Driving Long-Term Growth for a Multiadvisor Firm

Keywords: managing risk, regulatory focus, fiduciary responsibility, documentation

Looking for a new way to think about driving long-term growth for a multiadvisor firm? Ensuring that your firm uses consistent, centralized financial management practices is an effective—but often neglected—strategy. All advisors affiliated with your firm should adopt a standardized system and apply it across every transaction and account. When all revenue and expenses flow through your organization in their entirety, your profit and loss statement (P&L) will provide a clear, holistic picture of your firm’s performance.

Professionalizing your P&L drives value by:

Shifting your focus from top- to bottom-line performance. An increase in gross revenue doesn’t necessarily correlate with higher profitability. To understand profitability, you need a standard measure for how growth increases or erodes your bottom line. Use the information to align the interests of each advisor in your firm around profitability. The result will be a system where advisors do well only when the firm does well. Imagine the potential if everyone were focused on the firm’s success instead of individual performance.

Clarifying the drivers of your success. Once you have a complete view of your firm’s finances, you can identify and track key performance metrics. Tracking your overhead expense ratio, for example, can tell you whether your business is running more or less efficiently year-over-year. Profit per client illuminates how you scale service delivery in relation to your average client.

Promoting an entrepreneurial mindset. Like many advisors, you’re likely playing two roles: advisor and business owner. To build a strong multiadvisor firm—and cement your legacy—you need to separate those identities. Your focus on entrepreneurship could help younger advisors in your firm develop the strategic, venturesome perspective necessary to succeed at the partner level. As a result, you might discover which advisor could become an appropriate successor.

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These four steps are key to driving long-term growth for a multiadvisor firm:

1) As mentioned earlier, ensure that all revenue and expenses flow through the firm’s central accounting system. Moving your firm from silos to a centralized structure is the only way to get a complete picture of your financial position.

2) Align your P&L with the InvestmentNews biennial Pricing & Profitability Study, which leverages a standardized accounting method used by many advisors. Matching your chart of accounts to the report’s overhead categories provides a high-level framework that can:

  • Streamline the benchmarking of your financial data, which helps you compare your performance with that of your peers

  • Capture revenue and expenses more accurately

  • Separate direct expense, which is the compensation paid to owner and nonowner financial advisors for the delivery of financial advice (Essentially, direct expense functions as the cost of goods sold in an advisory practice because the input to create your product (financial advice) is your advisors’ time.)

3) Set a defined compensation structure for owner and nonowner financial advisors. By paying fixed salaries and/or variable compensation for advising clients—exclusive of profit distributions to owners—you can differentiate the cost of providing client advice from the ROI of owning the business. While all advisors would receive salary and variable compensation, owners would receive profit distributions as well.

4) Assign someone to monitor the firm’s financial performance. Hiring a CFO isn’t necessary, but do create a position responsible for setting financial goals based on P&L metrics and tracking them over time. Seeing changes in your business year-over-year helps you identify trends.

Succession Planning for an Advisory Firm

As you focus on driving growth for a multiadvisor firm, creating an equity structure for ownership might also be on your mind. Although it’s not ideal for all firms, an equity structure binds owners to the collective success of the firm. It also facilitates succession planning for an advisory firm by giving affiliated advisors the ability to continually purchase and sell equity shares. The goal is to create a long-term path to ownership for those whose work drives the firm’s growth and success.

A professionalized P&L is necessary for an equity structure to work. That’s because the value of equity is more than the value of the shares at the point of sale. It’s also the receipt of profit distributions based on proportionate ownership. That is, if you own 10 percent of the business, you’d be entitled to 10 percent of the profit of that business.

Profit distributions play a key role in equity structures because they create value in holding ownership. In addition, profit distributions can be leveraged by next-gen advisors to finance their equity acquisitions. Generally, profit needs to be approximately 20–25 percent of net revenue so equity holds meaningful value. Also, the compensation and profit distributions must be formalized and consistent.

The Bottom Line

To make all the puzzle pieces fit, professionalizing your P&L is an essential first step. This will allow you to analyze critical levers that affect your firm’s profitability, measure your critical financial metrics, and compare them with peer benchmarks. Ultimately, you could realize greater potential for success—and lay a strong foundation for succession.

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This material is for educational purposes only and is not intended to provide specific advice.

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