From the May 2007 issue of Investment Advisor • Subscribe!

Big Is Beautiful

Small is nice, but size positions advisors to confront the bigger industry challenges

I can't help myself. After reading a series of commentaries in the trade press about the simple perfection of tiny practices, I debated whether to take the bait. On one shoulder, Angel Mark was saying, "Leave it alone. They're just pandering to the masses of solo practitioners who are feeling abused, maligned, and disrespected." On the other shoulder, there was Devil Mark. "They're going to die a cold, lonely death if you don't get them to change," that voice said. "Stop them before they shrink again."

Alas, Devil Mark won out, though he was neutered by the Voice of Reason. It whispered, "This is not about right or wrong, despair or hope. This is about the Business of Financial Advice."

What tugged at me as I listened to the word volley from one shoulder to the other was the struggle many advisors have over whether this is a profession first, or a business. This should not even be a dilemma. Of course it's a profession first, one in which the client's interests should always prevail. After all, this is not another Scopes Trial over whether to teach practitioners evolution or "Divine Creation." We seem to be having a screaming agreement, but we are blotting out the relevant discourse about what problems advisors are trying to solve. The debate over quality versus quantity is a distraction and misses the point.

The financial planning profession emerged from the ashes of a transactional world, moving advice from product-driven to client-driven. The foundation is set and unchanging. But the evolution of the financial advisory business is causing many who remember its birth to experience discomfort with its growth. We are seeing the Modernists against the Traditionalists reincarnated. Is it really legitimate to argue that with leverage one loses his soul? That bigness compromises ethics, values, and commitment to the client? That size removes you from your calling to help others address their financial concerns? That those who chose to build an enterprise beyond themselves are greedy money-grubbers who are despoiling the profession's image?

From Underdog to Mighty Dog

There is an odd psychology in Western civilization. We admire the underdog, that long-suffering yet rugged individual who against all odds scrapes his way to success. Yet when that underdog reaches the top of the success ladder, we take out our guns and start shooting him in the bum. Think Starbucks and Google as examples. When did they go from awesome to awful?

Now that we have financial planning practices with staff counts in the dozens and revenues in the millions--such as Balasa Dinverno & Folz, Regent Atlantic, Sand Hill Financial Advisors, Sullivan Bruyette Blaney & Speros--can we honestly say that small is better? Or have these once-struggling entrepreneurs shown us the path to how a proper financial advisory firm should be designed and built?

What firms like these long ago recognized is that the financial advisory business has many challenges that will not dissipate just because we will them to. Most of these challenges arise as the industry ages: margin compression, practice continuity, demanding clients, compliance and regulatory pressures, competitive forces, an aging advisory population.

One choice is to go blithely along, ignoring the chaos. Another is to respond strategically to each challenge and create a blueprint for what you regard as the optimal practice model.

This is not an argument about growth for growth's sake. That's trite and tiring. This is an argument for growth as a way for professional advisors to construct a business that fulfills their personal definition of success, maintains excellence in client service, minimizes business risk, creates opportunity for staff development and yes, even enables them to achieve a greater financial reward.

Solo or ensemble is a personal choice. But from a business perspective, it might be helpful to evaluate your choice through this filter: Clients; Personal Income and Profits; and Risk Management.

Clients

One argument made by pundits about the value of staying small is that doing so allows you to stay close to your clients and not get distracted by other things like managing people or growing revenue. Great point. So ask yourself if you are providing the best client experience you can, or are you forced to deal with other issues that keep you away from them? How are you tapping into other expertise to ensure that your clients are getting the best advice? What is your process for determining their needs and meeting them? If surveyed, would your clients say you are reactive or proactive? How many clients can you adequately serve based on your size, and are you pushing up against the limit?

Personal Income and Profits

Ironic for a profession dedicated to the financial success of its clients, but among some in the trade press, the concept of profits has become a negative term. It's one of those '60s flashbacks I was hoping I'd never experience. What's missing from this is the recognition that profits are as important to an enterprise as oxygen is important to a human. Without it, the business can't fund its growth or even maintain an adequate investment in its infrastructure to support its current size.

Plus, most people don't look at financial advice as a hobby, but as a relevant and fulfilling profession from which they can extract a reasonable reward. How much one should make is a personal decision, but at least now there are benchmarks to help evaluate fair compensation for one's labor, and a reasonable return on investment for taking the risk of running a business. Back in the days when the profession was emerging from a producer culture to an advisory culture, the only meaningful metric was gross. Now, savvy practice owners are recognizing that revenue is the starting point, not the ending point.

Risk Management

More practices are beginning to think of safety as a cornerstone of their practices. In some cases, it's a defensive reaction to pressures from regulators, broker-dealers and custodians. In other cases, it's an offensive move to ensure that their clients are being served ethically and responsibly.

For solo practitioners, the more one is caught up in the whirlwind of everyday life, the less attention can be given to quality control. Compliance violations are often the result of mistakes, not ethical lapses. Yet the cost of hiring somebody to pay more careful attention to these issues is prohibitive for the smallest practices. What will be the result? Fewer clients. Poorer client experience. Failure to maintain a standard of care or uphold your fiduciary duty. If none of these choices is palatable, then one will hire help, adding to cost, forcing the practice to increase revenue, thereby getting larger. Once you start adding the calories, it's really hard to shake the weight.

Size Is Relative

The funny thing about this rush to Save the Solo is the perception that the alternative is a Big Business! Let's be realistic: even the big firms are small businesses. An advisory firm under $100 million in revenue would still qualify for an SBA loan, and there are very, very few of those. The largest practices with a few exceptions may be in the $10 million to $20 million revenue range, but those are a pimple on a gnat's butt compared to the major financial services firms like Merrill Lynch, Wachovia, and Sanford Bernstein. So big is a relative term. Bigger, but not humongous, may be what firms aspire to when put through this filter.

We all know that the status quo is a happy place for many. With change comes stress; with growth comes chaos. Money doesn't ensure happiness. In fact, our happiness is illusive at best. For many, the sheer pursuit of happiness is enough. But true entrepreneurs can balance a sense of fulfillment in their personal lives with the joy of having created a business to last.

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