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.

Reality Check

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.

A solo practitioner can make up to $1 million a year, but more likely will be in the $100,000 to $400,000 range (according to the 2006 Moss Adams Financial Performance Study of Advisory Firms), and have complete control of every facet of her business. Silos, where owners of separate stand-alone practices share expenses such as office space, staffing, and technology, create the illusion of an ensemble, but without the leverage and growth potential that true ensembles provide. Owners in ensembles, with multiple professionals, typically will make between $300,000 and $1 million, with the median about $430,000 (again according to Moss Adams). The majority of advisory practices these days are ensembles of one size or another, with the largest called market dominators, which have annual revenues of $5 million or more and average managed assets of $1 billion.

As ensembles grow, so do owners’ incomes, along with management responsibilities, a less flexible corporate culture, and management by committee. I’ve found that advisory firms grow most successfully when their owner(s) have carefully considered what they really want from their lives and their practices before they start to build them. I have also found that the overwhelming majority of advisors want to build their small firms into ensemble practices with $1M in revenue and sit there.

Just think, Mr. Broker/Dealer executive, about what your numbers would look like if all your small firms grew just to a $1M in revenue, $100M in assets.

Element 2: Implement an accelerated growth plan to create that ideal firm.

Finally, and most important, advisors need to create a plan to grow their firms: whom to hire, and when to hire them.

There are two basic functions of an advisory practice: bringing in new clients, and servicing existing ones. To grow, advisors need to successfully do both. The biggest mistake most advisors make is that they tend to add people too late, after their need to do so has become acute. An effective growth plan will help create an effective hiring plan to provide a framework to tell you when is the right time to bring employees on board at each level. Getting that timing right is critical. Do it too soon, and the increased overhead can be staggering; too late, and the practice will stop growing, client service will diminish, and the overburdened owner will burn out.

The problem is that hiring professional employees requires considerable lead time. Recruiting and hiring the right professional can take up to nine months. That leaves only three months to teach them your system and bring them up to speed to start making a valuable contribution within one year of when you decided to add someone.

To give advisors an early heads up on hiring, I’ve found that milestones tied to firm revenues work best: They reflect both what the firm can afford and the workload. As long as clients average about the same size, have the same servicing needs, and your fee schedule doesn’t change, growth in revenues will correlate directly with client growth, and revenue growth rate is easy to track.

Element 3: Create an environment that maximizes employee impact.

Once a firm has a plan that tells its owners which positions need to be filled when, it’s time to focus on the programs, systems, and procedures that will enable new or promoted employees to fully contribute to the success of the practice. Employees at every level need to be motivated through regular reviews (with goals and feedback), the proper compensation, and a clear career track and partnership opportunity if appropriate. Most advisory practices fail or stagnate because the firm culture fails in one, two, or even all of these areas. Consequently, employees are set up to fail, rather than trained and motivated to succeed.

By offering advisors help with these fundamental elements, B/Ds can enable them to hire the right people at the right times, and maximize their growth curve. Without a foundation rooted in what kind of practice an advisor wants, and whom they need to help them get there, these steps will have a greatly diminished impact. Creating a successful program to helping their advisors to grow is the best way for B/Ds to grow themselves.


Angela Herbers is a virtual business manager and consultant for independent financial planning firms. She can be reached at angieherbers@cox.net.