The Bridge: Spring 2018 | RIA Edition

RIA INDUSTRY KNOWLEDGE FROM OAK STREET FUNDING

a first financial bank company

RIA Edition | Spring 2018

Transformation: Is it time to update your brand?

Page 6

Expansion: Debt as a tool for growth Page 12

FEATURES

RIA Edition

Spring 2018

Publisher Oak Street Funding Editorial Director Meghan Milam

Do you have what it takes to thrive in a competitive environment?

Evolve your business and take it to the next level.

Contributing Editor Sharon Robbins

4

6 Transformation: Time for a brand update?

Keep your brand fresh to engage clients.

12

Expansion: Debt as a tool for growth Push beyond organic growth with an infusion of capital.

14 The Art of Attraction Are potential clients interested in your firm?

Share Your Thoughts If you have any questions, comments or ideas for The Bridge®, let us know. Email us at marketing.box@oakstreetfunding.com or visit us on social media.

Oak Street Funding does not make any representation as to the accuracy or suitability of any of the information contained in these advertisements or sites and does not accept any responsibility or liability for the conduct or content of those advertisements and sites and the offerings made by the third parties. Third party advertisements and links to other sites where goods or services are advertised are not endorsements or recommendations by Oak Street Funding of the third party sites, goods or services. Oak Street Funding assumes no responsibility for the content of the ads, promises made, or the quality/reliability of the products, services, or positions offered in all advertisements.

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Art Director/Designer Aidreen S. Hart Graphic Contributors Beth Winchell The Bridge is a newsletter produced by: Oak Street Funding 8888 Keystone Crossing, Suite 1700 Indianapolis, Indiana 46240 844-343-1411 Loans and lines of credit subject to approval.

Potential borrowers are responsible for their own due diligence on acquisitions. California residents: Loans made pursuant to a Department of Corporations California Finance Lenders License (#6039829). The materials in this paper are for informational purposes only. They are not offered as and do not constitute an offer for a loan, professional or legal advice or legal opinion and should not be used as a substitute for obtaining professional or legal advice. The use of this paper, including sending an email, voice mail or any other communication to Oak Street, does not create a relationship of any kind between you and Oak Street.

© 2018 by Oak Street Funding LLC. All rights reserved. Any duplication without prior written permission is strictly prohibited.

www.oakstreetfunding.com/ria-firm

LETTER FROM THE FOUNDER/CEO

Destination: EVOLUTION

Whether your firm has experienced no, average or exponential growth in the last few years, it can become easy to get stuck on autopilot. Doing things as you have always done them can jeopardize future growth, as stagnation can make it harder to implement the required changes for sustained success.

This edition of The Bridge is all about looking inward to determine which elements of your business need a push to evolve. Is your current branding doing an effective job at communicating who your company is, how you are different and what you offer? Are you meeting all your clients’ needs, or is there something you can do to improve your relationship?

Should you finally implement those strategic growth initiatives? You are in the driver’s seat. In which areas will your business better itself this year?

Strategically evolving may require an investment. Oak Street Funding

Free RIA Whitepapers Our resources are packed with expert advice and best practices.

Check them out!

provides RIA firms with debt capital for growth, acquisitions, successions and more. Whether you are maturing, expanding, or planning to exit your

oakstreetfunding.com/whitepapers-ria

business, evolution should be a constant theme. We’ll get you there.

Rick Dennen, Founder, President & CEO

Oak Street Funding® Vision Statement To be the market leader in client experience for commercial financing by delivering unique and diverse product offerings through cutting edge technology and exceptional employee and client service.

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sk most people about naturalist Charles Darwin,

and they’ll probably mention evolution. But the real

hallmark of Darwin’s work dealt with a concept called natural selection. Through natural selection, species that adapt to the challenges of their environment achieve long-term survival, while those that fail to adapt quickly become extinct.

The concept is also widely known as “survival of the fittest,” and it’s equally applicable to the world in which today’s registered investment advisors do business. Today’s investment marketplace is the most complex and challenging in history. As if the sheer number of advisors competing for the same clients, the list of businesses such as banks trying to carve out a piece of the market, and new technology-based competitors weren’t enough, there are the many regulatory and licensing changes that keep RIAs on their toes.

Healthy competition

The RIA industry has become accustomed to nonstop growth.

Between 2007 and 2015, assets under management doubled, and RIAs represented the single largest segment of the wealth management universe. But the sector’s biggest single competitive advantage is disappearing now that other investment players are also required to act as fiduciaries. The days of gaining business by telling prospects “we’re fiduciaries and they’re not” have ended.1 Another challenging aspect of competition is the emergence of “robo-advisors” that mimic the consultative process RIAs use with clients. RIAs will find themselves having to justify the fees they charge and explain what they can deliver that technology alone cannot. A robo-advisor is limited to its programming, with a finite number of potential questions and corresponding advice. A skilled RIA has the ability to go beyond those limits, probing more deeply 4 | w w w.oakstree tf un di ng.com • 8 4 4 - 3 4 3 - 1 4 1 1

and recognizing the emotions behind answers to questions. As fellow humans, RIAs can sense goals, expectations, habits, and fears better than any algorithm.2 In addition, a local RIA may be able to access investment opportunities that aren’t available to robo-advisors, such as a real estate opportunity, the chance to buy bonds to finance the community’s new school project, or mezzanine debt mechanisms that might be ideal investments for a specific client’s needs.3

Adapting begins with analysis

An RIA firm that’s determined to succeed for the foreseeable future should be in constant adaptation mode. That’s because the world doesn’t stand still, and changes in the industry and among local competitors may create the need to pivot and make slight course corrections.

Before making more significant changes, it’s prudent to stop and take stock of the current state of business, analyzing strengths, weaknesses, potential business opportunities, and threats posed by competitors and other factors.

A key consideration is the mix of products and services offered to clients. Does it address all of their current needs? Are there areas with gaps? Could offering new products or service lines increase revenue and provide a stronger defense against competition?

Another consideration is a clear understanding of who the firm’s competitors are and what they have to offer. Just because you may not consider a particular firm or type of firm to be competition doesn’t mean they actually aren’t. Any firm or service that people can use to invest and manage money is actually a competitor.

As an example, you may not see online discount brokerages as competition, but when a prospective client is considering which

route to take, she may be as likely to use that brokerage as to call you. That’s why you need to consider all potential competition and how your firm stacks up in comparison.

Once you have a clearer understanding of your marketplace, your competition, and your own strengths and weaknesses, you can identify and pursue areas that can make you more relevant and valuable to your clients.

The role of talent

Your RIA firm has many business assets. There’s your hard-earned professional reputation, for one. There’s also your experience. Another is the connections and product mix you’ve been able to develop over the years.

Nearly all of those are overshadowed by the one asset some RIA firm owners tend to neglect: the value of your team.

Your employees are a critical piece in ensuring the continued satisfaction and success of your clients, as well as in the efficiency and profitability of your operations. In a market as competitive as the current one, the loss of those employees is a considerable risk factor for most RIAs. Even if your accounts are protected by non-compete agreements, if a well-liked producer or customer service staffer departs, it’s likely that many of the clients that individual worked with will follow.

That’s why a big part of your firm’s adaptation involves optimizing your team. Are your employees truly happy and satisfied in their roles? Are they vulnerable to overtures from a competitor? Are they operating at peak efficiency? What could they accomplish with more knowledge or additional licensing?

Managing your human capital and helping them adapt to the shifting needs of your business is critical. Investing in professional development is one of the most effective ways to sharpen a team’s performance. Generally speaking, it’s far more economical to build upon the investment you’ve already made in people than in trying to find and hire new team members. Assessing the skills of every team member and giving them opportunities to add skills not only makes them more valuable to your firm; it also boosts their personal satisfaction and professional confidence.4

A new role

Traditionally, investment professionals have been expected to wear two hats. Their primary job was to counsel clients and provide financial advice. And, at most firms, they were expected to add to the client roster by recruiting new clients.

That mentality is common among RIA firms, but it may actually be interfering with their growth potential. The skills and traits that make someone an excellent advisor aren’t necessarily the same ones that make them an effective producer.

As the industry makes the transition from commission-based business to a structure based on recurring revenue from assets under management, many firms are recognizing that it makes sense to separate business development and client advisory roles.

The result is a growing number of “employee advisors,” professionals whose full-time job involves providing advisory services. In most cases, these individuals have minimal involvement in acquiring new clients, and are not part-owners of the firm.

The largest clients of the firm may continue to work with the owners or senior partners who focus on growing the business, but average or smaller clients are shifted to work with the employee advisors. That’s beneficial for two reasons: it gives those responsible for business development more time and

energy to focus on bringing in business, and it means the person who is advising the client isn’t the same person who “sold” them on the firm, strengthening the fiduciary image.

An ongoing Moss Adams study has noted that, as RIA firms using the AUM model for compensation have grown, an increasing number have moved to structures in which at least some of the responsibility for business development and client advisory has been divided among team members, suggesting that those firms are leveraging individual strengths. 5

Leaders and sponsors

If you want your firm to continue to grow, and you envision a day when you might want to allow your team to buy you out and fund your own retirement, you need to make leadership development a priority.

That’s particularly important where junior staff members are concerned. If your goal is to see your firm’s junior members grow into roles of increasingly responsibility, you need to develop a plan to support that. Leaving it up to chance may mean that the staff members don’t acquire the skills they need to benefit your firm, or that they may decide to leave for another firm where the opportunities for growth are clearer.

One leadership development approach that can be particularly effective is what is known as sponsorship. It pairs junior staff members who display promise with senior leaders who can help them gain the specific skills and opportunities they need to advance. Sponsorship goes beyond the traditional mentor/mentee relationship. Instead of simply providing wise counsel, sponsors take an active role in the employee’s career development. The sponsor and the employee are accountable to each other, and the employee’s success reflects favorably on the sponsor. The benefits go both ways: the sponsor can use the employee to provide support, such as preparing research materials or serving as a sounding board.

Beyond the obvious advantages sponsorship offers to employees, it gives RIA firms a way to attract and retain top talent, reducing turnover and its costs. It can help the firm put its succession strategy into motion, and more thoughtfully increase the firm’s diversity. 6

Your own adaptation

All of the concepts outlined here provide insight into the types of self-examination and change strategies RIA firms can use in developing their own plans for adaptation. Your firm is unique, and there may be other approaches that are more suitable. But you need to do something. The industry is ever-changing, and Darwin’s wisdom will be proven again and again.

Footnotes 1 Idzelis, Christine, “RIAs Are Losing Their Competitive Advantage,” Investment News, June 5, 2016.

2 Coutin, Carlos, MMM, “How RIAs Can Compete With Robo-Advisors: Emphasize Unique, Tailored Advice,” linkedin.com, March 9, 2015.

3 ibid.

4 Charles Schwab, “Accelerate Your Success: How Talent Development Can Benefit Your Firm,” schwab.com, July 2016.

5 Mitces, Michael, “The Rise Of The Employee Advisor At Financial Planning Firms,” kitces.com, October 14, 2013.

6. Schwab, op. cit.

When you think about your firm’s brand, what comes to mind? If your firm is a part of a wirehouse, your brand would have been defined for you by the national firm, but as an independent RIA, you have an opportunity to set yourself apart from the rest of the firms in your geographic region. When is the last time you asked yourself: Is your current brand doing an effective job in communicating who your company is and what you offer?

To get started, let’s review exactly what a brand is, and what that means to your firm. Your brand includes a comprehensive blend of several things, including the following: • C ompany Mission/Vision: What does your company stand for? For example, Steve Jobs’ original mission for Apple® was “To make a contribution to the world by making tools for the mind that advance humankind.” 1 •P romise: This is typically an extension of your company mission. What is the tangible benefit you give to clients when they purchase your product or service?

•P ersonality or Voice: If your company was a person, how would you describe its personality? Funny? Cheerful?

Serious? Sophisticated? This brand personality or voice can come across in your marketing and communication.

• Logo (visual representation of your business): This is what most people imagine when they hear the word “branding.” The logo is the company’s symbol that represents the brand visually, using graphicallydesigned symbols and/or words. You can even seek to trademark your logo.

• Tagline (catchphrase or slogan): When referring to branding, the tagline can be used alongside the company name and logo to represent or identify with your product, service or company.

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• Marketing messaging: The language you use in marketing materials should also correlate with your overall brand strategy. This could include the personality or tone of the content in an advertisement, your website content and printed marketing materials.

Successful Brands Start with a Plan

One way you can create a successful brand is to have a formal marketing and communication plan.

A marketing plan can help guide you toward creating a memorable brand because it involves steps like analyzing your competitive landscape, identifying your ideal client, and developing your unique selling proposition (USP). From there, you can determine your mission and vision, along with the best logo, tagline and marketing messages to use in your marketing and sales campaigns.

Let’s dive in further on how you can identify your unique brand through an exercise:

Uncovering Your Unique Selling Proposition (USP)

The acronym USP, is a marketing term which stands for your unique selling proposition, answers the question, “What is it that my company offers that our competitors do not?” In other words, “What makes us so unique that our clients prefer to buy from us over anyone else?” If you are not using your USP in your branding and marketing activities, you are failing to differentiate your business from your competitors.

First, you need to complete some analysis on your ideal clients, so you can understand their top pain points, beliefs and values, as well as research on how you can find other similar clients. Second, think about the one benefit that makes you stand out from the rest. Make sure that your competitor cannot claim the same thing, or it’s not a unique differentiator. What problem do you solve for your client better than any other firm?

Here are some common ways you can create a USP for your business: •P rice (higher or lower): Be sure to explain why your company positions itself as a high- or low-cost provider and make this your differentiating factor. In a commodity market such as financial services, it’s easy to be tempted to lower your price in your marketing strategy to get the client. But if you truly want to step away from becoming a commodity product or service, the key is to make your firm stand out so much from the crowd that people are willing to pay a little extra to get the added benefit from your differentiator.

• Above and beyond customer service: Again, this is a big selling point for RIA firms but it’s easy for you to start sounding like every other firm if you claim this USP. Instead of simply stating that you have the best customer service, tell us why by providing a few examples of how you provide excellent customer service. One way to do this might be to highlight a client testimonial or story, show how you solved a client concern in an outstanding way, etc.

• Convenience (location, ordering, etc.): Do you offer a special way for Your USP clients to purchase or interact with you? Examples might be online chat services, after-hours appointments, or similar benefits. Again, think Statement: of your ideal client and their reasons for choosing you.

•P roduct features or benefits (exclusive, popular or ___________________________________________________________ innovative): Don’t spend your time here describing what your (my company) policies include. Think of something extra that you offer that offers ____________________________________________________________ your competitors don’t offer, which is also appealing to your (target audience) client. This could be a new, innovative product, an app which ______________________________________________________________ makes your clients’ lives easier, or even something you offer in (your unique offering) your office that is an added benefit, such as notary service. so that they can _______________________________ As you begin to think about your company’s brand, consider (benefit gained) writing your own USP statement using the exercise above. If it’s not unique enough, ask your clients why they chose you. Sometimes this process will reveal a hidden USP that you didn’t consider. This might become the ticket toward a successful new brand! Sometimes emotion plays a part in developing a company’s USP, and these “beneath the surface” triggers serve as emotional levers that help the prospective client to buy in.

Once you have written your USP statement, it’s time to create or update your brand. If your current brand does not convey your new USP, or it needs an update, now is the time. Enlist the help of a professional marketing or design firm to create your new brand, which will include a brand statement, logo, messaging, color scheme and marketing messaging. In addition, you should establish a brand guideline sheet which outlines your brand, colors, messaging and how to use it. Your brand needs to be everywhere, including on your logo, website, business cards, email signature, client invoices, marketing and advertisements, direct mail campaigns, office signage, and more. Try to establish a cohesiveness across all aspects of your branding and marketing to reinforce your mission for your prospects and clients. Stay true to your brand and strive to be distinct. Train your employees to live and breathe the new brand, and it will continue to serve you well.

1 https://www.investopedia.com/ask/answers/042315/what-apples-current-mission-statement-and-how-does-it-differ-steve-jobs-original-ideals.asp

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:industry news

Can you stay ahead without advisor fintech?

Probably not.

Hello. I’m your robo-advisor...

Advisor financial technology has existed for years but has been overshadowed by the demand for consumer fintech. As RIA clients adjust their lives to universally incorporate technology, they expect to experience the same modernization with their financial services.

... how may I help you?

Consider the following software upgrades: • Partner with a robo-advisor to provide digital advice and reduce fees • Technology that helps advisors objectively calculate a client’s risk tolerance and align investment strategies accordingly • Software that coordinates and optimizes tax efficiencies across an entire household • Home-office technology platforms

Vaccinate against the organizational flu Much like how influenza can easily be transmitted from person to person through contact, causes a variety of negative symptoms, and adversely affects work performance, organizational “germs” may have a similar impact. In the 2017-2018 flu season, the flu interrupted the lives of 34 million Americans. Organizational “germs” are destructive internal dynamics that can cause a business to underperform – like management misalignment, loss of focus, and strategic inconsistency. The best treatment is prevention, so watch out for the signs and symptoms to ensure your business remains healthy and thriving.

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How satisfied are your customers?

Hearts & Wallets recently surveyed customers of the top financial services firms on 25 attributes for five key service dimensions and three pricing dimensions.

56% of customers say “fees [that] are clear and understandable” is an important factor influencing their overall satisfaction with their firm. Find out which financial providers performed well in the following categories (and more): • Explains things in understandable terms • Online tools and research • Has made me money • Unbiased, puts my interests first • Easily reachable by telephone

Underrepresentation of female fund managers may result in slightly lower returns

Employees desire financial education in the workplace In a recent study by Massachusetts Mutual Life Insurance Co., 51% of respondents said they would like their employer to provide more information about retirement savings, and 7 in 10 Millennials said they would welcome financial planning assistance. Despite high levels of interest from workers, only 25% of employees have been offered financial education in the

A recent Morningstar study indicates that investors may benefit more with women at the helm.

All-women fund manager teams outperformed all-men or mixed-gender groups by 41 and 38 basis

workplace. Financial education has a direct correlation to feeling more financially secure, but the study finds that these feelings of security are disproportionate based on income level. Unsurprisingly, 65% of upper middle-income workers feel

points higher than average over a 12-month period.

secure, while only 42% of lower-

However, only 11% of fund manager roles are held

income workers feel the same. A

by women today, compared to 17% in the 90s. As the

well-rounded financial education

industry expanded, men have captured nearly all new

for all employees may result

roles. With their measured success, it is unknown as to

in overall higher employee

why women don’t hold more fund manager positions,

satisfaction and retention.

but study authors continue to seek out answers.

Toxic clients may cost you in the long-term Employees are often considered the most valuable asset any company can have. As a business owner, you don’t want to jeopardize keeping your good employees on staff due to consistently difficult and rude clients. “Some clients feel like because they pay you money, they can treat you and your employees terribly,” said Piyush Patel, CEO at Digital Tutors. There are several things you can do to avoid and react to problem clients.

Among them include vetting your potential clients before they actually become one, not allowing a client to be over-demanding, and addressing regular misconduct.

http://www.investmentnews.com/article/20180203/FREE/180209989/the-dealmakers-financing-top-adviser-technology https://www.thinkadvisor.com/2018/02/13/clients-rate-top-financial-services-firms-in-13-ca http://www.smartbrief.com/original/2018/03/how-avoid-organizational-flu

https://www.financial-planning.com/news/morningstar-study-women-fund-managers-still-underrepresented?feed=00000152-a2fb-d118-ab57b3ff6e310000

https://www.fa-mag.com/news/workplace-benefits-influence-employee-feelings-of-financial-security--study-says-37584.html

https://advisornews.com/innarticle/draw-line-rude-clients#.Wqa8l2rwbmE 844- 343- 1411 • w w w. o a k s t re e t f u ndi n g.c o m | 9

Get to Know SUSIE MCEUEN Susanne “Susie” McEuen is Vice President of Strategic Markets Sales at Oak Street Funding.

If you need capital to support your RIA firm, we suggest you talk to with Susie. Here are some frequently asked questions that she has received from her borrowers.

What are some of the business and borrowing trends you see today?

I am seeing three major trends:

• There is a high level of transition among owners in the RIA industry.

Many are retiring, so successors and acquirers are in need of financing.

Key employees want to buy into the ownership of their firm, and firm owners are seeking more information about succession planning.

• There is a flurry of activity and interest in financial advisors leaving wirehouses to become independent, regardless of the recent changes in the investment management world and impact broker protocol has on investor and advisor relations.

• Advisors are seeking expansion opportunities beyond traditional organic growth. They are looking for acquisitions and books of business to purchase.

What is the loan process like at Oak Street Funding?

I like to think of our loan process in stages. The first stage is the “strategy” stage. This begins with our first conversation about your company: how you started, your borrowing experience, your growth strategies and goals, and your capital needs both today and in the future.

I enjoy learning about my clients’ firms!

During the strategy stage we collect your application and preliminary financial information and I prepare an indication of terms in the form of a loan term sheet.

As far as the terms and structure of your loan, we take a customized approach.

We don’t have a product that you take off the shelf; a one-sizefits-all loan product.

We work towards a structure that is mutually agreeable to our clients’ needs while balancing a responsible piece of debt.

We consider many factors, including industry tenure, your book of business, funding needs, credit score, and industry performance, among other items in our decision making process.

Once a proposed loan structure is accepted, we move to the “processing” stage, where you meet the team of people who will shepherd your loan to funding and we collect any additional information for underwriting.

The final “fulfillment” stage includes final diligence by underwriting, loan documents are prepared for closing, and you are introduced to an assigned Oak Street Funding servicing representative during a scheduled “Pre-Close” conference call. After the loan closing, your account is serviced

by Oak Street Funding, and never sold to a third party servicer.

Throughout these stages, I have immediate access in my office to a team of professionals, including underwriters, CPAs, attorneys, and loan processors. We work together to expedite your request to the loan closing. If you’re ever in the Indianapolis area, we invite you to come and visit us.

We would love to give you a tour of our

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operations and introduce you to the Oak Street team.

Why should we work with you?

I tell all my clients I have 20-plus years of experience as a commercial lender and private banker working with high net worth clients. Then they know, ‘Ok good, Susie understands my business.’ I have extensive experience in financing to businesses and I offer my clients the expertise needed and the understanding required to lend to a cash flow-based entity. Also, I am a “relationship lender” and a trusted advisor- I always keep my clients’ best interests in mind.

Ultimately, my role is to be a resource for you. When you have a financing need- to fund a succession, to buy a book of business, or some other need- reach out to me for questions. Let me know your financing need and I will help you.

Are you ready to learn more from Susie? You can reach her at susanne.mceuen@oakstreetfunding.com or 317-814-2669.

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Debt

“Neither a borrower nor a lender be,” cautioned Polonius in “Hamlet,” and William Shakespeare’s advice has gone on to form an attitude about debt that has survived countless generations.

Most registered investment advisors are financially conservative by nature, and their attitudes toward borrowing often spill over into their businesses. They avoid debt in their personal lives and do their best to steer clear of it in their firms.

There is unquestionably some wisdom in avoiding debt, particularly for individuals. One of the first financial lessons most people learn is to live within their means. Taking on more debt than we can afford to repay can easily push us into a situation that spirals out of control.

Different for businesses

But debt plays different roles for individuals and businesses. In fact, when it comes to business borrowing, “debt” isn’t the most accurate term. A better choice is “leverage,” because that describes the role borrowing can play in your firm. Essentially, when your firm borrows, you’re leveraging other people’s money to achieve a purpose that will increase your wealth and/or the value of the firm.1 In fact, the idea of borrowing is so negative to many business owners, that they make a big mistake in an effort to avoid it. When they need extra capital, instead of taking on temporary debt, they permanently give up part of their equity by assuming partners or equity investors. When you sell equity, you’re giving someone else the opportunity to profit from the 12 | w ww.o akstree tf un di ng.com • 8 4 4 - 3 4 3 - 1 4 1 1

hard work you’ve already put into the business, and you’re taking on what Kevin O’Leary describes as “a permanent partner that will bother you for the rest of your business’ life.” 2 Some business owners believe a more sensible approach to business is a reliance on organic growth that doesn’t involve borrowing. On the surface, that may seem like a better solution, but pursuing organic growth forces you to reinvest profits that you would otherwise be taking out of the business as income. It takes more time to achieve, and it essentially forces you to accept a smaller return on your personal investment in exchange for the eventual growth of the business. Careful borrowing, on the other hand, gives you the opportunity to simultaneously increase your firm’s profits and your overall return. 3

Debt can be healthy

When you use debt instead of granting equity, you don’t lose any control of the company. As long as you repay the loan on time, you know exactly what your borrowing costs will be, and once you make the final payment, the loan disappears for good.

You’re left to run your firm the way you want. 4 In addition, you may be able to deduct both the interest and the principal on the loan from your business taxes, making debt even more affordable. Be sure to verify deductibility with your CPA or other tax preparer before you borrow. 5

When does it make sense?

You probably wouldn’t take out a 30-year mortgage to buy groceries. Nor should you take on long-term debt to address short-term needs. It’s important to think of debt as a strategic tool. You can use tools such as lines of credit to help you with shorter-term needs such as managing cash flow.

There should be a specific purpose for your decision to obtain financing, whether that’s to buy upgraded technology, build a new office, or acquire another firm. Before deciding to borrow, create a business plan explaining your objectives and the return on investment that you anticipate receiving. Be conservative when estimating – understate expected revenues and overstate your costs – so that any surprises are pleasant ones.

If the expected return on investment is significantly higher than what it will cost you to borrow, taking on debt may be strategically wise. However, you should always stress-test your plan. In other words, consider whether you’ll be able to meet your obligations if, for example, your profits don’t match your expectations. 6

Debt drawbacks

As an investment advisor, you know that every reward carries corresponding risks, and the use of debt is no exception. The advantages of using debt to grow your firm are offset to some degree by several points. The biggest is that you’ll be expected to repay what you owe, even if something happens to your business. In many cases, you’ll be expected to back your loan with a personal guarantee, so that if the lender can’t collect from your business, it can attach your personal assets. In addition, if you file bankruptcy, the lender will get first crack at any assets that remain. And, if the lender requires collateral, borrowing may place some of your business assets at risk.

Depending on the market, the lender, your firm’s financial health, and your own personal credit history, you may have to

pay a higher-than-normal interest rate. The more you borrow, the higher that rate is likely to go. 7 Finally, if your firm becomes heavily dependent upon debt, it might be viewed as risky at some point in the future when you’re courting investors or seeking a buyer or merger partner. 8

Ways to borrow

Typically, RIA firm owners in search of financing turn to the most familiar source: that local bank officer they see at Chamber meetings. However, most traditional banks aren’t comfortable with the structure of fee-based businesses like RIA firms. Most are geared to making loans to businesses that have tangible assets such as inventory, equipment, and real estate. That’s why RIA firms will generally need to explore other alternatives. It’s important to choose the approach that best matches the needs and nature of your business.

Asset-based lenders. These lenders typically provide funds that are an advance against assets such as a firm’s equipment.

Again, because few RIA firms have a significant amount of assets, this approach isn’t often a practical option.

Factors. Similar to asset-based lenders, factors usually provide short-term capital in exchange for an interest in a firm’s accounts receivable. They typically arrange to have clients make payments directly to them through a lockbox.

Microfinance. Microloan companies specialize in making small loans (typically $500 to $35,000) to small businesses and entrepreneurs, at interest rates below those charged by business credit cards.

Revenue-based lenders. RBLs typically advance an amount that’s a percentage of a company’s prior-year revenues.

Repayments are normally based on current revenues, increasing as revenue climbs. 9 Specialty lenders. A growing number of RIA firms are turning to specialty lenders that are accustomed to working with the investment advisory profession. Such lenders understand how a firm like yours operates, and are familiar with the nature of your income streams, so they can approach the underwriting with realistic expectations and an appreciation for inherent risks.

As private companies, they are not restricted by the federal limits associated with some other types of loans.

Managing the risks

However you decide to borrow, start with a plan. Know what you want to invest in, what it will cost, and what kind of return it will provide for your firm. As an RIA, you teach your clients about the value of risk management. Don’t neglect to use it with your own firm’s finances. 10 Footnotes 1 “When Debt is Good,” Investment Advisor, July 3, 2017.

2 O’Leary, Kevin, “3 Ways to Grow Your Cash Flow With Debt,” inc.com, April 7, 2016.

3 Scott, Mark, “Debt is a cheaper way to grow your business,” sbnonline.com, January 1, 2017.

4 Allen, Scott, “Debt Financing: Pros and Cons,” thebalance.com, March 20, 2017.

5 Kunigis, Allan, “How to Finance Your Business Growth,” thehartford.com, undated.

6 Scott, ibid.

7 Allen, ibid.

8 Kunigis, ibid.

9 Schreter, Susan, “Taking on Debt to Grow Your Business,” entrepreneur.com, undated.

10 Scott, ibid.

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Are potential clients interested in your firm?

How long has your RIA firm been advising clients? Do you do things exactly the same way you did when you first started out? The fact that you’re still practicing would lead an observer to believe that you don’t, because companies that manage to stay in business over time evolve to meet the changing needs of their customers and their marketplaces.

Taking a proactive approach to change can make your firm more attractive to your clients and sharpen your ability to compete in an ever-more-challenging marketplace.

Whether that involves diversifying your skills, taking advantage of new technology, or applying new concepts to the ways you manage your business, evolving can give you greater control over your firm’s future.

In this article, we’ll look at ideas that may be worth considering – or that may inspire you to evolve in different ways.

Step up service

Clients have more options than ever before, and doing business the same old way is no longer adequate. They choose to work with a firm like yours because they value the personal insight and service your professionals bring. A decade ago, those clients might have been happy with a semiannual review and an occasional phone call.

Today, consumers are accustomed to getting what they want at the moment they want it. If they have a question on Saturday evening, they don’t want to wait until Monday morning to call and get an answer. If they can communicate with everyone else by email and text, why not your firm? Look at what services like Amazon® and Netflix® have done for consumers and ask yourself if what you offer is in line with today’s expectations. If you’re not offering that, someone else will.1

Try Trust

Living trusts and other estate-planning strategies are a critical component of financial planning for many individuals,

particular the more affluent. How many of your clients have established living trusts to protect and simplify their estates? Who prepared those trusts for them? Just over one-quarter of RIA firms nationwide provides trust services for clients, and only nine percent of RIA clients receive those services from investment advisors. Among the firms that offer trust services, 74 percent build those services into their fees.

While you may not be comfortable providing trust services, many of your clients would benefit from those services.

So if you can’t comfortably offer trust services under your own roof, look for partners who can, and fold their services into your fees. If you force your clients to go outside the firm for that kind of help, you run the risk that their assets will wind up in someone else’s hands. In addition, helping with the trust may increase the likelihood that the next generation will continue to use your firm’s services.2

Rethink Fees

Hesitant to offer discounts on your standard fees? Your competition may push you to do so, given that nearly two-thirds of RIAs now offer some type of fee discount. Unbundling fees is becoming more common, especially among larger firms, with many choosing to unbundle retirement planning, insurance planning, and trust services. While the thought of unbundling or offering discounts may seem like a negative, it may help you attract and retain fee-sensitive clients. It can also help to quantify the value of the individual services.3

Encourage RFP thinking

Looking for a way to help prospective clients understand what sets your firm apart from the competition? Teach them how to search for an advisor!

When institutions such as foundations or endowments seek new financial advisors, they typically send a Request for Proposal to all of the potential candidates. The RFP

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includes a standard set of questions that all of the candidates are expected to answer, making it easier for the institution to compare multiple advisors on an equal footing.

You could use a similar approach as a client acquisition tool. Develop an RFP document for prospective clients to use.

You could hand it to them during an initial meeting or post in on your website or social media. Explain that you know that most people are looking at more than one advisor, and to help make the search easier for them, you’ve created a document with questions they should be asking. Of course, the questions allow you to spotlight your firm’s competitive advantages.4

Maybe Merge

Finally, the right evolution for your firm might be a merger with or acquisition of another firm. By combining resources, you may be able to strengthen your competitive position and achieve more together. Some observers see the future of the RIA industry as one of consolidation, with the emergence of strong national brands backed by powerful marketing.

If that happens, smaller independent firms may be at a disadvantage, unless they offer clients valuable advantages and clear differentiation.5 Just like the natural world, businesses must continue to evolve, and your RIA firm is no exception. Consider these ideas now or in the future, but your constant efforts to change to meet our clients’ needs will give you a competitive advantage.

Footnotes 1 “Why RIAs Are the Future of Financial Advising,” Investment News, July 31, 2017.

2 Benjamin, Jeff, “RIAs Weigh Pros and Cons Of Offering Trust Services,” Investment News, August 30, 2017 3 Paikert, Charles, “Why RIAs should — and shouldn’t — discount their fees,” financialplanning.com, December 17, 2017.

4 Waymore, Jack, “How To Choose The Best Financial Advisor For You,” moneyunder30.com, January 5, 2017.

5 Investment News, ibid.

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