Financial Planning > Tax Planning

Name Game

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Working on the 2006 Moss Adams Financial Performance Study of Advisory Firms has been an enlightening experience. Not only does the Moss Adams team offer brilliant insight into what makes advisory practices successful, greater participation by advisors this year (over 1,000 firms, thanks to many readers of Investment Advisor, who responded to the online survey request) offered a deeper look into how practices grow. For the first time ever, Moss Adams is able to quantify the five evolutionary stages that advisory firms pass through, from early solos to giant market dominators–and identify strategies advisors need to succeed at each stage, and to make the jump to the next level. Yet, I kept coming back to a relatively minor point that nevertheless has major implications for the financial planning profession.

In the Study questionnaire, Moss Adams asked participating advisors how they positioned their firms: as financial planning, wealth management, investment advisory, or investment management. Being a hard data sort of guy, my fluff antennae immediately went up. Without clear definitions of each type of firm, advisors are free to call themselves anything they want. We all know that the advisory world is plagued by blurred distinctions and blatant misnomers.

“Ahhh,” the patient Moss Adams folks replied, “Why don’t you take a look at what we found?” So they sent me Figures 1 through 3. Regardless of the gap between self-descriptions and reality, the data clearly shows significant correlations between what advisors say they do and the size of their clients’ portfolios. The bottom line: If you want to attract the clients that most advisors target–those with assets from $1 million to $5 million–you might want to rethink that “financial planner” moniker on your business cards.

Understanding the following charts requires a little background. Moss Adams found that most advisory firms grow along a clear, predictable path. They start out as solo practitioners and after a few years, make a conscious decision about adding another advisor. After eight years or so, if “mature solos” haven’t added a partner, they probably won’t. A solo who does add another advisor becomes an “early ensemble” until the firm reaches $2 million in revenue. Beyond $2 million in revenue, firms become “mature ensembles,” and when they break the $5 million mark, they become what Moss Adams calls “market dominators.”

Each of these stages offers its own set of challenges for owner/advisors. But a quick look at Figure 1 shows a straight line between firm growth and the size of the clients they attract. Notice that the average clients of a market dominator have 5.5 times the assets in their portfolios as do clients of mature solos and that only mature ensembles and market dominators have average clients in the $1 million to $5 million range.

Okay, so bigger firms have bigger clients. But now look at Figure 2, which shows how these firms describe themselves. Note that no more than 25% of any category of advisory firm positions itself as a financial planning firm. That alone was shocking to me. But, as firms get bigger (and serve larger clients) the percentage of self-described financial planners falls until we hit market dominators–among whom there is not one financial planning firm. Instead, as firms get larger, (and attract larger clients) they increasingly call themselves wealth managers or investment managers.

If you’re still not convinced there’s a poignant message here for “financial planners,” take a look at Figure 3. In no cut of any category do even half the firms call themselves anything other than wealth or investment managers. More importantly, in every stage, the top 25% firms have a far higher portion positioning themselves as wealth managers or investment managers, increasing in a straight line as firms grow from 71% of early solos to 100% of market dominators.


It’s What You Say

Remember, this isn’t about what firms actually do (although the Study includes plenty of data on that, too). This is pure marketing: what do advisors tell people that they do? Regardless of what you really do, what you tell people that you do makes a huge impact on the kind of clients you’ll attract. If you want to attract wealthier clients, then positioning your firm as investment managers, or even better as wealth managers, seems to be the way to go. Moreover, bigger clients translate directly into a bigger bottom line: You don’t see many firms positioned as financial planners near the top of any category, no matter how small.

What does this mean for financial planning? For a couple of years now, I’ve been hearing that many firms actively or passively discourage their young professionals from getting the CFP designation. Now I know why: very few independent advisory firms position themselves as financial planners. Confirmed by the Moss Adams data, this suggests that having lived down the stigmas of tax shelter and then limited partnership salespeople, financial planners may have finally acquired a truly fatal reputation: advisors to the middle market.

In America today, you can make a fortune marketing to the middle market, as long as you don’t become defined by it. Folks who call themselves financial planners will increasingly face the choice between changing their positioning or accepting the limited economics of advising the middle market. Traditionally the perview of insurance agents and proprietary product houses such as Ameriprise Financial Advisors (formerly American Express Financial Advisors), clients with only a few hundred thousand dollars in their portfolios can’t generate enough management fees to cover the cost of comprehensive advice. Consequently, their advisors have to underwrite their advice by selling a broad array of high-commission products and constantly prospecting for new clients. The alternative is to charge only management fees, and offer limited services to a large number of clients. Yet even with maximum staff leverage, a hard working advisor can handle less than 200 clients, limiting themselves to lower than average income; not a very good return on tremendous effort.

Advisors who want to benefit from the more favorable economics of working with fewer–but higher net worth–clients will increasingly need to position themselves as investment managers or wealth managers. For whatever reason, financial consumers seem to have concluded that these loftier sounding monikers are closer to what they need. From a marketing perspective, it’s hard to disagree. Be honest now, without having an understanding of what’s really involved, which would sound more like a service you’d want to have: financial planning or wealth management? In truth, financial planning sounds a little too much like something in home economics. Wealth management? Who doesn’t want to have wealth? Hmm, perhaps I’d better get someone who knows how to manage it. Financial planners would do better taking a page from the current trend of self-effacing marketing, something like: Financial advisors for dummies.

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