Nestled along the mountainous border between Bolivia and Peru is Lake Titicaca. On its western shore are unique floating platforms made of buoyant totora reeds and called the Islas Flotantes, the Floating Islands. Centuries ago the indigenous Uros tribe conceived of the islands as a way to protect themselves from rivals. The Uros harvested the reeds in the shallows of the lake, bundled them together tightly, and built floating island platforms. Isolated on the lake, they were safe from marauding war parties.
Today, financial advisors have created their own Islas Flotantes--in the form of practice models that isolate and protect them as they strive to service their clients. Advisors bundle together core competencies, back office capabilities, broker-dealer or custodian support, and whatever staff they have recruited. Tied together by wit and hard work, these advisor islands float around a sea of complex regulation, buffeted by market forces, and are under constant assault by competitors for their clients' attention.
There are at least 25 different operating models for advisory practices and three basic platforms: solo, silo, and ensemble. Each of these platforms is further distinguished by one of nine strategic drivers such as niche, technological advantage, or "famous person." To understand the limitations and opportunities that each model and strategic choice offers is to discover the key that will unlock one's struggle with time management, income growth, client service, and business development.
A solo practice has only one person serving in an advisory capacity. That person may have staff performing other functions such as paraplanning or administration, but there is only one professional advisor directly involved in giving clients advice.
The ensemble model is distinguished by having multiple professionals working together in an integrated manner, striving toward the same goals, working with similar clients, applying the same protocols to client acceptance and client service, and creating a career path for their staff. There may be multiple advisors who lead relationship management and business development, but they are consistent across the teams in their approach to the business.
A silo practice is a cross between an ensemble and a solo. It typically has multiple professional advisors, but they each pursue their own businesses, maintain their own identities, and manage their own books of business. Individuals who choose the silo model tend to prefer the independence of operating separately but enjoy the collegiality of being in the same office and the economies of sharing overhead costs.
The vast majority of independent advisory practices are solo. This platform allows an advisor to be accountable only to herself (and of course, her clients). These advisors can work as hard or as little as they choose and focus on the clients they are most comfortable with. Perhaps the greatest appeal of this model is that the soloists don't have to manage anyone except a small support staff.
These days, there are a growing number of silo practices. This model helps to reduce redundancies in back office staff and often gives some buying power when negotiating with vendors. Hooking up with other advisors can be a challenge since people want to make sure they affiliate with others who share their values, but there usually are enough choices within a community to make it happen. The search should begin within one's own broker/dealer or with those who use the same custodian. This is an expedient model for many advisors since it focuses on the cost savings side of the business.
We've also observed that there is a growing number of larger ensemble practices. Many of these practices have gone through the silo phase and found they could achieve even greater economies while increasing revenues and improving their client service by aligning their business strategies and organizations more closely. Ensemble practices tend to be growth models because they provide capacity, expertise, continuity, and market presence in a way that neither silos nor solos can. They are also far from perfect solutions for many advisors, however, because they require implementing a career path for staff, a greater attention to practice management, and, can present a distraction from their first love--working with clients.
Which platform you chose will depend greatly on your long-term vision for the business. The visioning exercise is the first step in creating a business strategy.
When we examine the strategic positioning of financial advisory practices, we see at least nine generic examples that advisors deploy. Typically, they lead with one positioning strategy and invest in other supporting strategies to create a vision for their business. The nine strategic drivers--or differentiators--that we recognize from our research are:
Niche. This is a practice that identifies a specific clientele and builds its business around that market. The market might be business owners, gays and lesbians, evangelical Christians, or doctors. The rationale for a niche is that there are common characteristics and needs of the named market around which you can build a service offering. Once you've established your expertise in serving certain kinds of clients, they will usually do your marketing for you, singing your praises within their small community.
Technical Superiority. This is when advisors and advisory practices lead with a recognized technical expertise and strategically position themselves to attract clients seeking such expertise. Examples would be superior investment performance or expertise in stock option planning.
Market Dominance. Many advisors recognize that the markets in which they operate are highly fragmented, presenting an opportunity to be seen as the leading advisor. This may be an issue of size, but more often it is a matter of being perceived as one of the top two firms in a specific market. Firms who opt for this strategy are often interested in growth through acquisition.
Share of Wallet. Also known as "method of distribution," firms that elect this as their leading strategy are leveraging existing client relationships by offering more services and products to existing clients. Often this is the strategy of CPAs and banks that enter into the financial advisory business.
Method of Sale. It is difficult to distinguish one firm from the rest of the advisory community because many advisors have been taught the same marketing message about pursuing centers of influence, positioning yourself as a wealth manager, preaching open architecture, and so on. When advisors use this as their strategic driver, they are creating a systematic way in which to meet prospects, such as radio programs, special subject seminars, or even strategic alliances.
Human/Natural Resources. Some advisors have such a big reputation in their markets that we often call this a "famous person" strategy wherein they attract clients just because they are prominent. This is a common strategy among advisors who are investing in their reputation, but it is limiting in that it makes it hard to share or transfer relationships to others in the firm. Another resource-driven strategy is location. Some advisors are able to leverage their physical proximity to clients as a means of attracting a certain type of business.
Practice Efficiency. There are a surprising number of advisors who have crafted a business model where they can systematically serve large volumes of clients and not be overwhelmed. These advisors have invested in a process and approach to serving clients that is relatively low touch and, to a certain degree, formulaic. They do not tend to customize their service offering. This type of strategy works well when dealing with clients who have simpler financial needs such as 401(k) or IRA rollovers.
Short-Term Profit. While it's hard to imagine that a strategy with this nomenclature can be perceived as a long-term strategy, there are many advisors who stay focused on making money every month and worry less about the long-term implications for their relationships. They may not be investing in staff or infrastructure, but rather on keeping sales going. Firms that opt for this model tend to be product driven rather than client centric. We often see this strategy for new advisors who are motivated by survival and focusing on covering their monthly expenses, so they often take any client and provide any service just to gain revenues.
Technological Advantage. It is extraordinarily difficult for advisors to sustain a tech advantage as a differentiator because the cost to keep this competitive edge is so high while the risk of having an idea become mainstream is so great. That said, some practices will create unique processes that may not be applied technology, but concepts like Ross Levin's "The Wealth Management Index" as a meaningful differentiator. Think of this strategy as "innovation" rather than technological advantage and this choice may be more compelling. The challenge for this type of advisor to is to keep investing in this proposition so that it maintains its edge.
Some of these positioning strategies are incompatible with some practice platforms. For example, it is virtually impossible to become the dominant advisor in a market (unless it's a small market) and remain a solo practice. It is also impossible to build an ensemble practice around a famous-person strategy. Which model and strategy is chosen for an advisory practice depends on many factors. When you begin to examine the uniqueness of each strategy, ask yourself the following questions to help frame the decision as to what business you are in and what your operating model should look like:
How do you want to be perceived?
How big do you want to get?
What type of work appeals to you?
How much money do you want to make?
What services do you want to offer?
Who is your optimal client and what service experience do they desire from their advisor? How will you differentiate your firm from your competition?
The advantage of constructing your model with your differentiator in mind is that structure logically follows. As the adage goes, form follows function, though clearly many chose to reorder that thinking. The Uros tribe recognized this concept centuries ago when they defined their need then created their defense. The combination of platform and strategy allows you to float where you want, away from your competitors and toward your markets, in a way that should be personally fulfilling and rewarding.
Mark Tibergien is a nationally recognized specialist in practice management for financial services firms, and partner-in-charge of the Securities & Insurance Niche for Moss Adams LLP, the 10th largest CPA firm in the U.S. You can reach him at firstname.lastname@example.org.