As the financial services profession evolves, business models have matured to support individuals who want to be independent, but not alone. While the traditional affiliation arrangement still has appeal for certain investment professionals, three new business models that support more independent-minded professional have emerged. These Super Models, including three corresponding case studies, are discussed in-depth and available via a special content channel on WealthManagement.com.
Before you dive into the three Super Models, let’s look at some of the myths and realities in the financial services industry.
First, let’s talk about being independent as an individual versus having independence as a business. Being independent doesn’t necessarily translate into being out on an island—that’s one of the misconceptions about the move to independence.
While the entrepreneurial path is sometimes arduous and lonely, it doesn’t have to be if the right business choices are made early enough in the process. You can be in business for yourself, but not by yourself.
While some in the independent world will say there is one “best” way to run your business, in reality, the best model is the one that lets you focus on your goals and your clients’ needs.
Downward Spiral for Solos?
Some in the financial services industry are under the misguided notion that as advisors break away from big Wall Street brokerage firms or leave broker/dealers, they leave behind all affiliations. While some individuals may choose to put up a shingle, get their own office, and say that they’re not going to be dependent on or affiliated with any larger organization, it’s really not the future of the financial advisory business.
I don’t think solopreneurs have a healthy future; there is just too much competition now from other independent firms who can match what clients expect. Clients like to work with teams. They like to work with a real business versus Joe Financial Planner working on his own.
There is a cellphone service that advertises to business owners that they don’t need an office—your cellphone can be your office; clients will never know the difference. But clients do know the difference. Running a financial advisory business is too complex to do everything well while growing a sustainable and meaningful business on your own; it requires skills across all functions. Being a financial advisor has become a profession that, more and more, requires specialization.
Governance and Control
Independence may mean that you have governance and control over your future; you can make the key decisions for how you’re going to serve your clients. However, the highest-margin firms understand what they do well and what they lean on other providers to do. If we look back, that’s been true in the financial services industry for many years with: the general agency model, the wirehouse model, the career agency model, while others surrounded the advisor with services but the trade-off was the advisor was really not independent. They didn’t own their own clients or have flexibility over their service model, pricing or even the clients they served. For many advisors, that trade-off, to get all of those services or be surrounded by all those services, is attractive, while others considered it too expensive.
So, the initial choice of independence was “I’m just going to break away and create everything on my own.” The new choices include three increasingly prevalent business models that allow an advisor to be independent while bringing the best services their clients. In the ideal scenario, the advisor can focus on the things they do best, which might be sales or business development. It might be the technical side of the business such as investment selection and portfolio management or in financial planning and retirement income distribution. Whatever the advisor’s strength is, they can partner with or lease other services from a variety of different types of providers and not have to worry about whether they have everything lined up, so that they can operate in the way they want and deliver the services they envision for clients.
The Solo Model is basically “I’m in business for myself.” There is one professional and when I say professional I mean that’s the licensed advisor who interacts directly with clients. The solo model is a single professional with a single-owned practice. They probably have support staff with them (administrative, clerical or client-service), but there is only one individual who is the advisor with the clients. That’s the Solo Model. They tend to operate in an office by themselves.
In the Solo Model, the advisor works until they die or they simply can’t work anymore. The block of business atrophies. Eventually, clients become orphaned. The company that wrote the business through, whether it’s insurance or investment products, is really not geared to provide direct client-service. As clients age or hit a particular time frame, just when they most need advice, their advisor is gone. This contributes, in part, to the lack of trust in our industry. And there’s still a major issue with succession. The Super Models help address that.
Part Of A Group—But Still Siloed
The Silo Model grew out of the need to address some of the solo problems. It’s the kissin’ cousin to working solo, but it’s not one of the Super Models destined to provide more lasting benefits. In this scenario, one or more advisors, each of whom individually owns their practice, come together. They share services and expenses as a way to reduce costs and gain economies of scale, but they maintain separate profit and loss statements.
For instance, it might be two advisors who share office space and an assistant. Inside of a wirehouse or one of the Super Offices of Supervisory Jurisdiction, those advisors would be considered solo practitioners; the wirehouse or Super OSJ may provide some services, thus the advisor will be sharing expenses with other advisors but each will still own their own practices. They’re not sharing revenue or clients.
It may be easier to establish a continuity plan in the event of disability or sudden death due to the fact that, over time, the clients may begin to see the overarching entity or other advisors in the group as a lifeline in the event that their primary advisor is no longer able to serve them.
Adding Partners—Working as an Ensemble Team
The Ensemble Model is really where there starts to be a combined economic interest between advisors. This is where advisors are actually sharing the topline and bottom line—think about that as a partnership where they might not be equal partners but they might still have some direct compensation from the business they generate directly. Generally, what they are moving toward is a partnership model where they’re all sharing in one practice.
Those are just the fundamentals of the practice models. There are many variations; that’s one of the reasons the industry has so many boutique consulting firms and “practice management” consultants.
The fundamentals of the independent business models need to evolve to meet the growing challenges of running an independent advisory firm. Consider:
- Technology is complicated, even for a solo advisory firm, advisors really need an intermediary to help them sort through all the options and make wise decisions.
- As these businesses grow, there is no dedicated management of the business. Management is a profession; large firms realize the task of running the business day-to-day is not a part-time gig.
- There are all the rules that have been overlaid from a regulatory standpoint over the years.
- The financial services industry suffers from a high early-stage turnover rate—a challenge to growth.
Rare is the individual who can do the entire job well—business development, financial planning, investment management, client service and business management. One of the reasons advisors tend to affiliate with someone else, whether it’s a broker/dealer or getting support through a custodian or other service firms, is because they might do only two of the key five or six jobs well. They know they need help. There aren’t enough hours in the day. Figuring out what the advisor’s job is and what they need to outsource is one of the reasons advisors think about affiliating with intermediaries.
Matt Lynch is the Managing Partner of Strategy & Resources,LLC, a financial services consulting firm that links strategy with the art of the possible in terms of implementing change. Learn more at www.StrategyResources.com.