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November 01, 2006 at 02:00 AM
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.
