The Right Practice Model

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.