Rethinking Practice Management Fundamentals for Advisors

Kenton Shirk
Kenton Shirk

08.20.19 in Marketing & Practice Management

Estimated Reading Time: 9 Minutes (1612 words)

Marketing and Project Management

As advisory firms have become larger and more successful, they’ve also become structurally complex—and their objectives, needs, and challenges have evolved, too. To continue to thrive, firms need to be able to respond to shifts in the landscape. But what’s the best way to gain competitive advantage? How have growth strategies for financial advisors changed? Let’s consider four practice management fundamentals for advisors today:  

  1. Building an enduring legacy firm

  2. Driving growth via advisor recruiting

  3. Driving growth via repeat acquisitions

  4. Developing organizational scale at a firm level

1) Building an Enduring Legacy Firm

The desire to leave behind a legacy is time honored—and deeply personal. Increasingly, today’s founding advisors want to build a firm that will endure after they exit and be there for clients over the long term. If this is—or might become—your objective, now’s the time to focus on the following practice management fundamentals:

Multigenerational teams. To establish a vibrant firm that will last for generations, focus on building a multigenerational team. By grooming younger advisors, lead advisors can develop a dynamic talent base that will produce future leaders—who can take over as partners when the time is right. And younger advisors may excel in building relationships with younger clients on track to their peak earnings, a group that could become important contributors to your future revenue stream.

Multigenerational clients. If you haven’t done so already, take steps now to get to know your clients’ beneficiaries and establish relationships that will turn them into loyal clients when they inherit the assets you’ve been nurturing. HENRYs (high earners not rich yet) could also become an ideal client base—one that might be ignored by other providers. As elite professionals, HENRYs are likely to become wealthy and may already have discretionary income to invest.

Leadership development. Firms with a long-term entrepreneurial vision would benefit from deemphasizing their dependence on founders and spreading leadership responsibilities among top advisors. This will help ensure a smooth transition of ownership when the time comes. Founders should mentor potential successors on running a business as well as building client relationships and managing investments.  

As part of this process, there’s a degree of control founders will need to relinquish. If they fail to share true authority and decision-making, second-generation owners might struggle to assume these responsibilities when the founder leaves, particularly if the exit is abrupt.

When taking the helm, new owners must be ready to steer the firm’s strategic direction and assume a host of leadership responsibilities, such as setting marketing strategy, managing profitability, and creating organizational scale, all while managing staff and mobilizing operational teams. Future owners will set the bar for individual performance and shape the firm’s culture and values.

Ownership structure. In recent years, some firms have been shifting away from the classic producer model in which compensation is based solely on an advisor’s client base. A fee-based model gives advisors greater latitude regarding business and compensation structures.

These firms are adopting an equity-centric model that may include variable compensation for managing client relationships, salaries for leadership roles, and profit distribution based on equity ownership. With this model, value is no longer based on an individual practice but instead on the valuation of equity shares. It’s not the right choice for every firm, but it provides the advantage of longevity since equity shares may exist in perpetuity.

2) Driving Growth via Advisor Recruiting

Among today’s successful growth strategies for financial advisors, recruiting has become popular. This strategy encompasses taking on established advisors with a client base and hiring associate advisors who are beginning their career. Recruiting and grooming advisors is a complex subject, but one fundamental is key: before you start recruiting, be sure to ground your multiadvisor strategy on a clearly defined business model.

The multiadvisor model. Considerable time and energy must be invested in defining the structure and strategy of the new business before adding new people. To create a well-thought-out plan, take the time to answer these questions:

  • How does the business model align with your long-term vision?

  • Is the business model sustainable over the long term?

  • Is your recruiting strategy repeatable?

  • Does the firm have adequate infrastructure to add new advisors?

  • What competencies do you need—business development, client management, or leadership?

  • What will attract advisors to your firm?

  • Why will advisors want to stay at your firm?

  • If an advisor is bringing an existing client base, will he or she be a partner?

  • Will new advisors have an opportunity to acquire ownership? If so, what are the time frame and criteria?

  • Will advisors operate as silos or within a team?

  • Will clients have a single, dedicated advisor or a team of advisors?

Economic considerations. To plan for the financial implications of your new business model, start by mapping the possible outcomes of adding new advisors, factoring in their contribution to the firm (e.g., new revenue), their ownership stake (if any), and their compensation. Then project the impact on the firm’s income statement and valuation over a three- to five-year time frame.

You’ll need to strike a balance between compensation levels attractive enough to recruit and retain advisors and the need to generate a healthy return on investment for the firm. Explore not only best-case scenarios but also potential problems, such as what might happen if one advisor grows rapidly while another stagnates.

Ask yourself how value and ownership will be calculated for new advisors immediately or in future buy-ins. These factors could vary based on the origin of the advisor’s clients, such as existing clients brought to the firm, clients transferred from a founding advisor to the new advisor, and new clients acquired while at the firm.

Compensation and ownership structures should be thoroughly vetted before adding new advisors. Once in place, they’re difficult to unwind—nobody is happy when their compensation changes dramatically or is perceived to be moving backwards.

3) Driving Growth via Repeat Acquisitions

In 2018, Commonwealth facilitated 76 business transitions within our network (up from 40 three years earlier), and our advisors have also been acquiring external businesses. Industrywide, a growing number of advisors are pursuing serial acquisitions.

Given the aging of the advisor population, I expect this trend to continue. Opportunities for buyers will abound in coming years, especially for firms with younger advisor talent that have the required skills, infrastructure, and financial strength to implement transitions.

When successful, acquisitions result in rapid growth for the buyer. But this can be disruptive to a business’s economics, client experience, and culture. Buyers should proceed with caution. For those firms that want to pursue serial acquisitions, there are two fundamentals for success:

  • Develop a compelling value proposition for prospective sellers

  • Invest in infrastructure to assume rapid growth

Attracting sellers. Developing a compelling value proposition is key. Start by identifying your target market and exactly what an ideal seller wants. Demonstrate your acquisition acumen and, if you can, play up your track record executing acquisitions with a high retention rate. Highlight your firm’s robust infrastructure and financial strength to reinforce your ability to implement transitions.

Shrewd buyers remember that sellers care deeply about their clients’ well-being. In your value proposition, emphasize how you’ll continue serving clients with quality advice and the utmost in care. Clarify your value by explaining your client engagement model and, as appropriate, your unique investment or planning philosophies.

Infrastructure investments. Repeat acquirers should prioritize infrastructure investments. Acquisitions place stress on a business, but a strong, well-scaled infrastructure helps seamlessly integrate an influx of new clients. Staffing decisions are critical. For example, hiring additional service advisors (who aren’t expected to generate business) increases a firm’s capacity to handle clients. Service advisors can take on smaller clients, freeing up lead advisors to focus on the most important new clients.

Codifying core processes is equally critical to efficient integration of new clients. Consistent, streamlined processes help reduce potential delays from exception processing and simplify employee training for new staff joining the buyer’s firm. A thorough review of core processes will prepare your entire firm for a rapid growth spurt.

4) Developing Organizational Scale at a Firm Level

A scalable business model is a top priority as firms grow and assume more advisors and staff. Without a thoughtful approach to economies of scale, large multiadvisor firms may experience disorganization and inefficiencies that will lower productivity and increase costs. A key fundamental for building scale at a firm level, as opposed to an individual practice level, is to build organizational focus.

Alignment of strategy. The more that individual advisors operate with a unique approach, the harder it becomes to scale a business. How can firms balance advisor autonomy and their need for economies of scale? To build organizational focus, a firm’s leaders must align their vision and strategies. Offsite partner retreats, held at least annually, will help ensure that everyone is focused on the same strategic priorities. It’s equally important that staff at all levels understand and focus on the same goals.

Firm uniformity. Firms with the greatest scale advantages have consistent investment and financial planning philosophies. These unified philosophies—rather than individual advisors—define the firm’s value proposition. An ideal client profile is shared by all advisors, and services are delivered consistently across client segments. Core processes are uniformly executed. As a result, clients enjoy a consistent experience regardless of which advisor they engage. When both strategy and execution are acutely focused, firms achieve the greatest economies of scale.

The Path Forward

As large and growing firms define new objectives and catapult themselves into new territory, they’re reshaping practice management fundamentals for advisors. I’m excited about the possibilities for the future and the role Commonwealth will continue to play in helping our advisors identify the best path forward for their practices.

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

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