Before installing a team, the lead advisor might have been running out of capacity, running out of energy and lacking a succession plan. The associate, meanwhile, who couldn’t generate revenue on his own, may have been struggling in his career. Now he has a career track and the lead advisor has a growth plan (and perhaps a succession plan too). This is why large RIAs are hiring talented professionals and growing a strong cadre of future professionals while smaller firms are stuck trying to picture what succession would look like.
The team approach (or leveraged approach) is not a succession plan. It is most of all a growth plan. It offers natural succession options, but that’s not the main reason for it. The point is that the associates in this setup can grow into successful leads—and in turn replicate the model on their own, continuing the process and adding new associates.
Many firms wonder if they could use this strategy to double their clients or assets. This is where the entrepreneurial nature comes to play. Some firms will take the leap of faith and add the capacity and look to grow. Others will take the more conservative position and look to maximize existing capacity. Each is a viable strategy. But before you choose, consider this: Those firms that added associates between 2001 and 2007 have grown and prospered while those that waited to add have been stuck at the same size for the past five years.
You can certainly create a fairly large firm of multiple professionals without a team approach. That means each advisor or partner works with one client and the firm grows by simply adding more advisors. That’s called the “silo” model. It offers the same set of advantages as a solo firm, but also poses the same problems.
A Fact Of Life
The team model is a fact of life for firms with more than $1 billion in assets under management, or more than $5 million in revenue. These businesses understand the advantages of the model.
But no team means remaining an otherwise successful firms with $200 million to $800 million in assets that is struggling to grow. Leverage is easy to conceptualize but very difficult to create.
Still, let’s consider the financial ramifications by looking at the results of a 2012 Investment News/Moss Adams survey. If we take the ratio of owner compensation to non-owner professional compensation, plotted on the left-side vertical axis of the following chart, and the profit per owner, plotted on the right-side vertical axis, we can observe an almost perfect correlation. For example, a firm with $250,000 to $500,000 in revenue has six times more owner compensation than non-owner professional compensation. That’s a low level of leverage. Such a firm generates $189,000 in income to the owners. Now compare that with a firm that has $3 million to $5 million in revenue. This firm has only slightly more owner than non-owner professional compensation (a ratio of 0.98 on the left-hand side) but generates $784,000 in owner income. The more the firm leverages, the higher the owner income. (See Figure 1.)
Developing A Firm Identity
There are two types of changes necessary for a firm that wants to create leverage with a team.
The first change is “mechanical,” and this may be the easiest to achieve: The firm needs to break down the client service process into component parts and identify things that can be performed by the associates. These usually include much of the plan drafting, the portfolio analytics, a lot of the product research and much of the investment analysis. Associates can also take over many routine questions.