The long-term effect of lifestyle-friendly advisory practices

Pinnacle Advisory Group partner Michael Kitces refers to a lifestyle practice as a low-growth model in which the adviser enjoys a lighter workload, with fewer staff and management responsibilities. Lifestyle practices were initially seen among tenured advisers who had dedicated decades to growing their business. They accumulated clients gradually over time, rather than through acquisitions; they nourished the day-to-day operations of their firm; they lived through the trials and tribulations of any small-business owner; and finally, they got to the stage where they could focus less on business development and gaining new clients and could instead kick back a bit and enjoy the fruits of their labors. The idea of the lifestyle practice seems to have grown in popularity, extending beyond advisers with mature businesses (usually those in their 50s and 60s) to those at all levels of experience, including 30- and 40-somethings. Certainly the desire to attain work-life balance is nothing new, especially for those with busy, active families. But this trend brings both good news and bad news for our industry. CONSEQUENCES OF PURSUING A LIFESTYLE PRACTICE In a society where being a workaholic is often perceived as an advantage, the trend toward lifestyle practices may be good news. Moderating attitudes toward work could be good for everyone — from advisers, parents and children, to communities, culture and society in general. It's certainly not a surprise, though, that advisers would want to have a practice like this. Advisers in this industry are often well-compensated, while also enjoying a job that can be immensely gratifying. Long term, however, a downside of a general shift toward lifestyle practices may be that we become an industry with a high percentage of businesses in decline. A review of the fundamentals of the small-business lifecycle from the classic Harvard Business Review article, “The Five Stages of Small Business Growth,” shows us why this may be the case. Authors Neil Churchill and Virginia Lewis outline five stages: existence, survival, success, take-off and resource maturity. In the last stage of resource maturity, they identify eight factors that affect whether the business will continue or decline. The owner's goals for him- or herself and for the business are one of the critical factors. FROM THEORY TO REALITY With so many advisers choosing to remain in the business indefinitely, what I often call “dying with their boots on,” it's not surprising that many businesses, especially solo adviser practices, may be heading toward decline. This happens for predictable reasons: • Younger clients in the accumulation stage generally seek an adviser who can outlast them. There is a built-in bias against more tenured advisers. • Since owner-advisers likely accumulated clients who were their own age or older when growing their firm, one would expect the client base to be older and in the distribution stage. Unless clients number among those with ultra-high-net-worth, AUM is likely to decrease as well. • Older clients eventually begin to pass away. Although advisers often seek to retain the clients' heirs as clients, the reality is that the next generation often does not stay with their parents' adviser. At the same time, there are many younger advisers anxiously waiting to buy practices from more tenured advisers; it's their primary growth strategy. Although this is a perfectly logical approach, it's important to recognize that they are buying a book in decline — if no one has attended to growth by taking on new clients in the accumulation stage. And if all advisers have moved to lifestyle practices, where is the motivation to attract new clients in the accumulation stage? A NEW METRIC The industry has long used revenue and assets under management as measures of success. I think it would serve us well to add a new key metric that tracks the addition of new households in the accumulation stage. This would help guarantee the long-term viability of our industry beyond the lifetime of current clients. Instead of simply passing around older clients, advisers would be working with clients on their way to becoming affluent. This requires more patience, however. Organically growing one client at a time is like dollar-cost averaging — a constant deposit into the future viability and success of a business and of the industry. Joni Youngwirth is managing principal of practice management at Commonwealth Financial Network.