Small Is Beautiful, Part Deux

However, as with most data, the message isn’t as straightforward as you might think. For one thing, I believe the Moss Adams data is somewhat skewed toward larger firms. Of the 863 firms providing data to the Study, only 34% were solo firms. Based solely on my own experience, of the roughly 100,000 independent advisory firms in the U.S., there have to be substantially more than 34,000 solos. Another indicator of this skewing is that the average annual revenue of all firms in the Study is $1.4 million. Call me crazy, but in the advisory world I know, the “average” practice does not generate nearly a million-and-a-half bucks a year.

More importantly, I believe the Study data (and data from all similar studies) is skewed against smaller practices because solo practitioners tend to underreport their income. Company cars, home computers, cell phones, working vacations, rent in their own office buildings, and even second homes in some cases, are all business expenses that would probably be personal expenses in a larger business. Small practitioners are famous as well for pouring money into pension funds that would have to be taken as income anywhere else. Consider that the top 25% of mature solos average $845,000 in revenue but only show $435,000 in income: with an average of two staffers, do you really believe their overhead is $410,000 a year?

Solos’ Earning Potential

So the solos’ low income figures may be a little misleading from the start. Even so, the Moss Adams data holds some interesting revelations. Figure 2 shows the average income of solo practitioners broken down by firm size. While solo advisors who generated less than $250,000 in revenue took home on average $76,000, those who generated more than $1 million in revenues took home $780,000.

Granted, the latter category included only 12 advisors, or 3.4% of all solos. But consider that the average income for owners at the 37 participating Market Dominating firms (that’s 6% of ensemble firms, averaging over $7.6 million in revenues) was $843,000. Point is, the income cap for owners of even the largest advisory firms seems to be somewhere around $1 million. Some solo firms generate about that much income as well.

To me, this suggests that solo advisors have the same earning potential as those in ensembles: it’s just that fewer of them actually achieve it. So instead of telling advisors who prefer to remain solo that they’ll forever be relegated to the lower rungs of the advisory food chain, perhaps we should be helping ratchet up the practices of solo advisors who want to earn more, but don’t want the headaches of a larger firm. Here are a few modest suggestions to get those solos moving in the right direction:

- Leverage your largest asset. To maximize revenues and earnings if you’re going to remain solo, you need to maximize yourself. That means you need help. The top 25% of Mature Solos average two support staffers, while the other 75% have only one. For maximum leverage, consider adding one junior professional–not as a step toward building a larger ensemble, but to run the firm and handle the client work and contacts, which will free you up to generate new clients, and new revenues. The Study shows that top solo advisors spend 50% more time on business development, and 33% less time on operations.

- Position your firm for wealthier clients. Larger firms have larger clients. Mature Solos average $341,000 in AUM per client, while Mature Ensembles get $1.3 million, and Market Dominators just under $2 million. To attract higher-net-worth clients, be careful how you position your firm: “financial planning” or “retirement planning” smacks of the middle market. Wealthier clients aren’t concerned about “retirement” and they expect a plan as part of their comprehensive advice. Instead, they gravitate toward wealth managers or investment managers, no matter how large the firm. But you also have to back up this branding with services targeted to a wealthier clientele, such as trust services or alternative investments.

- Focus on a niche. I know it’s become a clich?(C), but I’m not talking about typical niches such as doctors, business executives, or even inheritors. Some successful small practices focus on a very specific group of clients, often in a single geographic location: executives at IBM headquarters or professors at Texas A&M. These markets are so small they can be dominated by one small firm, enabling even solo firms to attain the Moss Adams’ pinnacle of success–Market Dominator–along with the income, if not the revenues, of the industry’s most successful practices.