The future of the advisory business is all about people, according to Philip Palaveev. “No matter what happens with consolidation and pricing,” he says, “no matter what role technology plays, the most successful firms of the future will be those which excel at retaining, motivating and organizing their people.”
Palaveev is the founder of the Ensemble Practice, a new consulting group for advisors who want to build multi-partner firms. Some of you may remember him as the author of those compensation and staffing studies that the Moss Adams Consulting Group would put out every year. More recently, he has served as the president of Fusion Financial Network, which he once described as a "practice management health club for advisors who want to get their firms in shape."
Last February, Palaveev led a private two-day workshop in Boulder, Co. on how to take an advisory practice to the next level. The audience included the principals of a dozen prominent advisory firms which most advisors would consider quite successful. The topic was staffing and compensation.
Palaveev started off with a deceptively simple series of questions.
"In your experience, how easy is it to hire staff people who are already experienced in the business?"
The general consensus, muttered unhappily, was that it is nearly impossible.
"How much does it cost to hire an experienced person?" Palaveev continued.
The consensus was that the cost ranges from too high to astronomical.
"After you've hired these people," Palaveev said, "do you still have to train them in your own systems and procedures?"
Of course. A quick look around the room showed there is no dissent.
"So," Palaveev concluded, "the advisory profession still thinks of hiring and training new staff people in terms of a liability on the expense side of the ledger. But in light of your answers, how much additional value does your firm acquire, compared to the company down the street, each time you hire and train a staff person to where he or she is contributing to your overall value proposition? How much value do you acquire when that person becomes a capable lead advisor with clients? Or when that person understands and contributes to your office systems and procedures?”
More than a health club
Palaveev created The Ensemble Practice and its workshops after he became convinced that advisory firms need more than just fitness. If the profession is to survive, thrive and address its pressing succession issues, then tens of thousands of advisors will need to master a new business model. Legal and accounting firms are built upon multi-partner structures with prospective future partners climbing a well-defined career ladder and receiving dedicated professional management.
"This model has proven itself over and over again in other professions," Palaveev says. "So we shouldn't be surprised that today it is becoming the model for the largest, most successful advisory firms."
Palaveev defines an ensemble as "multiple professionals working toward the same goal" – characterized by shared decision-making, specialization of roles and a process-centric service model. "There is a very simple test to find out whether you have an ensemble practice," he says. "Sit in on the next management meeting where the partners are talking about the firm and count how many times somebody uses the term 'I' or 'my:' 'My clients.' 'My revenues.' 'My profits.' 'My employees.' 'My assets,' 'my technology.' And then count how many times they say 'our:' 'Our strategy,' 'our firm,' 'our business,' 'our value,' 'our partnership,' 'our team,' 'our clients.' “
“The more you use the term 'our,' the more you are an ensemble," he says.
One by one, he ticks off the advantages of "our" over "my." The ensemble firm has the critical size to compete for desirable clients in its market, eyeball-to-eyeball with the brokerage firms that are more aggressively pursuing investment-management and financial-planning clients. The owners of an ensemble firm can specialize in their abilities and compare notes on their business progress. "If you're making big decisions during very stressful times, it's helpful to be able to turn to a business partner and say: ‘What do you think?’" Palaveev says
Beyond that, the ensemble firm is the rare employer that can offer a defined career track for young talent, giving it a huge advantage in recruiting and retention. Many times, the ensemble model also allows the company to offer a lower starting salary to ambitious, talented newcomers. And an ensemble firm provides the kind of office culture that employees value even more than a fat end-of-year bonus.
"You cannot possibly over-appreciate the importance of culture for retaining productive employees," Palaveev says.
The compensation bonanza from ensemble firms
Palaveev's final workshop presentation showed how and why there is a huge disparity in take-home income between solo practices and ensemble firms. The key slide shows that the average mature solo practice pays its owner just under $220,000 a year. For mature ensembles, that figure is just under $500,000 a year. For the best-managed ensemble firms, it jumps to just under $1 million.
And perhaps most importantly to those 60-something advisors who wish they had started on their exit plan in the 1990s, an ensemble firm creates a diversified portfolio of potential successors. The profession is filled with stories of people who designated talented younger professionals as their successors, only to have those successors leave the company, get out of the business or never master the skills required to keep the company going.
"Just as you want diversification in the portfolios you manage for clients," Palaveev says, "you also want to have many potential successors, because you can never tell which of them are going to step up and become partner material."
Convinced? Even if you are (or were before you read this), you may still be unclear about how to evolve your practice to the ensemble model. "The problem we face in the profession," Palaveev says, "is that an ensemble advisory firm is far more complicated to own and operate than a solo practice. Building this more complicated entity looks overwhelming to a busy advisor, and it requires a lot of management skills that an advisor or financial planner is never taught."
The M&A market for ensemble firms
Where do you start?
Today’s advisor can get detailed data on M&A activities around the profession from a number of sources, including the Real Deal reports from Pershing Advisor Solutions, and yearly notification from Schwab Advisor services on how many Schwab-affiliated advisors sold their practices in the next 12 months. Unfortunately, these reports focus on the very tip of the iceberg: practices with more than $1 billion in assets under management that are sold to banks, private equity firms and rollups. They miss at least 95% of the practice values that are actually changing hands in the profession.
All over the country, advisors of similar size are quietly, without fanfare, combining their practices to create scale. This act is often a precursor to hiring a dedicated operations manager or chief operations office who will take the administrative tasks off the plate of the founder advisors.
"Some of the chapters in my book were basically taken from emails that I sent to Fusion advisors who were looking to merge practices together, and who want to be in a better position to hire junior associate advisors," Palaveev says. "If you have your ear to the ground, that is really what is going on in the profession right now. So many advisors see a merger as their best chance to create larger, more durable, more competitive practices."
Palaveev argues, persuasively, that these under-the-radar exchanges of ownership are creating the practice management future of the profession. Multiple successors eventually become multiple owners of a solo firm. Merged firms will be managed by multiple owners.
As they create an ensemble practice, advisors may not realize that they immediately face a number of crucial staffing and organizational decisions that could stunt – or accelerate – their future growth and profitability. Palaveev believes too many merger partners are focusing too much on the least important issues.
"If you are contemplating a merger with someone, there is a natural tendency to ask: ‘What is the deal going to be like?’ ‘How much am I going to pay?’ ‘What percentage of the business am I going to own?’" he says. "But the last thing you should be thinking about in a merger is the structure. Let the lawyers and accountants worry about that at the end of the process."
"The first thing you should be thinking about is: ‘What is our strategy?’ ‘What are we going to achieve together?’ And very importantly, ‘What brings us together?’ ‘Are we two people who perhaps can achieve something together?’" Palaveev says.
He also believes that potential merger partners should pay careful attention to their ongoing compensation structure (related to the work they do in the office), instead of focusing on the ownership percentages (the profit split at the end of the year). "I have seen a number of situations where partners did very simplistic compensation deals and said, ‘Hey, let's pay out our salaries and split whatever is left.’ That usually leads to problems," Palaveev explains. "What happens if you have one partner who built the firm for 20 years, and these days he is not contributing as much, and the other partner is contributing a lot, but he has not been with the firm as it was growing into what it is today? What if one is working hard but not getting any results? Does that by itself demand equal compensation to the person who is getting a lot of results?"
The key thing to understand, he says, is that "partner" is not a job description. "Partner compensation should consist of two different components," Palaveev argues. "The equity compensation is what you receive in return for the capital and other things that you have invested in the business. The other part is the compensation you receive for the labor in the business."
Meanwhile, both solos and mergers can make the mistake of organizing themselves around silos instead of departments.
Instead, managers should create staff leverage at the earliest possible moment in the evolution of the firm, which means creating and staffing departments rather than silos. To illustrate how poorly advisors have evolved their staff support system compared with other professions, Palaveev compares the typical advisory practice to a doctor's office without nurses, where the advisor (the "financial doctor") takes the client's temperature and blood pressure, delivers the diagnosis, writes the prescription and copies all the notes into the client's chart.
"You only get the full benefit of staff leverage when you create repeatable processes in the firm that deliver services to clients," he says.
The signs that your staffing plan is working
You know you are benefiting from staff leverage when clients have multiple contact points with the firm, when the lead advisor works with associates to deliver client services and when associates play an integral role in the service process, including making service decisions and establishing client relationships. In that type of firm, associates are trained to take over the most desirable relationships, rather than smaller ones.
Interestingly, when you break down an advisory firm's primary customer services into underlying components, you immediately see the outlines of a career track for employees. Each of these services requires what might be called a "Tier I" employee (with less than three years of experience) to handle tasks like inputting data into the CRM or planning software and running reports. A Tier II employee (3-6 years of experience) might be called on to manage these tasks and contact clients for additional information. A Tier III staff person (6+ years) functions as an advisor, managing existing relationships and running client meetings. The partners (Tier IV) manages sales and marketing, establishes new relationships and oversees the client-facing activities of the advisors.
In his workshop, Palaveev offered metrics that help advisory firms know when they need to start recruiting new hires. But this is not an exact science. It is easy to overshoot (create more capacity than the business coming in the door) or underestimate your hiring needs and have to turn away clients.
As the firm grows, the staffing decisions may actually become less complicated. "When you get right down to it, most advisory firms are structured in pretty much the same way," Palaveev says. "NFL football teams have distinct positions: tight ends, quarterbacks, offensive tackles, linebackers and so on. At the end of the day, all the teams in the NFL have very similar standard position descriptions, and the positions within an advisory firm also tend to be similar."
Palaveev has also given a lot of thought to how to improve on the traditional practice management consulting model. "Traditionally, consultants have always worked on a project basis," Palaveev says. "The consultant will fly in, give you a document and then fly out. But every advisor knows from their professional experience that the plan document is only the first part of the client success story."
The Ensemble Practice essentially replicates the service model of the top advisory firms. "Like the financial planner, we want to work with our clients to help them implement their plans over the course of two, three, four, five years – as much time as it takes," he says. "To borrow again from the medical model, we don't want to function as a project-based emergency room that just fixes problems. Ideally, we want to work with patients over time to improve their well-being."
The engagement starts with a comprehensive assessment. "We assess their structure and strategy, the way they develop business and systematically attract new clients to the firm," Palaveev says. "We look at the way they organize their human capital, compensate their employees, organize their operations and technology, and last but not least, make sure all of this is profitable and all of this is something that persists over the long term and creates equity value."
The Ensemble Practice workshops (the next one is scheduled for May 15-17 in Boulder, CO) supplement the consulting with MBA-level management training and the chance for a dozen advisory firms to compare notes about the challenges they're facing and brainstorm with Palaveev and his team. The advisors are encouraged to stay in touch and compare notes as they move forward via an intranet system that is monitored by the consulting group. "A great part of the value of going to a meeting is the interaction between participants," says Palaveev. "We wanted to capture that as part of the value proposition."
Understanding the opportunities in your firm
Toward the end of his final workshop session, Palaveev offered a list of threats and opportunities that face most advisory firms. On the opportunities side, they can differentiate themselves by focusing on specialized clientele and developing niche expertise. They could bring in NextGen employees and deepen their talent pools. They can develop great client relationships, enhance their reputations in the community and provide supportive environments for a growing staff.
On the threats side, firms could become so reliant on their owners that clients will never let go of personal relationships with specific advisors. Meanwhile, the client base is aging, and there is declining energy and commitment from the partners.
"Notice that just about everything here is under your control," Palaveev concluded. "That is the opportunity that comes when you understand and master the most important management principles – that you control your fate, rather than being constantly pushed around by whatever is happening in the markets, in the compliance area, technology and everything else. Ideally, the business plan we are going to create together will help you create a business enterprise that will take on a life of its own."
Bob Veres's Inside Information service is the best practice management, marketing, client service resource for financial services professionals. Check out his blog at: www.bobveres.com. Or check out his Insider's Forum Conference (September 17-19 in Dallas) at www.insidersforum.com.
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