What Does it Take to Maintain a $100 Million Practice?

And this shrinkage will happen even with the best of service models. With poor service the shrinkage will happen faster.

To maintain the practice, one needs to add $6 to $10 million each year to the asset base. For growth, more needs to be added. If there is growth on the assets because of a good market or good stock selection, that should be considered a fortunate occurrence. But since one has no control over market forces, it should not be taken into consideration when planning or budgeting for the practice. In fact, since the practice could experience shrinkage of assets at any time, budgeting for the year should be based on the income from no more than 90% of the book.

The following is what needs to be done, at the minimum, to maintain a good reputation for excellent service:

1. Each six- or seven-figure account needs to get a call every quarter and an in-person review of their accounts at least once a year.

2. Each account under six figures should receive at least a yearly phone review.

3. Each client who calls for service should be handled quickly and efficiently with the service matter resolved ASAP.

4. The service advisor should look for opportunities to keep clients out of danger. For example, make sure RMDs are taken on time.

5. All of these tasks should be done in a spirit of eagerness to please the client, no matter the difficulty or client attitude.

There will be more expenses related to servicing small accounts due to the fact that there is less revenue generated on them, but they require almost the same amount of service per account. Some FAs may cull the smaller accounts from their book, while others may feel an obligation to those people who trusted them when they were first getting started. Each advisor must make that determination on their own.

Even though those service tasks become part of the FA’s practice culture, it’s not enough. If they have good investment performance they may generate referrals, which may give them enough new clients to maintain or even grow their asset base. But in times where referrals are scarce, to grow the assets of the practice, the FA may have only two choices:

1. Acquisition
2. Organic growth

Acquisition is the fastest and probably the least expensive way to grow a practice. Finding a seller, though, can be problematic. To find buying opportunities for practices that are a fit for the FA’s culture and practice, and one that is fit to buy, the FA will need to prospect just like they would for individual clients. There are long lead times and it takes a lot of effort, but the high cost and most of the effort doesn’t come into play until they actually buy and take over the practice.

Organic growth is the most common way FAs grow their practices. There are two primary ways to grow organically:

1. Chase after potential clients. They find prospects wherever they can and continually call them or send them material until they either reject them or they become a client. This way is effective, though tiring and ego-deflating. However, it is the one way to prospect that the FA has the most control over.

2. Attract potential clients by getting them interested in the FA’s services. This is the way it works with most referrals from current clients. The client gets referrals interested in their service and then the FA comes in as the expert professional, not the desperate salesman. But if referrals have dried up, or if the FA is new in the business, the FA must prospect like described above or find ways to attract new business. That can be much more difficult than one would normally anticipate. The FA must invest money up-front with no guarantee they’ll ever recoup their investment. What’s more, for a marketing strategy to work, one must have a consistent message over time. So while the FA is spending lots of money on a marketing campaign with no immediate results, they don’t really know if it will actually produce any new clients. They could be consistently marketing in an ineffective way. They just won’t know for months at a time. There are any number of companies that will market an FA’s services for them, but they must trust them to deliver their prospects to them, and they must pay for that service before that happens. That is expensive and is anything but guaranteed.

That’s what makes this business so difficult. It is expensive to get in and expensive to stay in. It takes money, work and creativity to be successful. Most young people have little money to spend, but are energetic and can put in lots of hours.

They must learn not only marketing and prospecting skills, but they must also learn how to make effective sales presentations and to close business. Beyond that they must also be good at investing correctly for their clients. Personality and presentation may get one a client, but the FA needs performance and service to keep that client. In addition, the FA must also be competent at running a business.

Whether or not it is true, the commissioned salesman is increasingly being perceived as less of an advisor than is the FA who works under a fee model. So the more professional revenue model is perceived to be fee-based, either according to the assets the FA has from the client under his management, an hourly fee for service model, an annual retainer fee or some combination of the three. A young planner just entering the practice of financial planning will find it difficult to start with no clients and make enough income to sustain a living using strictly the fee model. It will likely be necessary to start one’s career as a commissioned salesperson and convert to fees once his clientele has grown to a sustainable level.

The other and more desirable way for a young financial planner to enter the business is to join an established financial planning practice. They can go into the practice and work with some of the clients of the owner in either an advisor or service position. During that time the young FA should be working on developing their own book of business. Since they have a salaried income and they’re working in a successful office, it is the perfect time to try some marketing ideas and develop their own style. If they want to enter a niche, this is the right time to be developing that area of expertise in which they’ll need to be successful.

Unless one is happy always working with someone else’s clients, building a practice on their own is necessary to get to the place one will need to be to break out on their own or even assume the practice they work in once the owner decides to retire, either by his own desire or by necessity. Even if one is offered the opportunity to buy the practice they work in, it will be unsuccessful if the young advisor has not demonstrated the ability to develop business sufficient to maintain the asset level of the practice. In a $100 million practice, that means the advisor should possess the demonstrated skill to bring in at least $10 million of new assets every year.

For advisors who are currently working in an office as an independent rep and paying the office owner rent and an override on their revenue, they should continue building their business and possibly be looking for opportunities to purchase other practices should they be a good fit for the young FA’s process. If the FA desires to one day purchase the practice they’re working in they should be realistic when sizing up their capability;

1. Does the young FA have the money it will take or the ability to borrow the money it’ll take to make the purchase?

2. Have they demonstrated the ability to produce at least 10% of the book in new assets each year? As you may notice, I said "have they demonstrated," not "do they believe." I’ve known many people throughout my life who "believed" a lot of things that are not true. But if you have "demonstrated" the ability by actually producing at that level, you now have proof of your ability.

3. Does the FA possess the skills (hard and soft) to operate a business? Running a financial planning practice is far different from being a financial planner. The practice is a business and must be run like one. If the young FA has never run a business with employees, and they have no schooling in the subject, they may want to take a class or two at their local community college to learn the basics of running a business. It will make their job as “boss” a little easier if they possess the requisite business knowledge.

Finally, if the young FA is currently working in a practice they one day hope to purchase and take over, they should work extra hard to help build that practice and its value for not only the current owner, but also for themselves. Doing so will be in the young FA’s best interest for the following reasons:

1. Working side-by-side with the current owner and taking on more responsibility over time will help the young FA build the skill for attracting the business they will need to attract to keep the practice growing once the current owner retires and the young FA takes over.

2. Buying out a $200 million practice will cost at least twice as much as buying out a $100 million practice. However, it will also be producing twice the revenue (duh), so once the practice has been paid for the young FA will be able to afford a better lifestyle than with the smaller practice.

3. By working hard to develop the business, the young FA may ingratiate himself or herself to the owner. This may be advantageous to the young FA when it comes time to purchase the practice for these reasons:

a. By showing the retiring FA that the young FA knows how and can operate the practice, the retiring FA may be more willing to agree to more generous terms so as to make it easier for the young FA to buy the practice

b. The retiring FA may recognize the contribution the young FA made to building the practice and sell it to the young FA at a more attractive price.

4. Even if the retiring FA fails to recognize the help she got in building up the practice value and sells the practice to someone else, the young FA will have developed skills they will be able to carry into their next job. In other words, the hard work that was put in will not have been in vain.

The vast majority of practices never get to seven figures in revenue per year. If you’re working in a practice that is currently, or is growing toward that size, should you ever hope to one day run that practice, learn all facets of the business and demonstrate the ability before you’re given the opportunity to purchase it.

Noel B. Swain, CFP®, is the founder of ProVest Wealth Advisors in Spartanburg, is a Registered Principal with Cambridge Investment Research, and has been actively involved in personal financial planning since 1984. His areas of specialty are Retirement Planning and Investment Management. His special talent is to make the investment process understandable to ordinary citizens by using analogies and real-life stories from his 35 years of experience. His burning desire is to make the name ProVest Wealth Advisors synonymous with the highest quality brand names in the industry. He invites you to visit his website at www.provestwealth.com.

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