For many advisors, life at their firm isn’t what it used to be.
Increasing bureaucracy, rising compliance restrictions, and diminishing freedom over investments and client communications are issues we hear about every day.
Yet many advisors choose to stay the course since it’s still “tolerable.”
Why knowingly accept a subpar situation?
Typically, it’s because things are “good enough,” and advisors can still serve clients well despite their own daily frustrations. And change is scary, risky and disruptive — so it’s natural to think that maintaining the status quo is the safe bet.
The reality is that staying the course comes with its own unintended consequences. Consider these.
Advisors working in an environment that is bureaucratic and managed to the lowest common denominator often find that the growth of their business is negatively impacted. This may result from not having access to the holistic and high-end resources needed to land high-net-worth clients. Or growth may be stymied by an inability to utilize social media and marketing to develop prospects. In fact, we find that advisors are often so busy making a suboptimal situation work that they don’t even realize they are limiting themselves. However, the danger of continually restricting to fit the confines approved by the firm is that it squashes creativity and results in a less differentiated and growth-oriented business.
A persistent concern for advisors is retaining experienced staff. The best team members make a wealth management business operate like a well-oiled machine. However, growing compliance mandates and bureaucracy, plus increasing revenue hurdles that advisors must hit to receive a fully paid support person, are resulting in understaffed teams — leaving the support staff overworked and frustrated. And when key staff members leave, it sets advisors back substantially as they take on administrative and client service tasks while spending months trying to hire and train an acceptable replacement.
It’s every advisor’s nightmare: the loss of an important client. Operational delays, difficulty getting things done, and poor service from other areas of the firm sometimes lead to client losses. Advisors work hard to bubble-wrap clients, protecting them from any deficiencies by stepping in to ensure excellent service. Even when that's done successfully, efforts to insulate clients from the firm are, at their core, counterproductive since advisors could ideally use this time for prospecting or fostering existing relationships. And sometimes, advisors can’t protect clients when they interact with another part of the firm and are left so frustrated that they pull the entire relationship.
Many advisors find it hard to walk away from deferred compensation, viewing this as money they've already earned. The good news is that many firms will add a percentage of an advisor’s production into a deal to partially make up for the deferred an advisor leaves behind. In a move to independence, the combination of upfront transition capital and a higher net take-home also helps to defray a portion of what’s left behind. So for advisors planning on one well-timed move in their career, it’s important to remember that deferred compensation balances increase over time. If they feel handcuffed now, it will only get worse in the future.
Acquiring businesses from retiring advisors is a great way to turbocharge growth. Yet acquiring a book through a firm’s sunset program requires the acquiring advisor or team to sign a contract tying the business to the firm for five to eight years. And large teams with many advisors are often continuously fulfilling a sunset buyout — creating a cycle that can be difficult to break. The net result is that advisors lose agency over their future since they are continually “recommitting” their business back to the firm.
While staying the course can minimize disruption, it typically results in suboptimal career enterprise value. Why? Advisors who don’t make one well-timed move are forgoing a transition deal, which can deliver up to 300% to 400% of an advisor’s production. Or they miss out on transitioning to independence, which offers higher net take-home pay — plus the ability to sell the business at market-based multiples, yielding a larger gross monetization and a higher net since proceeds will be taxed at long-term capital gains rates.
Although it may appear that staying the course is the safest bet, it’s clear that there are risks involved in settling for the status quo. So, it’s essential for advisors to challenge their thinking and evaluate all the positive and negative impacts of staying put versus taking the leap of faith to land somewhere better.
Wendy Leung is a senior consultant at Diamond Consultants.
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