Perspective. Perspective. Perspective. To paraphrase the old real estate saw, the older I get, the more I realize that truth is more often than not a function of one’s perspective. Case in point: Fiduciary Network president and CEO Mark Hurley’s June white paper entitled “Creating, Measuring, and Unlocking Enterprise Value in a Wealth Manager.”
To set the record straight, I like Mark Hurley. I’ve met him a couple of times and talked to him on the phone a few more times than that. I found him to be intelligent and engaging, and I’ve always learned something from our encounters.
With that said, I’ve also consistently found that some of his conclusions stem from what seems to me a rather skewed view of the independent advisory world—first, from the perspective of a former Goldman Sachs investment banker, and lately, as a financier of the largest of independent firms. To be sure, “large independent advisory firm” is right up there with “army intelligence” and “jumbo shrimp,” as oxymorons go. The biggest wealth management firms in our little world have a couple of billion client dollars under management, and generate maybe $5 million to $10 million in annual revenues: That doesn’t even qualify as a “mid-sized” small business by B-school standards. Still, from the advisory industry’s perspective, the difference between a firm with $100 million under management and one with $1 billion in AUM is like comparing apples to bowling balls.
The Value of Small Advisory Firms
In both his writings and in conversations, it quickly becomes apparent that Hurley’s exposure to the independent advisory world has largely revolved around firms falling on the largest end of this spectrum. By itself, that’s no crime: Mark probably knows as much about the business end of those large firms as anyone. More problematic, though, is his insistence on making pronouncements about the independent advisory world as a whole.
The result has been a constant theme in Hurley’s work questioning the value of smaller advisory practices. This notion culminates in his latest tome, which under the guise of informing advisors about the economics of their businesses, boldly suggests that for most firms, there aren’t any: “A careful analysis of the [advisory] industry suggests that only about 200 to 400 of its participants either have or possess the potential to build material enterprise value. The remaining 18,000 to 19,000 firms currently have no enterprise value and are very unlikely to build any in the future … the overwhelming majority of [the non-large firms] are unprofitable ‘lifestyle practices.’”
Not a conclusion intended to give a warm fuzzy to most independent advisors. But the good news is that he’s only half right, at best. We can see the skewing of Hurley’s thinking by how he frames the question: “What is enterprise value and what are the steps necessary to create it?” He gives us the definition of this “enterprise value:” the economic value that an investor captures from owning the equity of a company. He is approaching the question of value in advisory practices solely from the perspective of an investor, which he was as an investment banker at Goldman and continues to be today.
The Investment Banker Perspective
From that viewpoint, there probably is considerable truth to his analysis. If you’re an “investor,” you’d most likely want to think twice about sinking your portfolio into a smaller advisory practice. This is probably why many so-called rollup firms have to resort to financial sleight of hand to make their deals work: proprietary products, restricted stock, and advisor pay cuts, to name a few.
Yet Hurley goes on to write this 124-page report as if “enterprise value” were the only kind of value. Just because independent advisory practices don’t have much value to would-be investors doesn’t mean they don’t have any value at all. You don’t see institutional investors buying up single family homes like they’re going out of style, even in this market. Why? After debt service, upkeep, real estate taxes, income taxes, and the cost of keeping it rented, most houses just aren’t economically viable; that is, they don’t have any enterprise value.
Yet my house has considerable value. First, because I, like most folks, have to live somewhere. Second, it’s pretty comfortable here. Third, as long as interest rates stay reasonable, the mortgage payments aren’t that much more than renting a comparable house.