The Enduring Advisory Firm. Mark C. Tibergien

while those who operate under the supervision of their broker/dealer’s corporate RIA are known as Dually Registered).

      This background is important for understanding the transformation of the retail financial advice business and the catalyst for growth. Not only is there a big shift from brokerage to advisory, from transactional to fee revenue, or suitability to fiduciary, but from single books of businesses managed by solo practitioners to larger, professionally managed practices, many operating in multiple locations.

      Perhaps the biggest leap in the evolution of independent advisory businesses is the shift from small to medium-sized firms. Consider this: The U.S. Small Business Administration (SBA) regards Financial Investment firms (NAIS Code 523) such as securities brokerage, portfolio management, investment advice, or trust & fiduciary firms as small businesses when their annual revenue is below $38.5 million. An advisory firm with $1 billion of assets charging an average of 80 bps would be generating under $10 million of annual revenue, so to exceed the small business threshold, an advisory firm would need to be managing somewhere between $3 and $4 billion of assets. While there are few who fit into that mid-sized category of advisory firm today, it is clear it won’t be long before there is a meaningful cluster of such firms with more and more merging, acquiring, or growing organically to a new level of critical mass.

Just a decade ago, for example, it was a big deal for independent advisory firms to achieve $1 billion of assets under management (AUM). According to Evolution Revolution, produced by the Investment Advisor’s Association in March 2015, more than half of all SEC-registered advisors have AUM between $100 million and $1 billion. Today, there are more than 3,000 RIA firms that manage more than $1 billion of assets (Figure P.1). Even more significant is that according to the 2016 Investment News Study on Compensation & Staffing sponsored by Pershing Advisor Solutions, there are now more employees within advisory firms than there are owners. Few things mark the emergence of a real business than this dynamic.

Figure P.1 Number of SEC-registered investment advisors above and below $1 billion real assets under management in 2015

      Source: Investment Advisors' Association, Evolution Revolution 2015

      For many firms that have become bigger, it may feel like those of us over 35 who seem to add a pound for every year we are on the planet. It’s insidious, it’s persistent, and it’s maddening. Principals in larger advisory firms look around at their holiday parties and wonder how the guest list got so big! It is a management dilemma to experience challenges inherent in being a small practice but with the added complexity of a larger business.

      Growth of these firms has come organically for the most part with the addition of new staff and new advisors. In other cases, growth came through mergers or acquisitions. Oftentimes, the growth was not conscious but merely reactive to the increasing demands for their services as their brands became stronger and their value became more appreciated.

      Over the years, we’ve come to recognize that advisory firms hit a series a walls when they add more staff, almost in accordance with the Fibonacci sequence (a pattern of numbers where each number is the sum of the two preceding numbers). They hit a wall at 5 people, 8, 13, 21, and so forth. By hitting a wall, I mean that quality control, staff supervision and management, and the client experience each get strained.

      In this scenario, each advisor seems to have their own approach to working with clients, developing recommendations and in some cases, even in how they produce reports. But far worse than applying a different approach to clients is when teams of individuals form cliques to pursue and serve clients a specific way for a specific need that is different from the firm’s stated strategy. Often there is no consistent method of training, of quality control, or of staff development. The unevenness ultimately hurts the firm brand because clients are having distinctly different experiences depending on with whom they work. Even certain employees feel disadvantaged if they are on a team that is less productive or effective than another.

      The good news is that the strain is caused by business growth and therefore the problem is eminently fixable. The bad news is that partners and employees often grow attached to their way of doing business so changing their behavior requires mutual sacrifice for the good of the enterprise.

      When advisory firms evolve from small to medium size, relationships get strained and profitability suffers. But like adolescence when your clothes don’t fit and mood swings become more frequent, one must conquer the awkwardness that this brings. When you hit the wall, ask the right questions: Is my strategy still relevant? Am I structured right to achieve my strategic goals? Do I have the right people doing the right things? Am I clear on what success looks like? Are we all in agreement about the goal and how we get there?

      With this book, we have attempted to take a fresh look at the business of financial advice. Clearly, much has happened since the pioneers in financial services climbed the mountains and swam the streams to find a new and effective way to help individuals achieve their financial goals. The early leaders in this movement had less of a desire to work with partners and employees than the people coming into this business today. But that leaves the next generation of leaders at a loss as to what successful business models look like.

      In our opinion, there are five key characteristics that the best-performing advisory firms share:

      1. Clear Positioning – they know who their optimal client is and create a client experience in alignment with this insight.

      2. Structural Alignment – they design work flow, leverage technology, and build processes that allow them to serve their clients effectively while running their businesses efficiently.

      3. People Planning – they strive to match the right people to the right jobs and create an environment where motivated people can flourish.

      4. Actively Manage to Profitability – instead of viewing financial performance of their business as a consequence of their actions, they use the levers of financial management consciously to produce the right outcome.

      5. Systematic Client Feedback – they incorporate a process that allows them to elicit from their clients insight into what’s on their minds – not just whether they are satisfied but whether they are fulfilled and at peace with the direction they are heading.

      As you read this book, we hope you will be able to recognize the different ways we suggest for incorporating these five elements into your thinking so that you can build a business to last.

      Mark Tibergien and Kim Dellarocca

      Part I

      The State of the Advisory Business

      Chapter 1

      Key Business Trends

      Assumptions

      Back in the day when individual investors were buying stocks and bonds instead of packaged solutions like mutual funds and ETFs, there was an investment analyst Mark knew in Seattle who was locally famous for his contrarian bets. His inclination was to look at companies currently out of favor with the investing public; assess their management, their culture, and their market; then take a long view of their business to determine whether it was an opportunity worth owning.

      The stockbrokers who worked for this particular firm adored the man, whom we will call “Conan the Contrarian,” because his reverse approach always made them look good with their clients. Today, whenever we hear some industry pundit spout conventional wisdom, we try to channel Conan. We find it helpful to ask, “What would Conan do?” whenever we see our profession fleeing from or toward an idea.

      Among the beliefs most often repeated are:

      ● Advisors are reducing their fees.

      ● Young employees lack a work ethic.

      ● Robos/digital platforms will make it difficult for advisors to compete.

      ● The industry will benefit from a