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Additional praise forPractice Made (More) Perfect:

Transforming a Financial Advisory Practice into a Business

“There has never been a better time to aggressively build your business. Make iteasy . . . trust Mark and Rebecca’s sage advice.”

—Deborah D. McWhinney, former President, SchwabInstitutional and Citi Personal Wealth Management

“Even a quick look at the most successful firms in our industry shows they haveprocess excellence at the heart of their success—truly allowing them to create agreat client experience again and again. That’s the difference between the leadersand the rest of the pack. I believe that this is [Tibergien’s] best work yet asit provides real-life anecdotes that can be applied to managing an investmentadvisory firm—small or large.”

—Rudolph A. Galera, multi-family office professional

“This edition is a must-read. Adding to what was already an invaluable resourceare Mark and Rebecca’s new perspectives on the industry as well as current bench-marking data. If you are going to read only one book on practice managementand leadership, this is the one.”

—Kelli Cruz, Director of InvestmentNews Research & Consulting

“Passion can start an advisory practice, but it takes intentional business man-agement to achieve long-term success. In this book, Mark and Rebecca providestep-by-step guidance on how to think about your business, the decisions thatmust be made, and how to get the measurable results that you want. If you feeloverwhelmed with the task of running a business, this book will be an invalu-able tool.”

—Elaine E. Bedel, CFP, President,Bedel Financial Consulting, Inc.

“Today, all advisory firms stand at the crossroads as client demographics, manu-facturer interests, and regulator imperatives seek to align to present one coherentpicture to the marketplace. It will inevitably fall to the advisory firm to deliverwithin the new framework. It is within this context that Mark Tibergien andRebecca Pomering have produced a ‘must read’ manual for all thinking advisorswho are looking to evolve their practice to the next level.”

—Terry Bell, founding Partner and Managing Director,Business Health Pty Ltd

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“Over the last 20 years, Mark’s sage words have helped us develop our practice,through good and bad years. Mark and Rebecca’s revision of a fabulous bookbrings the topic right up to date and provides a superb roadmap for those seekingto make the most of the fabulous opportunity and challenges we all face, resultingin better informed choices. Without this intelligence, business life is unnecessarilymore difficult.”

—Mark Ralphs, Partner, Financial Planning Corporation LLP

“Mark and Rebecca are exceptional industry consultants who, in their currentroles as financial services executives, have further enhanced their solid industrycredibility and thought-leading perspectives. Advisors will be well-served to applythese new learnings from Practice Made (More) Perfect in order to better assuresustainable business performance through changing operating environments.”

—Eliza De Pardo, Principal and Director of Consulting,FA Insight

“There is simply no other resource on the subject of managing a financial advisorypractice as comprehensive AND as practical as Practice Made (More) Perfect. Ofcourse that’s hardly a surprise since there simply aren’t two other people who are asknowledgeable on the subject as the authors. If you are an advisor who is lookingto build a more profitable, faster growing, and more valuable practice, you canbegin with this book and come back to it every time you face an importantdecision.”

—Philip Palaveev, industry expert and President, FusionAdvisor Network

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PRACTICE MADE(MORE) PERFECT

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Since 1996, Bloomberg Press has published books for financial professionalson investing, economics, and policy affecting investors. Titles are written byleading practitioners and authorities, and have been translated into more than20 languages.

The Bloomberg Financial Series provides both core reference knowledgeand actionable information for financial professionals. The books are writ-ten by experts familiar with the work flows, challenges, and demands ofinvestment professionals who trade the markets, manage money, and analyzeinvestments in their capacity of growing and protecting wealth, hedging risk,and generating revenue.

For a list of available titles, please visit our web site at www.wiley.com/go/bloombergpress.

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PRACTICE MADE(MORE) PERFECT

Transforming a Financial Advisory Practiceinto a Business

Mark Tibergienwith Rebecca Pomering

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Copyright © 2011 by Mark Tibergien. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

This book is a revised edition of Practice Made Perfect: The Discipline of Business Management for FinancialAdvisors, published by Bloomberg Press in 2005.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form orby any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except aspermitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the priorwritten permission of the Publisher, or authorization through payment of the appropriate per-copy fee tothe Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400,fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permissionshould be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street,Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online athttp://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts inpreparing this book, they make no representations or warranties with respect to the accuracy orcompleteness of the contents of this book and specifically disclaim any implied warranties ofmerchantability or fitness for a particular purpose. No warranty may be created or extended by salesrepresentatives or written sales materials. The advice and strategies contained herein may not be suitablefor your situation. You should consult with a professional where appropriate. Neither the publisher norauthor shall be liable for any loss of profit or any other commercial damages, including but not limited tospecial, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, pleasecontact our Customer Care Department within the United States at (800) 762-2974, outside theUnited States at (317) 572-3993, or fax (317) 572-4002.

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print maynot be available in electronic books. For more information about Wiley products, visit our web site atwww.wiley.com.

Library of Congress Cataloging-in-Publication Data:

Tibergien, Mark C., 1952–Practice made (more) perfect : transforming a financial advisory practice into a business /

Mark Tibergien with Rebecca Pomering.p. cm. – (Bloomberg financial series)

Includes index.ISBN 978-1-118-01931-3 (cloth); ISBN 978-1-118-09547-8 (ebk);ISBN 978-1-118-09548-5 (ebk); ISBN 978-1-118-09549-2 (ebk)

1. Financial planners. 2. Management. I. Pomering, Rebecca, 1974– II. Title.HG179.5.T528 2011332.6068′1–dc22 2011008889

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

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http://www.copyright.com

http://www.wiley.com/go/permissions

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Our tremendous gratitude for Arlene Tibergien and GrantPomering for their love and support, and to our colleagues and

partners at Pershing LLC and Moss Adams LLP, for theirwisdom, insight, and friendship.

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Contents

Preface xiii

Acknowledgments xvii

Introduction xix

CHAPTER 1The Financial Advisory Business: What’s Next? 1What Are Top-Performing Firms Doing? 3The Business as Client 410 Things to Think About 4

CHAPTER 2Strategic Business Planning: Defining the Direction 11Muddled Messages 12What Is Your Strategic Differentiator? 14What Is Strategic Planning? 14The Strategic Planning Process 16

CHAPTER 3Managing Workflow: The Back Office Moves Forward 35Sources of Inefficiency 36Achieving Efficiencies 37Does Efficiency Come at a Cost? 39Managing Risk 45

CHAPTER 4Building Leverage and Capacity 55Getting to the Next Stage 56Becoming a Market Dominator 57The Challenge of Growth 58The Entrepreneurial Crossroads 59Cornerstones of the Professional Practice 66Models That Work 68

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Leveraging Your Affiliations 72Big Is Beautiful 76

CHAPTER 5The Human Capital Plan: People Who Need People 81The Problem You Can’t Do Without 82Aligning Human Capital with Strategy 83The Nature of the Work 86The Nature of the Worker 90The Interviewing Process 93

CHAPTER 6Creating a Positive Workplace:Professional Development 99The Career Path 101The Appraisal Process 104Coaching and Development 107The Workplace 109Building a Foundation 114The Four-Way Test 115Lessons on Inclusion 125

CHAPTER 7Rewarding Behavior and Performance:Compensation Planning 129Developing a Plan 135The Components of Compensation 139Establishing Base Compensation 149Establishing an Incentive Compensation Plan 150Owner’s Compensation 153

CHAPTER 8Reading the Financials: Financial Management 155Fundamentals of Accounting 155Constructing a Financial Statement 156Tying the Financials Together 165

CHAPTER 9Income, Profit, Cash Flow: What the NumbersAre Saying 167Formatting the Financials 168Analyzing the Income Statement 169Analyzing the Balance Sheet 179Analyzing the Statement of Cash Flow 184Financial Impact Analysis 185


Contents xi

CHAPTER 10Managing Growth: The Search for Solutions 189Harnessing Resources 190Using Financial Leverage 192Managing Cash Flow 194How About Equity? 195Referral Agreements and Joint Ventures 196Practice Acquisitions 199Investments in New Initiatives 203

CHAPTER 11Exit, Stage Left 205The Price of Indecision 206Sale Planning versus Succession Planning 207Wisdom or Obsolescence? 209What to Do? 210Keeping It in the Family 211How to Make a Partner 217What About the Successor? 223Merger as a Succession Plan 226So What Do You Do? 228Seeking Counsel 230Developing the Assumptions 231Take Control 232

CHAPTER 12On Leadership and Management 235What Defines a Leader? 236Who Will Emerge? 239Is Anybody Leading? 240Rites of Passage 242Ready, Fire, Aim 244Awakening the Manager in You 248Practice What We Preach 251Hiring Your Boss: Do You Need a CEO? 251

Afterword 257

Appendix 261

About the Authors 297

Index 299


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Preface

Aristotle penned a treatise entitled “On Longevity and Shortness of Life” that stillhas relevance today. He observed that “it is not clear whether it is a single or diversecause that makes some to be long-lived, others short-lived.” He was referring toplants and animals, but one could pose the same question about advisory firms.Some will last a few short years, and others evolve through multiple generations.

Now we don’t claim to be experts on Aristotle or philosophy, but we knowthe guy liked to stir the pot when it came to critical thinking about all things thatmattered. He intuitively understood how environment, nurturing, and genes allcollaborated to produce an outcome. There are lessons in this bit of insight forthe future of the advisory business.

Like people, some advisory firms are positioned for long-term growth, whileothers will not make it past adolescence. We are nearing an inflection point wherethe future of the profession and how advice is delivered depends on the actions ofits leaders today. Managing an advisory business has become more complex, andthe assumptions about what will impact future growth have altered the way inwhich advisors are managing to success. But perhaps the most critical deficiencyis the absence of professional management from so many advisory firms that arehurtling at mach speed to a new spot in their own galaxy.

The difficulty, of course, is that most advisors are part-time managers, andthey are conflicted as to where to spend their precious time—on clients or on thebusiness. But enlightened owners recognize the time is now to invest in the nextgeneration of leaders in order to carry the business to a new level.

It probably hasn’t helped that industry organizations such as the CertifiedFinancial Planner Board of Standards do not recognize practice management asrelevant to continuing education, so many who come into the profession are notprepared to manage, let alone lead an advisory firm. Many of the universitiesthat offer degrees in financial planning do so under the auspices of the socialsciences college, so they, too, tend to focus more on the counseling aspects of theprofession and ignore the business aspects.

There are any number of reasons why it may be difficult for advisors tosend their associates to university leadership programs to develop their businessskills. So for the most part, leadership and management development is left to

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the advisors themselves, who may not have had much training in this realmeither.

The reality is that every area within an advisory firm needs management,including strategy, business development, operations, investment management,planning, compliance, and administration. Typically, these are all responsibilitiesconcentrated in the hands of one or a few principals. By grooming the nextgeneration of advisors, operations people, and business developers, owners puttheir businesses in a great position to capitalize on the demand for advice.

Whether advisors develop their own curriculum or seek help from others,there are several key skills that should be emphasized in the evolution of leadershiptalent:

� Developing clarity of vision—being able to define what business you’re in,whom you serve, and what you will need to invest in to accomplish your busi-ness goals is paramount. When one is responsible for a particular area of man-agement, it is key to be able to align the management area with the goals, visions,and values of the overall business. Understanding the principles of strategic plan-ning allows future leaders to make informed decisions about where the businessshould commit resources for future growth.

� Communication—being able to inspire others to pursue the vision and accom-plish the goals of the business is a lost art in some quarters. While advisors forthe most part are adept at persuading clients to action, often they are reluctantto confront and cajole their own associates into levels of higher performance.While some lead by position, the most effective lead by persuasion.

� Challenge the process—as businesses evolve with the clients they serve andthe size they become, often the processes that used to work well are not bestpractices anymore. Good leaders monitor what’s working and what’s not andhave the courage to make changes even if it means a disruption in the lives ofboth people who work inside the firm and clients.

� Enable others to act—perhaps the hardest part of being a leader is effectivedelegation. There is a tendency to try to do things oneself thinking, “It’squicker to do it than teach it.” While in the short term that may be true, in thelong term not allowing others to make mistakes and learn limits one’s abilityto grow the practice. But eventually, with delegation comes accountability, soholding people to their responsibilities to do the job they’ve been assigned is akey part of effective delegation.

� Acknowledge others—every good leader will tell you that people need, want,and deserve to be credited for their contributions to the success of the busi-ness. It may be difficult to subordinate one’s personal ego when managing ateam or managing a business, but people almost always respond to positivereinforcement. At the top of the house, owners of advisory firms need to lead


Preface xv

by example, which means applying the same encouragement to other partnersand other leaders in the firm.

Unlike plants or animals, advisors have the opportunity to ensure longevitythrough their enterprise, should they be so motivated. They have the opportunity,but perhaps not the ability.

While it is fair to look to industry providers as part of the solution, in the end,the trade associations, technology consultants, product providers, custodians,and broker-dealers can do only so much to tee up this issue for independentadvisors. Ultimately, owners of advisory businesses need to invest time, money,management, and energy in a talent recruitment and development program fortheir own enterprises. And associates within advisory firms need to start steppingup to take ownership of their future as well.

Effective management is a function of your ability to make decisions, youraptitude for evaluating data, and your commitment to your business model. Greatleaders have learned to leverage their organizations so that the business sustainsitself rather than depending solely on them.

Our goal with this book is to share the lessons learned in having workedwith hundreds of financial services organizations worldwide and having servedin leadership roles ourselves. This book builds on key teachings we hope wereimparted in our original text, Practice Made Perfect, and adds substantial contentaround operating efficiency, leadership, and people development. The business offinancial advice requires more heat and light in order for the independent enter-prise to reach its next level. We hope this book makes a meaningful contributionto how current and future leaders of advisory firms of all stripes—investmentmanagers, wealth managers, financial planners, and family offices—define andimplement a strategy that serves their clients well while building a business tolast.


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Acknowledgments

There have been many people we’ve crossed paths with who have had a profoundimpact on our thinking. Since Practice Made Perfect was published in 2005, bothof us have developed new perspectives on the business of financial advice becausewe both took on new roles—Rebecca as CEO of a very large advisory firm andMark as CEO of a leading registered investment advisor custodian. This exposedus to an even broader spectrum of people who are making an impact on thisprofession.

In addition to all the individuals we acknowledged in our first book onpractice management, Mark would like to thank Kim Dellarocca and AndreaMadden of Pershing LLC for their creative thoughts on marketing and practicemanagement, Jim Dario and Karen Novak for their leadership of Pershing AdvisorSolutions (PAS), and Kevin Taylor and Kevin Armstrong for their businesslikeapproach to risk management and compliance oversight.

In addition, Mark would like to thank Trent Witthoeft and his technologyconsulting team within PAS, who help advisors make prudent choices about thesolutions they use to gain greater efficiency; PAS relationship managers GabeGarcia, Ann Smith, Derek Purdo, Jennifer Gadd, and Mike Goyarts for theirinsight gained from working with advisory firms across the United States; andIgnacio Ramirez of Pershing and Michelle Gutierrez, Mike Nespor, and MarcButler of iNautix (USA) LLC for their important contributions to the focus onworkflow and operating efficiency.

Special gratitude goes out to Jamie Green, editor of AdvisorOne.com andformer managing editor of Investment Advisor magazine, which has carried Mark’scolumn on practice management for many years. Ideas for much of the contentof this book have been drawn liberally from those columns.

Rebecca would like to additionally thank her partners in Moss Adams WealthAdvisors—Erica Coogan, Lars Landrie, Jason Romano, Sheryl Rowling, JimSchlager, and John Whiting—as well as Ken Evans and Gidget Furness, who runthe firm’s operations and compliance. This amazing team has allowed Rebecca theopportunity to practice what she preached as a consultant and has been patientwith her when bridging the theory with the application isn’t as easy as it soundsin a book.

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xviii Acknowledgments

We would also like to express our deep appreciation to Suzanne Siracuse,Kelli Cruz, and Jeff Pierce of InvestmentNews for access to their custom researchon benchmarking data in the industry. In addition, our former colleague and closefriend, Philip Palaveev, president of Fusion Advisor Network, added additionalmaterial for us to work with in the development of this book, and we continueto appreciate the way he challenges our thinking about this business.

We also owe a great deal of gratitude to the hundreds of advisory firmsaround the country who have been clients, peers, and friends of ours and whohave shared their business wisdom and experiences with us over the years. Thisprofession is filled with generous people who all bare their souls and challengeswillingly in order to not just improve their own businesses but also to advancethe profession. This has created a great community—and laboratory—in whichwe have been able to work and explore, creating many of the lessons we share inthis book.

We both owe special thanks to the great companies that we work for,Pershing LLC and Moss Adams LLP, for allowing us to spend the time andfocus to deliver this additional contribution to the thinking around practicemanagement within financial advisory firms. In our opinion, the best ideas oftencome from someone else, in how they either addressed a problem or created asolution. Over the years, we have learned much from many other authors andconsultants on practice management, including Deena Katz, Angie Herbers, BobVeres, Joel Bruckenstein, Glenn Kautt, Stephanie Bogan, Dave Drucker, JulieLittlechild, Joni Youngwirth, Andy Gluck, Dan Inveen, Eliza DePardo, and oth-ers, who have contributed much to thought leadership in this profession. Theincredible combination of practitioners, observers, researchers, and consultants tothe business of financial advice has helped us become more effective in addressingbusiness challenges ourselves.

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Introduction

If running a business were easy, everybody would be doing it. Management is bothart and science. But as with any profession, if you have a protocol for the sciencepart, you create a framework for the art part. As with jazz music, improvisationoccurs within a structure—it’s helpful to know the end in mind before startingoff on a riff.

To understand this principle, consider how you would structure your man-agement if you could build your optimal model and you were not constrained bythe resources of time, money, management, and energy. Recognizing that yourresources are finite, we will focus on the critical management disciplines you needto master regardless of the size or profile of your business:

Strategy: the framework for a firm, which informs all business decisions. As wediscuss business strategy, we will walk you through the thought processesthat can help you create a context for your management decisions. In ourresearch, consulting, and interaction with hundreds of financial advisoryfirms on every continent except Antarctica, we’ve learned that eachbusiness has a different set of parameters and perspectives to considerbecause each firm is unique. But whatever the structure, the work ofsales and marketing, financial management, operations, human capital,and information technology is always better performed when the firm’sstrategy is understood. So at a minimum, advisors must have a clear ideaof what business they’re in and how they define success. Managementdecisions become easier to make when you know what you want toachieve as a business.

Operating efficiency. As with the principle of modern architecture, form fol-lows function. When advisors are clear about which business they are inand what client service experience they wish to deliver, they can designa process around delivering on their expectations with efficiency andeffectiveness. They can also deploy technology in a more systematic way,which is a material improvement over the random process by whichadvisors historically have purchased and applied solutions.

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xx Introduction

Human capital: achieving effectiveness. In exploring human capital, we con-sider the concepts of recruiting, retaining, and rewarding staff at alllevels. You can’t be a true entrepreneur without leveraging off other peo-ple. Such leverage is part of the difference between managing a bookof business and managing the business itself. The selection techniques,leadership concepts, and reward systems we offer here can help youreinforce your business strategy.

Developing cultures: creating a positive workplace. We’ve learned much overthe years about how ultimately culture trumps strategy every time. Howadvisors establish the foundation for what type of environment theywant to create, and how they reinforce the right behaviors, becomes acritical element in managing a growing business.

Financial management: managing the bottom line. The information we presenton financial management addresses critical issues such as benchmarking,budgeting, and management analysis. Financial advisors tend to giveshort shrift to the financial management of their practices, perhapsbecause they believe that simply having more clients will solve all theirproblems. The dynamics of a financial advisory firm, however, requiremore active management and a solid understanding of what to monitorand act on to translate revenues into profits, cash flow, and transferablevalue.

Preparing for succession. With the average age of principals in advisory firmscontinuing to rise, the issue of creating an orderly transition is becomingeven more acute. It is also developing into a critical aspect of businessmanagement, as the failure to plan threatens the very continuity ofthe enterprise. Our belief is that succession planning and sale planningare quite different, and that the advisory firms that are built to last arethose that also have a thoughtful career path that leads to partnershipfor those impacting the organization today.

Leadership. Because our profession relies on data to make informed decisions,there is a tendency to rely on facts and rules of thumb and best practicesas the key elements in building a dynamic business. The reality is thatover the years, very little space has been devoted to the developmentof management and leadership skills in an advisory firm that showshow judgment and action drive results. Key to the future of individualadvisory firms is how the people in charge will translate vision intoaction and how their followers will eventually emerge as the leaders ofthe business.

Please note that we have added a worksheet icon in the book at each mentionof the worksheets in the appendix. Our hope is that this will key you in to whenthe worksheets might be especially helpful to you.


Introduction xxi

Our goal in discussing these management disciplines is to awaken your man-agement skills and give you a framework for making informed decisions withinyour business. To accomplish that, we focus on five critical disciplines of busi-ness management: strategic planning, business structure, human capital, financialmanagement, and leadership development. How you approach the managementchallenges related to compliance, sales and marketing, and information technol-ogy will, of course, be influenced by the strategic decisions you make.

Some of the larger firms in the industry can afford to employ full-timemanagement to attend to these critical aspects of running an advisory business,but for many advisory practices, that option is not always financially viable,which puts many firms at a crossroads. Advisors who are unwilling to invest inseparate professional management must master the essence of these disciplinesthemselves. The management techniques at such firms are part art and partscience, and leadership is even more challenging because it requires the firm’sowners to create a vision and inspire others in the business to follow them intothe fray.

The best way to break into that league of successful firms is to evaluate yourbusiness the way a physician evaluates someone who’s sick:

� Examine the patient.� Diagnose the source of the pain.� Prescribe some solutions.� Recommend behavior change for long-term health.

That done, you’re ready to proceed. Worksheet 1 in the appendix canserve as a valuable tool as you assess the condition of your firm inseveral key areas of management and determine where to begin the

work of transforming the practice you have into the one you’ve always believed itcould be.


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CHAPTER 1

The Financial AdvisoryBusinessWhat’s Next?

Much has changed since Practice Made Perfect was first published in 2005. Backthen, the average advisory firm was growing at a compound annual rate of18 percent. Advisory firms were transforming in record numbers from solo prac-tices to ensembles, with multiple professional staff. The markets were moving atan inexorable pace to reach new highs. Business profits were strong, and ownerincome was increasing year after year. Little did advisors know the seeds of des-truction were being sown.

Starting in 2007 with the collapse of the housing bubble, the world economieswent into a tailspin of such velocity that many financial professionals were un-prepared. Then in 2008, the securities and banking industries started to bite thedust at a more rapid clip. Bear Stearns was bought in a fire sale by JPMorgan;Lehman Brothers shut its doors; AIG unraveled and put in peril many of itscounterparties around the world. By November of that year, the S&P500 wasdown 45 percent from its 2007 high. The Troubled Asset Relief Program (TARP),with $700 billion of funding for financial institutions, was implemented by theBush administration to fend off a total collapse of the U.S. economic system. Inthe midst of this, Merrill Lynch was sold to Bank of America, and Bernie Madoffemerged as the biggest fraudster of all time, further adding to the idea that WallStreet could not be trusted.

In the aftermath, the landscape for financial services appeared much differentfor good reason. Anyone associated with stocks and bonds, synthetic securities,financing, securitization, or any permutation of Wall Street was held in contemptby individual investors. Organizations that were once trusted and respected were

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2 Practice Made (More) Perfect

vilified by Congress and the press. Consumer organizations pressed for tightercontrols. Meanwhile, clients began asking their current and prospective advisorsto demonstrate why they should be trusted.

Banks and wire house brokerage firms still dominate the landscape in sheernumbers of assets and financial professionals, but a large and growing populationof independent advisors own their own businesses and are operating as registeredindependent advisors (RIAs) or are affiliated as independent contractors withIntroducing Broker/Dealers (IBDs). In the United Kingdom and other countriesin Europe, Australia, and Asia, there is an emerging market of independentfinancial advisors (IFAs) and multi-family offices (MFAs) that operate much likeindependent advisors in the United States, free of proprietary products but withan increased responsibility to manage their own businesses as well as serve theirclients well. There continues to be a persistent migration out of the captiveenvironments into independent businesses, where the advisors can create theirown brands, deploy resources the way they see best, and exercise judgment thatthey feel is in the best interests of their clients.

Of course, a huge body of independent pioneers led the way, but the averageage of those practitioners continues to rise, and the business pressures continueto increase. This is both a blessing and a curse. The aging population of financialprofessionals creates opportunities for growth among younger practitioners andperhaps even opportunities for acquisitions and mergers. The curse is that many ofthe older generation of advisors have not adequately prepared for their succession,so what they ultimately transfer to a successor may be an aging pool of clientsheavy into their asset-withdrawal cycle. The good news is that the aging pool ofclients is also transferring assets to their heirs, which provides a new opportunityfor serving accumulators.

But being an independent in financial services at this time is not withoutits challenges. Foremost is the belief by most industry observers that we are ina slow-growth market environment for a long time, or at least until corporateearnings improve dramatically, unemployment comes down, interest rates go upfor the benefit of savers, and the market becomes less volatile. Many advisorstoday are making growth assumptions of 4 to 6 percent compounded annuallyfor their client portfolios.

Exacerbating the challenge is that the cost of doing business for advisors isalso increasing because of rising labor costs, a tougher regulatory climate, andheightened scrutiny by clients and prospects regarding their ethics and way ofdoing business. This, after taking a beating in the market right along with theirclients, has driven most to work extra hard during the intervening years to rebuildassets and income.

The blame for this added pressure could go to the larger banks and brokeragefirms who were at the fore of the crisis, but that’s like blaming fellow travel-ers for the cold you got. It may feel good to point fingers, but it does little to


The Financial Advisory Business 3

ameliorate the situation. In fact, it may have created an opportunity for inde-pendent practitioners to distinguish themselves in the market with clients andstaff.

What Are Top-Performing Firms Doing?

In 2010, Pershing Advisor Solutions sponsored a survey conducted by Investment-News/Moss Adams on the financial performance of financial advisory firms. Asthe dust settled, the survey revealed that the leaders of top-performing advisoryfirms were able to raise their heads out of their foxholes and capitalize when otherswere tentative. This serves as a good baseline to begin measuring improvementsin advisory firms for the foreseeable future.

� While average advisory firms saw their overhead expense ratio increase to44.9 percent of revenue, the top-performing firms kept their operating expensesto 29.3 percent.

� Top-performing firms generated more revenue per professional staff member.� As further evidence of greater productivity, the top-performing firms generated

almost 20 percent more revenue per client than the average advisory firm.

The combination of greater operating leverage and expense control allowedthe top-performing firms to spend more on the client service experience as well.The top-performing firms spent more per client than the average firm. The top-performing firms also spent more of their total expense dollars on their ownpeople at a ratio of 70.3 percent of total expenses compared with 61.2 percent atthe average advisory firm.

It doesn’t take a CFA to deduce that a greater investment in clients andthe people who serve them yields a higher probability of retaining both—andattracting others. The big takeaway from these statistics: The top-performingadvisory firms have not only the right discipline in managing their businesses butalso the right people to execute their management plan.

Often, advisors and firm rainmakers are oblivious (at best) or dismissive(at worst) of the people not working directly with clients, those responsible forrunning the business and managing operations. Many mistakenly perceive themas overhead and do not see the value they contribute to the brand and clientexperience. Data from most industry studies seem to refute this thinking.

In fact, the InvestmentNews/Moss Adams study showed that those firms withmultiple owners and a commitment to professional management were growingfaster than the average advisory business. This makes intuitive sense. With mul-tiple owners, an advisory firm has multiple points of contact, multiple centers



of influence, and multiple clients to drive more revenue. A multiowner firm alsoallows specialization among the partners, freeing up each to take on specific man-agement responsibilities to oversee critical areas like human capital, operations,the client experience, investment policy, financial planning, and other disciplinesthat are core to the firm’s success.

The Business as Client

Another thing the InvestmentNews/Moss Adams study revealed is what happenswhen advisors view their own business as a client rather than an afterthought.This means they plan, they execute, they monitor, and they adjust as needsdictate—just as they would for a client.

Unfortunately, time constraints for those who are both managing individualclients and attempting to manage the business are an impossible barrier formany. The typical advisory firm is already at capacity in terms of the number ofclients it can handle, so there is no leeway for adding more management duties.How do you find time to ensure the business is performing to its optimal levelwhen confronted with a schedule filled with client appointments, concerns aboutvolatile markets, and urgent decisions? Even more significantly, how do you findthe time to think strategically about the business—let alone implement a plan?

It is within this context—market pressures, management challenges, risinglabor costs, new regulatory environment—that owners of advisory firms must askthe question: Is my strategy still relevant? To begin this process, there are 10 bigthings to think about how you would address in your own business. The outcomemay be a mere refinement of your strategy, or it may require a wholesale shift inhow you do business to ensure you are building a business to last.

10 Things to Think About

One of the challenges of managing a business is the necessity of analyzing the firmand making plans about where to focus your attention and resources. Even thoughit is an inexact science, we can probably draw some conclusions about where thebusiness of financial advice is heading, based on some essential observations. Ourvision of the typical advisory firm includes the following:

� Most are small businesses (even at $10 billion of assets under management, therevenue level would qualify a firm as small).

� Most are owner-operated (though with the emergence of consolidators, this ischanging somewhat).

� Most have experienced rapid growth in clients.


The Financial Advisory Business 5

� Most have experienced a meaningful increase in headcount.� Overhead costs in general have gone up dramatically, particularly compen-

sation-related expenses.� Clients are expecting—if not demanding—more from their advisors without

allowing for a commensurate increase in charges.� Firm owners and staff are getting older.� These trends are expected to continue.

If you agree with any or all of these assumptions, then what do you think thefuture holds for your firm?

1. Managing Growth

Much of the growth in advisory firms before 2008 came as a result of marketincreases, but a fair amount also came from new clients, which required theaddition of new people to serve them.

While growth provides the opportunity for staff development, increases inprofits, more succession options, and an exciting atmosphere, it brings with it thepotential for stress fractures. When an owner’s span of control is stretched, quality,consistency, and effective leadership suffer. Often, the firm’s sense of purpose getsderailed as well because there is no time to inculcate new associates with thefirm’s philosophy on the right way to do business, or for leadership to evaluatewhat’s working and what’s not. Unmanaged growth can be more dangerousto a business than no growth at all because of the reputational, financial, andcompliance risks.

The question advisors should ask is whether their business is structured rightto effectively manage growth. Do you have the right people doing the rightthings? Have you examined your processes, procedures, and methods of ensuringconsistency? Are those responsible for managing doing their job well, or do theyrequire more training? How fast can you grow without fundamentally changingyour management structure? And if you do have to change your structure, whowill you put in place to ensure you execute this well?

2. Hiring Professional Management

As an owner, you will know your practice is at a crossroads when you do nothave time to both serve the clients well and manage the business well. For manyfirms, the business has become the biggest client, and it has many moving parts:strategy, human capital, financial management, operations, sales and marketing,client service, and compliance. If you evaluated your business management by thesame standards your client uses to assess your ability to provide sound financialadvice, how would you rate? Your challenge now is to decide whether to give



up one to focus on the other. Data shows that advisory firms with professionalmanagement grow at a substantially faster rate than the average firm, and logicaffirms that.

“Mission Possible II,” a white paper published by Pershing Advisor Solutionsin 2009, reported that 14 percent of advisory firms with more than $1 million ofannual revenue added dedicated management. As firms increased in size, this hasbecome more common. At $3 million to $5 million, 76 percent of firms addedprofessional management, and over $5 million, 88 percent had this capability. Itis hard to say if this is cause or effect, but it is clear that as firms become larger,they require more specialization and focus and more accountability around thedifferent disciplines within the business.

The question is whether one of the principals who heretofore was workingwith clients while managing the business part-time will step into a full-time man-agement role or whether the owners will cede some control and hire professionalmanagement from the outside. With qualified individuals dedicated to a job, theoutcome will almost always be better. The process of deciding who should per-form certain management functions should be no different than evaluating whoshould be the chief investment officer or chief compliance officer. It is a functionthat requires vision, empathy, attention to results, and a passion for performingthe work well.

3. Improving Operating Efficiency

It is becoming accepted wisdom that most advisory firms have plenty of toolsbut are not utilizing technology to the optimal level. The failure to interface andintegrate, train properly, plan, or budget for acquiring software and hardwareall contribute to the inefficiencies. Having made multiple steps forward, mostadvisors now need to take at least one step backward to assess workflow anddetermine how technology can be optimized to improve productivity and clientservice. There is a high likelihood that the solution will not be a proprietarycreation but better usage of what currently exists in the marketplace.

The independent advisory business has transitioned from being a techni-cal business to a relationship business. And the key to relationships is howclients are treated. As your practice grows, that increasingly means operations—encompassing everything from client intake, to execution of the plan, to tradingand reporting, to compliance and financial management. These days, operationsis rising in importance and strategic value for many advisors. When PershingAdvisor Solutions commissioned “Mission Possible I,” we learned from detailedinterviews with leading advisory firms that their processes can’t keep pace withclient demands and firm growth. Most of these advisors told us they are mostlyreactive and not strategic about how they address operations issues and that theirstaffs are overwhelmed.

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