There are more wealthy people in the United States and around the world than ever before, which means there are more people who need financial advice than ever before, which means there is tremendous potential for growth for those advisory firms that can efficiently meet the needs of this highly demanding clientele. As observers of the profession have been pointing out for years, that means an increasing level of competition from large brokerage, banking, and insurance firms that have the economies of scale to serve this audience.
Those firms that are looking to capitalize on this potential growth have to determine the business model that works best for them. For those looking to develop more than a solo, silo, or ensemble practice, that often means bringing in management professionals. Mark Tibergien, Bob Clark, and others have written in these pages about the turning point faced by many firm founders where they have to decide if they want to concentrate on running their business or on advising their clients.
It’s a difficult decision to make and one that many owners seem to put off. According to the 2007 Moss Adams Compensation and Staffing Study, only 4% of firms planned to hire professional management in either 2006 or 2007.
John Waldron, who founded Waldron Wealth Management in Pittsburgh in 1995, got to the point where he needed help with the business side of his firm several years before he actually did anything about it. Lucky for him, when he was finally ready to take that plunge, the perfect candidate for the job was the person who first suggested the idea to him. It all started when he met Krishna Pendyala on a flight home to Pittsburgh in 1999.
Five years later Waldron asked Pendyala, who had since become a friend and a client (see John Doesn’t Do PowerPoint sidebar) to take on the job. Although his professional and educational background had absolutely nothing to do with financial services, his experiences as an entrepreneur and business consultant convinced Waldron that he had the ideal complement of skills to meet the challenge of instituting business systems for Waldron Wealth Management.
Before offering Pendyala the position of COO, Waldron assessed the situation and decided that at the firm’s current revenue level and the number of contacts that Pendyala brought with him, that Waldron Wealth Management would be able to bring him on board without any negative impact on the bottom line. What he hadn’t counted on was Pendyala’s intense desire to begin a new career as a professional life coach.
“Usually a professional life coach builds a private practice one client at a time, much like an independent advisor,” Pendyala says. “I didn’t want to do that, so I made a deal with John: ‘You allow me to become the coach for all your employees and I’ll do the crap for you. I’ll be your COO.’”
Pendyala joined the firm, which then had 42 clients and $185 million in AUM, as its eighth employee in August 2004. Today there are 16 employees, 75 client relationships, $750 million under management, and $2 billion under advisement.
In order to effectively act as Waldron Wealth Management’s COO, Pendyala felt the first step should be for him to get to understand who the clients were. So he had Waldron outline each of the 42 clients, and how they came to the firm. “Each one was different,” he says. “I was stumped. I was expecting two or three value groupings.”
After struggling to find some common denominator, Pendyala finally arrived at the first of the firm’s three core values, what he calls client-focused innovation. “For each prospect, this firm does something unique, solves a problem that is not too easily solved, before they become a client.”
The next value on the list is something every business, not just an advisory firm, strives for: impeccable service. For Waldron Wealth Management, providing that service with a personal touch is a little bit more challenging than for most. While most advisory firms draw the majority of clients from an immediate geographic area, according to Pendyala only 16% of Waldron’s clients are actually from Pittsburgh. The rest are in Philadelphia, New York, Washington, and scattered around the country. “Most of our clients don’t visit us in person,” explains Pendyala.
Since very few potential clients actually come to the office, the first impression is made by the person answering the phone. Yet Waldron had no receptionist. So Pendyala made hiring the right individual for that position a top priority, going so far as to conduct preliminary phone interviews with 72 candidates. He reasoned that how they sounded and handled themselves on the phone would be the most important attribute, certainly a much more crucial factor than their appearance.
The third leg of the values triangle is flawless execution. “Competitive edge is what really brings you a client, but it’s in the prospecting phase that competitive edge shines,” he says. “After that, how you execute the important functions is more important. It’s the operational issues that become very important in sustaining a client relationship, because if you screw up there it shows.”
Building a Culture
Creating the operational systems to help Waldron Wealth Management transition from an advisory practice to a business enterprise is what Pendyala figured would be his biggest task, but first he had to lay the proper groundwork.
“It took about 15 months putting the right culture in place,” he recalls. From an organizational standpoint, he saw Waldron Wealth Management as a “green field.” “They had great people, great ideas, and great clients, so what I did was formalize the strategy and build around it the three critical components–the people, the processes, and then the use of technology.”
Pendyala’s background as a coach and mentor, business consultant, and technology entrepreneur with an engineering degree gave him grounding in all three areas. He feels that coming from a different industry–actually a number of different industries–gave him a fresher perspective than would likely be available to someone who has spent their entire career as an advisor.
One of his first observations was that many advisory firms had created procedures without first having an understanding of processes and workflow. “Procedures are the last thing,” he says. “You look at your workflow, you look at your processes, and then you define and derive a set of procedures.”
Pendyala says that if the original set of circumstances that created the procedure no longer is valid, then the procedures need to be analyzed and updated, but it seems that most firms, large and small, rarely take the time for such evaluation.
He cites as an example how most people, even those who have actually used a typewriter, don’t understand why the “QWERTY” computer keyboard is laid out the way it is. (Old-timers’ note: On the original manual typewriters, meaning pre-IBM Selectric with its typeball, the letters were on metal arms that moved forward when you depressed the appropriate key. It was determined that arranging the keyboard in the order with which we are all familiar prevented the typist from hitting the keys too quickly and having the mechanical arms become entangled.)
“We make sure we capture the context of the procedures, so that three or seven years from now, we can look at the context, and if the context has changed, you change the decision and not blindly follow something that has worked. You’ve heard the adage ‘Don’t fix what’s not broken?’ If it’s not broken but the context has changed, how can you say it’s still right?” he asks. “If the context changes it behooves us to look at what we’re doing. That’s something John Waldron says, ‘Let’s challenge ourselves before our clients do.’”
One of the processes that Pendyala has put in place to give employees a reason to challenge themselves is a variable pay program. It’s an idea that he’s been toying with for more than 10 years and feels that he’s finally nailed it at Waldron. The program centers on giving employees incentives to find ways to buy more time from their current workdays. His goal is to help employees find ways to work less, not get less done, and think more.
Twice each year all employees are evaluated in seven categories dealing with subjects such as compliance, dealing with clients, working better as part of a team, and, of course, buying time from the workday. To qualify for the variable pay program, the employee has to come up with an idea, implement it, share it with the team, and then write a report. The additional pay can be as high as 10% of the individual’s salary. Interestingly enough, Pendyala doesn’t see the additional compensation as a payroll cost, but as a “firm improvement” expense. He recently completed the evaluations for 2007 and says the firm paid out about 80% of the potential funds available.
As a newcomer to financial services, but by no means a neophyte to the business world, Pendyala is in a good position to make some observations about the advisory profession. One of the first things that struck him is the prevalence of what he calls a sole proprietor mentality. A typical independent advisor is an individual who leaves a wirehouse or some other institution and starts a business, maybe with an assistant. The first challenge comes when the advisor wants to grow beyond the size he can handle alone. “The model that I have observed to grow a financial advisory practice is that you multiply books of business, what Moss Adams calls an ensemble practice,” he says. “We didn’t do that.”
In setting up Waldron Wealth Management, John Waldron (who has an accounting background) realized that in that model each advisor only deals with his own clients and is limited by his own skills. Instead, Pendyala reports that Waldron decided that “what I need in my firm is people with diverse backgrounds, not duplicate books of business,” says Pendyala.
Although Waldron had the vision, he wasn’t able to see it come to fruition until after he hired Pendyala to help turn his practice into a business enterprise. Pendyala says that “When I [looked at] the financial advisor and financial assistant model that you find so common in the industry, I said, ‘This doesn’t work for me. Strategic advice and operational execution are equally important.’”
When anyone becomes a client of Waldron Wealth Management, a team of at least three players is assigned to them–a wealth counselor, who serves as the strategic advisor; a financial manager, who provides operational and administrative assistance; and an investment specialist to manage and advise on their assets.
When Pendyala first joined the firm, Waldron suggested that he be a team member and take on some client duties. But Pendyala, who says he has no desire to be a pinch-hitter, says that would be like sending the coach into the game. “So we made a strategic decision that I would not get on the field,” he says. “On the other hand, I deal with a lot of client situations from a coaching standpoint.”
A big part of Pendyala’s attention is spent helping various team members make the most of their client communications. With most of the clients being in another part of the country, clarity of written communication becomes even more crucial than in many firms. To make sure the wealth counselors and financial managers remain on message, Pendyala reviews e-mails and letters to clients before they’re sent. “It’s not for proofreading,” he says. “It’s about angle. It’s about communication.”
Among the First, Not to Be the Last
Pendyala knows that professional managers, not to mention coaches, like him are but a minuscule portion of the advisory business. We just haven’t reached the tipping point that will lead to a revolution in firm structure. That’s because, Pendyala suspects, many firm owners still don’t understand the value that professional management brings to the table. “They see this as a finite, zero-sum game,” he explains. “Because of this sole proprietor mentality, when it comes time to hire professional management, they see that as a cost that will cut into their profits. They don’t see the growth.”
To back up his point, he cites Mark Tibergien’s presentation at the recent Investment Advisor/Moss Adams Advisor Summit, where Tibergien cited one study he had worked on that showed that any firm that hired a general manager or COO doubled their revenues in two years. In the three years since Pendyala has been on board at Waldron Wealth Management, revenues have more than tripled, a fact to which he credits John Waldron’s foresight in hiring the right professionals for his team. Without a professional manager to create the conditions to allow those professionals to thrive, it’s unlikely the growth could have been so dramatic.
E-mail Managing Editor Robert F. Keane at firstname.lastname@example.org.