While billion-dollar firms might be considered a minority in the wealth management industry, more and more firms are reaching this level.
In 2012, there were more than 500 billion-dollar firms reported – up from 300 firms just three years prior. And these firms are controlling a disproportionate amount of the assets in the RIA channel, according to the Alliance for Registered Investment Advisors. In 2012, billon-dollar firms represented over 40 percent of all assets under management.
The Alliance for Registered Investment Advisors (aRIA) released its fifth white paper, 6×6 = $1 Billion: Six RIAs Share Six Secrets to Achieve Scale, today to provide financial advisors with a blueprint of “What it takes to be a billion-dollar firm.”
The aRIA is composed of six independent financial advisory firms – Advisor Growth Strategies LLC; Savant Capital, Exencial Wealth Advisors, Carson Wealth Management Group, Stratos Wealth Partners, Beacon Pointe Wealth Advisors and Highline Wealth Management.
“This is our most deep-drill white paper to date,” says John Furey, principal at Advisor Growth Strategies and managing member of aRIA, in a statement. “It is effectively a blueprint for getting to and growing beyond the billion-dollar plateau. With checklists, best practices lists and real-world examples presented by the best of the best independent advisory firms, anyone interested in growing their firm and taking it to the next level will find this useful, to say the least.”
The white paper, released to coincide with Schwab’s Impact 2014 conference in Denver, focuses on six ways a firm can grow its business into a billion-dollar firm.
The first step toward becoming a billion-dollar firm: The necessary evolution of the owner’s role within the firm.
As an advisory firm changes and increases in size, the owner’s role will also change.
Brent Brodeski, CEO of Savant Capital, examines the evolving role of the owner and the owner’s movement from “player” to “player/coach” to “coach” to professional manager and lastly to “strategic owner.”
“The unwillingness or perhaps lack of skill to be a great people manager is a primary reason why many advisory firms might find their growth to be stagnant,” the whitepaper states.
The owner’s role will typically start changing when the independent firm is initially forming. And once the firm reaches a certain size, the paper says “usually around the $500M in assets or $5M in revenue range,” the owner will take an oversight position and everyday client responsibilities will transition to junior staff members.
The owner’s role will transition from acting as a point of escalation and collaborator on client strategy to spending the majority of time on business operations.
As the firm continues to grow even more, the owner’s role will start to look like more of a strategic owner.
“Strategic owners have many advisors and staff members reporting to them to fill the owner’s past roles,” states the whitepaper. “The strategic owner is now focused on the strategic vision for the company and the tactics needed to realize that vision.”
The second step toward becoming a billion-dollar firm: Developing the right ownership structure for your firm.
“Failure to develop an ownership structure that goes beyond the founding partners can be extremely limiting,” the paper says.
Ownership structures can vary widely from single members, to multiple “active” members, to firms with passive owners, to firms that have capital partners, such as a strategic acquirer or private equity.
As Ron Carson, CEO of Carson Wealth Management Group, said in a statement, “A striking commonality among all aRIA firms is that they all have built ownership structures that have not only helped them achieve their growth objectives, but they have set their firms up for even more meaningful growth in the future.”
The paper suggests several reasons creating an ownership structure is beneficial, such as helping create long term growth, set up a succession plan and lessen clients’ view of risk.
From the client perspective, firms that manage a client’s wealth with only one or two owners could be seen as risky.
An ownership group or team-based approach in delivering the client experience would also distribute the revenue risk across more individuals in a partner group, versus one or two people.
The paper also points out that providing a path to ownership to existing employees and/or talent from outside the firm is key for founding partners who are seeking a succession plan. Without this, partners will have a more difficult time constructing a long-term plan.
While growing business is a top priority for partners, the paper points out that professionals who are not aligned through equity are more likely to be “less interested in the firm’s long-term growth perspective.”
The paper suggests creating a compelling compensation package — and using equity to do it — for top talent in the wealth management industry. Which leads us to the next secret.