Build, Buy or Partner: What's the Best Way for Advisors to Scale?

As advisory firms seek to grow their businesses, the question that inevitably comes up is whether they should achieve that, at least in part, through acquisition or by partnering with another firm to add services or expand their footprints.

Doug Johnson, managing director at DeVoe & Co., and Tina Hohman, executive vice president, practice leader, wealth management at independent financial services and insurance firm Alera Group, debated the pros and cons of each solution on Jan. 25, during the webinar “Partnering for Scale: Beyond Wealth Management.”

DeVoe & Co. polled the webinar audience and found that 100% of advisors had clients who were curious about tax planning, estate planning and employee benefits. However, of those advisors who referred these requests to outside consultants, not one advisor polled was satisfied with the amount of business referred back to them in return, according to the firm.

Beyond Table Stakes

Financial planning, for most top-performing advisory firms, is now considered “table stakes,” Johnson said, pointing out: “They’re doing tax planning, preparation, investment planning, retirement planning, college planning” and more.

“As I talk to firms around the industry, they come to me and they say, ‘Hey, you know, Doug, everything’s growing well, but my clients are starting to ask for different services — things that I’m thinking about building out but, man, it could cost me a lot and hurt my bottom-line profits,’” he told viewers.

The people running those firms are also asking whether they should instead partner with firms that already offer the services clients are asking for, Johnson said.

So the question comes down to, “Should the advisory firm build it, or should we partner with somebody else?”

“Part of that conversation, too, is opening in new locations,” because firms know their rivals are expanding geographically, he added.

Hohman said that is “absolutely” what she’s hearing also. There are “still a lot of traditional firms out there, [but] I think we’re [at] the beginning stages of this,” she noted. “I think we’re just kind of on the upward trajectory of talking about these different types of services added to our practice.”

“What I find most interesting is that we aren’t even talking about investments anymore,” she said. “That’s not the conversation. The conversation is this holistic planning for your clients and ‘How do I best serve my clients?’ It’s not, ‘What is the next incredible investment?’ like it used to be.”

How an advisory firm can help its clients with “holistic solutions [is] becoming broader than just those table stakes … I think we’re on the next wave, even beyond that,” she said, adding: “I think we need to start talking about how do we access these services” that go beyond making financial planning “better.”

Johnson conducted a live poll among viewers to gauge precisely what services clients were asking them about. “Almost everybody is getting asked” about estate and trust services, he said. Life insurance was another service cited.

Everything Everywhere

Another big trend is that, “with these mergers and acquisitions and these large acquirers out there in this space, that there’s this convergence, if you will, of everything financial coming under one roof,” Johnson said.

In the case of Alera, the firm was founded as an employee benefits organization then got “heavily involved in property casualty … and then a couple years ago, we started focusing on wealth services,” which includes both insurance and an RIA business, as well as retirement plan services, Hohman said, adding that Alera recently added one more business: human resource consulting.

The Referral Relationship

Referral relationships come with a spate of questions that need to be addressed, Hohman said, noting that Alera has referral partners. The first concern is revenue sharing. Another important question, she said, is “What kind of trust level do we have?”

The big question is, if an advisory firm is referring clients to a partner, “are we getting any referrals back” from those partners? Johnson said. So is the relationship an “equal partnership or is it a one-way street?”

She also pointed to one more concern of advisory firms: “How certain are you that once you’ve introduced somebody, that they don’t introduce somebody else into the relationship” — such as a company offering multiple services — “that takes that relationship away from you at some point in time? Those are all things that advisors have felt over the years.”

(Pictured: Tina Hohman, executive vice president at Alera Group)