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November 01, 2008 at 04:00 AM
A number of lessons can be learned from the recent calamity in the financial markets: if you don’t manage risk, you will likely fail; if you don’t manage growth, you may go broke; if you fail to plan for business continuity, fate will be your driver. But as one of my early mentors liked to say, “The end of the world only comes once, and it’s not today.”
Many independent financial advisors–whose ideas about business growth are more prosaic than those of investment bankers, wirehouse firms, and mortgage lenders–plod forward like the proverbial tortoise while the hares find themselves in foxholes. The recently released 2008 Moss Adams Financial Performance Study of Advisory Firms, sponsored by Genworth Financial, validates many compelling attributes of the independent advisory firm model in the midst of headline risk, bankruptcy, and sinking values.
With a very solid sample of firms reporting (almost 800), the 2008 Moss Adams study showed that revenue for the average participant grew by 22% in 2007 after an 18% increase the previous year. Personal income has more than doubled since 2003, and assets are flooding in from new clients who appear to be leaving their brokers and advisors at other firms as well as creating more new liquid wealth.
Beyond the cold statistics of this study is the observation that the financial advisory profession is going through a structural evolution. This may come as a surprise to the creators of independent financial advisory firms who at one time seemed singularly committed to remaining small as a badge of honor. But the demand for independent, objective advice is growing, putting pressure on the best advisors to invest in their businesses by managing risk, managing growth, and planning for succession.
Like tadpole to toad, many advisory firms have moved from swimming in small ponds to hopping from stool to stool, capturing more flies at every stop. They are doing this through a clearer value proposition: as client advocates rather than product purveyors, as employers of choice for people drawn to the profession, and by investing profits into their businesses to finance their growth.
The Moss Adams studies over the years have coined the descriptions of practice models as Early Solo, Early Ensemble, Mature Ensemble, and Market Dominator. Solo firms containing only one advisor benefit from the high personal touch of the owner and a reputation tied to the principal, while ensembles leverage other professional and administrative staff as they mature.
Solos by definition have to be generalists, because whereas ensembles and market dominators have the luxury of staff specializing in different disciplines.
Getting to the Next Stage
An Early Solo is defined in the study as a practice formed since 1999 and operated by one professional. According to the Moss Adams study, Early Solos are growing fast–which isn’t surprising considering their baseline is so small. Between 2005 and 2007, the median compound annual growth rate has been 29% compared to the rest of the survey participants at 20%.
Predictably, most Early Solos hit a wall after a few years when they have no capacity to pursue and take on more clients while managing their practices. They tend to outsource more than their peers in order to gain leverage but because outsourcing is often done on a variable cost basis, it is more difficult to improve profit margins.
If Early Solos want to grow from this model, Moss Adams recommends that they begin accounting for profitability and productivity like more mature businesses. The theory is that with a proper accounting framework, they can better evaluate what’s working and what’s not, and identify where to invest for future growth. A discipline around financial management and budgeting is the second step in the evolution of entrepreneurship: more closely monitoring and managing the key performance indicators of the enterprise in addition to focusing on innovation and revenue generation.
Early Ensembles are firms with two or more professional staff (non administrative) and that generate less than $2 million in annual revenue. The decision to add a partner or another professional colleague can be difficult for advisors who have enjoyed playing in their own sandbox and not sharing their toys. But as the Moss Adams study numbers suggest, the impact on growth, profits, and value as firms create operating leverage is profound. The added capacity allows the firm to add more clients, and partners to backstop each other’s practice, sharing responsibilities as well as overhead.
