Building a business – not just a practice

Feb 17, 2014 @ 12:01 am

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How does an adviser go from maintaining a practice to building a vibrant, viable – and scalable – business that has both growth potential and transferable value? This white paper highlights three key areas and outlines multiple steps for adopting a CEO state of mind and building a more valuable enterprise.

Succession planning – or a lack thereof – has been widely acknowledged as one of the most vexing issues threatening the current and future growth potential of the advice industry.

“The cobbler's children have no shoes,” “Someday is not a day of the week,” and other quips and clichés are routinely employed to describe an aging adviser workforce (now well into its 50s) seemingly unconcerned, or at least unmotivated, to identify an exit strategy.

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Indeed, in a recent study of 400 financial adviser firms conducted by InvestmentNews Research, just 7% of the respondents said that they have executed a formal succession plan. An additional 15% acknowledged that they have a succession plan in place that is ready to execute, compared with 43% who fell into a category respectfully acknowledged by IN as “planning to plan”.

Despite this lack of planning, 92% of these same firms admitted that it is “highly or moderately risky” to run a business without a succession plan in place.

We believe, however, that this well‑documented disconnect underscores a broader theme and is merely a single symptom of a much larger problem that plagues the industry.

What do these numbers mean?

Most advisers currently run practices – they do not operate businesses.

Without adopting a “CEO state of mind,” which involves taking a strategic approach to aligning personnel, technology and marketing decisions with clear and reasonable goals, advisers will limit their potential for growth – and ultimately the overall opportunity to maximize the value of their business.

To address this issue at its core, three main areas and steps to achieving a CEO state of mind—and running a business, instead of just a practice—will be examined. Download the full white paper 'Building a business – not just a practice'.

Why professional management matters now

Market conditions are pointing to an increasingly favorable environment for growth in the near future. Specifically, more than 300 independent financial adviser firms in the 2013 InvestmentNews/Moss Adams Adviser Compensation and Staffing Study reported average revenue growth of 14% a year, which puts the industry on pace to double in size over the next five years. General drivers have included, and will likely continue to include, baby boomer retirement, increased use of defined contribution plans and individual retirement accounts, longer lifespans and asset appreciation.

At the same time, investors continue to move more of their assets from captive environments and traditional brokers to the independent space.

As these assets shift and grow, the independent financial adviser industry's top firms will likely grow at a much more significant clip – making the emphasis on developing an established business versus a practice more important than ever before.

Complexity and change

Today's top firms are growing more complex in their structure and strategies. The firms that have grown the most in recent years are those that have a diverse mix of skill sets and roles within their organizations. They are essentially multi-professional firms that have expanded their headcount to increase their capacity to add more clients and manage the client relationships they already have more efficiently and effectively. In short, those firms that have grown the most have typically identified their strengths and weaknesses, measured them against their growth goals and managed their personnel accordingly.

For those advisers that are looking to grow their businesses into one of these more developed—or “ensemble” practices, as they are now often called—the following three areas of concentration are described, along with the necessary steps, to move from a practice to a business.

The three areas are firm staffing, compensation and technology.

This blog post was an excerpt from a new white paper “Building a business – not just a practice”, by Cadaret Grant & Co., in partnership with InvestmentNews Research. To download the full white paper, click here.

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