Last month, I gave a one-day practice-building workshop for ProEquities, Inc., concluding one of many business management conferences they offer their affiliated advisors each year. During the workshop, I asked the 60 or so advisors in attendance two questions: What are their current gross revenues, and to what level would they like those revenues to grow over the next five years? The answer to the first question was an average of $200,000. To the second, the answer was $930,000–36% per year growth.
Simple math would tell you that increase would be taking a firm with $20 million under management to about $100 million AUM. Yes, I know, $100 million is a pretty modest goal, compared to the firms with $1 billion-plus that Moss Adams is always talking about. But that’s just my point: It’s a five-fold increase (36% a year) that’s very achievable for many, if not most, small independent firms. Mike Mungenast, CEO of ProEquities Inc., ended my workshop by telling his advisors: “If we could get all 60 of you to grow your firms by just 20% a year over the next five years, we’d more than double the size of ProEquities.”
Traditionally, independent B/Ds have relied on recruiting to grow, attracting the largest advisory practices away from their competitors. As the wirehouses have discovered, however, recruiting is largely a zero-sum game: The other guys are working just as hard to recruit your big advisors, so over time it’s just about a break-even proposition. Except, of course, for the cost. Recruiters can spend years wooing a large advisor away from another B/D.
I think it’s about time that B/Ds and custodians realized that it’s far easier and cheaper, with way more upside potential, to focus their efforts on helping their existing advisors (particularly their smaller ones) build their practices. Not only would these successfully growing practices be attracting assets away from their competitors, but the growing success of their advisors wouldn’t hurt their recruiting efforts either.
How realistic is it to quintuple the AUM of an independent advisor in five years? The 2007 Moss Adams Compensation and Staffing Study, says that since 2001, revenues in the average advisory practice increased two-and-one-half times, from $632,000 to $1.6 million. Moreover, that’s growth with little or no outside help. Imagine how much a smaller firm could grow with effective guidance! Firms with relatively small revenues can post some pretty impressive growth rates on some pretty attainable actual dollar increases. From my own experience, a well-managed smaller practice can grow between 35% and 50% a year, especially in the early years. If they only achieved 25% growth, I’m sure both the advisor and his broker/dealer would ecstatic.
Admittedly, I’m biased. As a consultant to independent advisory practices I’ve seen firsthand what a dramatic impact some very basic business consulting can have on a firm. For what amounts to a very small investment–compared to recruiting or buying other practices–most advisory firms can multiply their revenues dramatically while improving their gross profits and profit margins. Over the next year or two, I predict more than a few B/Ds will come to this realization, and offer some meaningful practice building support not just to their largest advisors, but to all their practices that express an interest in growing their firms. The broker/dealers that offer the most successful programs will rise to the top of the independent heap, right along with their dramatically growing affiliated advisory firms.
A B/D Program for Success
Today, there’s no lack of information for advisors who want to grow their practices. Unfortunately, most of that help is targeted toward helping larger firms get even bigger, because (as bank robber Willie Sutton famously said), that’s where the money is. As we all know, however, the vast majority of advisory practices are relatively small, and that’s certainly true at broker/dealers as well. That means they can benefit to a far greater degree by helping their small firms grow even a little more than they would have, than by enabling their relatively few larger firms grow a lot. What’s more, in my experience, it’s far easier to substantially grow a smaller firm, both because increasing smaller dollar amounts equate to larger percentages, and because the help those firms need is usually much easier to implement. Here are some of the elements that an effective growth program for broker/dealers would include:
Element 1: Determine the structure to support your ideal advisory firm.
Just as advisors tell their clients, the clearer they are about what they want that practice to be, the greater the chance they will succeed. There are four basic types of independent advisory practices: solos, silos, ensembles, and market dominators. Each poses tradeoffs in compensation, control, workload, and practice value. The key is to pick the structure that suits your vision.