect in the new area who accepted a proposal.  "Yes", said the new client, "let's get that insurance plan on our executives and we'll move our 401(k) to you as well."

Great, a no-brainer.  The kind of transaction he does dozens of times a year, but wait -- before his move, he had a staff to actually execute all of this once the client said “yes.”  They had been trained to be meticulous about setting up a case and seeing it through.

Instead of a staff, he now had a big pile of paper on his desk and was not sure where to begin.  Not that he doesn't know how to proceed; he's done this business for years, but he has to think about it, and he had to remember.  And when it comes to doing, it's valuable not to be thinking at the same time.  (More about that in another post.)

Have you ever had the experience of doing something again for the very first time? It seems silly doesn't it?  But every time you do something you've done before, and you have to think about it, that's exactly what you are doing.  Engage your brain to create, not to recall, whenever you can.

As he built his business, he carefully developed processes, created lists that address each type of activity, and systematically trained staff to carry them out.  The product was a successful business with consistently high quality service.  Of course, those processes and lists are still in a box someplace.

He dug into the paperwork.  As he went, he drew on his experience to recall the requirements of these types of accounts, these product companies.  Okay, these forms are complete -- oh, and I need one of these.  Then we need to do this and this, and, oh! I forgot this.  Two hours of work took all day.  Without simple, written instructions, he essentially had to design a new process as he went, even though he had done the same thing hundreds of times in the past.  He will be unpacking that box very soon.

Do you perform any routine processes by memory?   That’s fine for the simplest ones that never change – brushing your teeth, recording your voice mail message, scheduling an appointment.  But as the number of steps and the number of options increases, the more likely a missed detail can derail a smooth outcome the first time, the more you can benefit from written prompts and reminders.  No one I know uses a checklist before starting a car.  Every pilot runs through one before starting a plane.

Of course, midway through his process, his wife, who's business he had just set up with carefully designed processes and instructions, walked in.

“What are you doing?”

“Making sure I have everything I need to process this case.”

“You should have a checklist!”

“Thanks, dear.”