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There are more “silo practices” than we realize – those with two or more advisors, each with his or her own book of business. Each has a distinct investment philosophy and strategy, client demographic, business strategy and value proposition. They share the costs of running their own practices within a practice.
Usually there is one managing partner – typically the founder and majority owner – who cares (far more than other partners) about growing the firm, and its brand, for monetary and other reasons. They run the firm in addition to managing their clients; they feel frustrated and overworked while their partners work fewer hours and take plenty of time off; they feel that their partners are not contributing their fair share relative to their ownership and/or compensation.
The obvious downside to this business model is that while the partners technically have ownership interests in the firm, their vested interests lie mostly or exclusively in their own books of business. The firm is a platform from which they run their own business. This division of allegiance and insular attitude do not align well with their duties and responsibilities as owners of the firm.
Furthermore, this business model significantly impairs the enterprise value of the firm in that its future cash flow is less predictable and volatile. This is because its “eat-what-you-kill” model is not scalable or sustainable as the partners’ incentive is how much money they make.
Moreover, these firms attract and provide a platform to independent “producers” who are dissatisfied with their current setup, be it a wirehouse, independent broker-dealer or another RIA. In so doing, asset size and future production potential speak volumes. There are often only superficial discussions, if at all, about shared strategy and values, cultural fit, business planning and other crucial but nonmonetary issues. The obvious risk here is that a producer can leave when there is a better deal elsewhere. Such turnover means a loss of assets and a further eroding quality of cash flow.
Said differently, in the eyes of a buyer, these are business risks that chip away at these firms’ values.
Five steps to maintaining a successful silo practice
But not all hope is lost. To mitigate against these and other risks, there are at least five things these firms can do.
- Implement and maintain a world-class, turn-key operational infrastructure, including investment management, back-office support, technology and compliance. Make it so easy for producers to run their practices that it becomes too hard for them to leave.
- Aggressively add quality producers. What the firm may lack in cash-flow quality, it can make up for it in volume.
- Build a strong and respected brand in the community that attracts not only prospective clients, but strong producers as well.
- Build an equitable financial structure that is aligned with producers’ contributions, namely their production volumes. It should also include succession planning options – for example, enabling younger advisors to seamlessly buy retiring advisors’ books.
- Hire or promote a full-time or semi-full-time professional executive to handle the daily chores of running the firm. This frees up time for partners and advisors alike from nonproductive tasks to focus on their core duties of servicing and acquiring clients. This will in turn help grow assets.
