Advice delivery does not necessarily have to be a team sport, but it is no coincidence that the industry’s most competitive firms are team-focused. According to the fifth annual advisory firm study from FA Insight, “People and Pay,” the industry’s best and biggest firms are three times more likely than their large-firm peers to maintain a team-based service structure.
The importance of teams is apparent in FA Insight’s consulting work as well. We are typically engaged by good firms that hold strong aspirations to become great firms. Frequently the key hurdle they must overcome relates to putting in place the right organizational structure, starting with the best possible framework for managing client relationships.
At the core of a successful firm’s organizational structure—one that facilitates, anticipates and accommodates growth—is the way in which a firm organizes for advice and service delivery. In addition to being a key influence over the client experience, advice and servicing personnel account for the majority of a firm’s staff and are accountable for much of the firm’s expenses. On average, 37% of a firm’s staff members bear direct responsibility for delivering advice or services. These professionals, including those with oversight for business development, account for nearly three-quarters of the average firm’s payroll. Another 29% of team members indirectly support advice and service delivery.
Perhaps the most important reason for focusing on teams, however, is based on the ability of a well-structured team to amplify the productivity and effectiveness of the firm’s most senior advisors. Readers of our previous “People and Pay” feature in Investment Advisor (see “Getting More Mileage from Your Lead Advisor”) will recall our focus on the critical need for advisory firms to get more out of their lead advisors. In that article we touched on teams as just one of many ways an advisory firm can maximize the return from this scarce resource.
In this, our fourth and final article featuring findings from “The 2013 FA Insight Study of Advisory Firms: People and Pay,” we examine teams in more detail, putting the advantages of teams in context with other servicing structures and offering suggestions for how firms can make best use of a team-based servicing structure.
Options for Servicing Structure Grow with Firm Size
For the 80% of “People and Pay”firms with more than one professional, the great majority work collaboratively to deliver advice and service (see Figure 1, left). Most of this collaboration occurs informally, however, where professionals partner on an ad hoc basis to service the firm’s common client base. Just 11% of all firms are truly team-based, where a defined team services its own distinct client group.
As firms grow and add professionals, their options increase for how they might organize to serve clients. To gain a better understanding of service structure types and their respective advantages, FA Insight conducted a special tabulation of multi-professional study participants. Firms were grouped according to three primary service approaches:
- Silos—A sole professional responsible for overseeing a distinct group of clients, sometimes assisted by non-professionals who may or may not be dedicated to a sole professional.
- Firm-wide collaboration—Professionals partner on an ad hoc basis to service the firm’s common client base.
- Teams—Professionals are organized in teams, with each team servicing a distinct client group or providing a distinct service.
The use of multiple professionals collaborating across the firm’s client base tends to dominate with smaller multi-professional firms. As firms grow in size they will increasingly adopt one of the other two main servicing approaches. They will organize by defined teams or, alternatively, they will trend in a very different direction, relying on “silos” where sole professionals oversee distinct groups of clients (see Figure 2, right).
Teams Yield Compelling Advantages
Analyzing these service structures reveals a great deal about the advantages and disadvantages of each, as well as which structure might be most suitable for a specific firm. Selected performance metrics for typifying each approach are provided in Figure 3. The data points provide a helpful backdrop for our assessments of each model.
Turning first to silo-oriented firms, their most obvious performance distinction is rooted in low overhead expenses, which in turn support solid profitability. They restrain overhead largely by capping use of non-professionals. Compensation costs in general are also lower for silo-oriented firms.
The silo structure offers a primary advantage of independence to firm professionals with respect to client servicing preferences. This trait can facilitate a growth strategy based on advisor recruitment, where a seasoned professional can join the firm with little or no change in how they must service their clients.
The structure is not without drawbacks, however. Silo profitability is not accompanied by effective conversion of revenue to owner income. Additionally, silos, with embedded client experience determined by a particular professional, may find it more challenging to build a brand around the firm. The client experience delivered within a silo may be sub-optimal given scarce interactions with other advice teams.
What’s more, the absence of collaboration pressures professionals to become generalists instead of specialists, which may then restrict the quality of advice delivered to clients, professional growth and compensation. Finally, silo-type servicing may constrain career opportunities and succession solutions.