Choosing a different road doesn't have to mean traveling on the cheap.
There seems to be a perception that Moss Adams and
other consultants to the profession are anti-solo practice; that we
invented the ensemble model and that we pooh-pooh any firm that does
not adopt "our" model. Though we coined the phrase "ensemble" a few
years ago to describe a practice model we saw evolving in the industry,
we certainly never implied that the solo model has fallen by the
wayside, or that advisors cannot be successful in a solo model.
Let's be clear. Growth-or the adoption of a multi-advisor (ensemble) model-is not a requirement for a successful business. Financial performance is not the only measuring stick of business success. And the ensemble model is not the only model that advisors can adopt to be successful.
The solo practice is a viable business model.
The vast majority of firms are and will likely remain solo practitioners.
Those that prefer the solo model generally do so because it fits with their personal definition of success.
Some solo practitioners rival the industry's elite ensemble firms in terms of profitability.
Are their any limitations to the solo model? Of course. By definition, the solo practice is limited to the professional time, expertise and capacity of a single advisor. That has limitations on the practice's ability to grow and its ability to create depth of client relationships. There are limitations in the solo's ability to provide continuity for clients. And business transition upon the death, injury, or retirement of the advisor is limited to external options that do not have established relationships with the clients. That, of course, has implications and limitations on practice value.
But are solo practices worthless in terms of practice value? No. Is a solo advisor recognizing some of the value for their practice in terms of current income instead of future value? Yes. Does that mean the solo model is not worth pursuing and fully able to meet the personal definition of success of many advisors? No. This is a model worth considering, and many solo advisors have been incredibly successful.
We took a look at the most successful solo practices in our most recent research study (the 2005 FPA Compensation and Staffing Study, sponsored by SEI Advisor Network) in order to identify the characteristics of those solos that have risen to the upper decile (top 10%) of the solo model. (The upper decile and the upper quartile [top 25%] are defined based on pretax income per owner, which includes both job compensation [direct expense] and return on ownership [operating profit].)
The average profile of the top 10% solos looked like this:
The practitioner has been in business for an average of 19 years.
The most common business model is the independent, fee-based or fee-only RIA (45%).
The broker-dealer affiliated model is the second most common business model (35%).
The most common service model is investment consulting (35%); financial planning is second (20%).
These firms are managing $135 million in assets, on average, with total revenue of $900,000.
They have, on average, 161 clients.
The average staffing model for the top 10% of solo firms includes one principal, 1.2 support staff and 1.1 administrative staff, for an average total of 3.3 staff members. (Support staff includes paraplanners, traders, research associates, client service staff, etc. Administrative staff includes assistants, receptionists, etc.)
The financial results for these top 10% solos, and even for the top 25%, solos are quite impressive (see Figure 1), both in dollar and percentage terms (i.e., operating income as a percentage of revenue).
For these profitability and income metrics, the best solo practitioners are at least on par with the elite (top 25%) ensemble firms (Figure 2).
It is important to observe how superior the performance of the top 10% and even the top 25% of solo firms is relative to the other 75% of solo firms, called "All Other Solo Practitioners" in Figure 1. The challenge does not end with selecting an organizational structure. The question is, what are these solos doing that makes their performance superior? If you have decided you want to be a solo firm, what can you do to manage your business to the metrics of the top performing firms?
For solo practitioners, profitability is largely a function of size. The same is true for ensembles, but "size" is on a different scale. While we see a $1-million barrier to controlling overhead expenses at a reasonable level in ensemble firms, for solo practitioners the barrier seems to be around $500,000. This is the size above which solo firms seem to achieve operating leverage and their overhead expenses begin to decline as a percentage of revenue.
The top 10% and top 25% of solo firms are even larger than that, however, with average revenue of $940,497 in the top 10% solos and revenue of $720,321 in the top 25%. Which begs the question: How many $750,000 solo advisors there are in the industry? Very, very few. It is very difficult to build a $750,000 solo practice, while a $2 million to $3 million ensemble is a much more common and a much more systematic development. Some extraordinary individuals can achieve tremendous success in the solo model, while more individuals will probably get better results in an ensemble.
Another factor that differentiates the top performing solos is their client profile. The upper decile have fewer clients than the upper quartile, but these clients are almost twice as large in terms of assets under management (and more than three times larger than the clients for all other solos) so the advisor generates significantly more revenue and operating profit on these client relationships. Add that on top of a more efficient overhead structure, and the drivers of superior profitability in the top 10% solos become pretty clear (Figure 3).
In addition to size and client selection, the keys
to achieving this level of success in a solo model are very similar to
the keys for any successful practice:
Develop a consistent, repeatable client experience. This does not mean the client approach is cookie cutter, or that the solutions offered are templated. What it means is that while the outcomes are customized, the process is standardized. This is the only way a solo practice can achieve the efficiency required to allow them to work with either the number and/or complexity of clients required to achieve the scale that leads to superior performance.
Work at your highest and best use. Though solo practices do not employ other professionals, they do employ 1.2 support staff and 1.1 administrative staff, on average. The keys are to delegate and find a may to leverage your time as much as possible by effectively utilizing these support functions.
Pursue clients and growth strategically. Define who you are going to be as a business. Not just that you are going to remain solo, but really who are you as a business. What will you be known for in your community? How will you differentiate your business? Who is your target client and what is your defined client experience? A solo business needs to develop, implement and live by a business strategy just as much, or more than, a larger business would need to. This discipline is pivotal in the solo practices that have been most successful.
Deploy technology effectively. Along with the use of support staff, technology will allow you to automate that which can be automated, organize, delegate more effectively and again focus on your personal highest and best use.
Monitor your financials and other business factors. The best performing solo practices are also the best-managed solo practices. Though they are not out to build an empire, they manage their business like a business, utilizing the same business management techniques that we have been espousing for years. When we talk about Business Strategy, Financial Management, Human Capital, Sales and Marketing, Technology, and Operations as the key management disciplines for an advisory practice, we aren't just talking to the big guys, or to those firms that want to grow. We are talking to any business-solos included-that want to improve their performance and their results. As we have seen, the top performing solo practice is vastly superior to the average solo practice when it comes to financial results.
Of course, it's not all about financial results, either. If the question you ask every day is, "What model will allow me to make the most possible money?" then the ensemble model is probably the answer. If you can do the ensemble model really well, it has the best chances of maximizing your returns in dollar terms and in terms of future value. But if the question you ask every day is, "How can I make an impact while running a business that I love?" then you are asking a much more complex question. The ensemble model may be the answer. Or running a solo practice may allow you to achieve everything you are after.
The ideal situation would be to achieve the revenue level of the top 10% ensemble ($5.4 million) at the profitability level of the top 10% solo (41.8%), which would result in operating profits of more than $2 million. This is where the rub lies in the solo model. The theoretical revenue size of a solo firm is limited. One professional can only handle so much even if he or she is fully leveraging the resources of his or her practice. As discussed earlier, the revenue levels of the top 10% and top 25% of solo firms are very difficult and rare to achieve in a solo model. Of the top 10% of solo firms we looked at, 35% are looking to add professional staff in 2006. Most of those (86%) aºre looking to hire individuals primarily focused on servicing existing clients. Another 15% of these firms are looking to outsource professional functions. These firms recognize the limitations on growth within the solo model.
Think about your long-term business and personal goals, and deliberately build the business model that will best allow you to achieve those goals. The most common distinguisher among the top performing firms in any model is that they have a defined strategy and long-term goals. Their business model is in place to support that strategy and achieve those goals. They don't define their goals based on the limitations or possibilities of their business model; they build the model they need to support the business and the life they want.
We are not in the business of passing judgment on individuals' personal or business decisions, or declaring one business structure superior to another. We are in the business of educating advisors on the characteristics of various business models and assisting them in aligning their businesses with their goals. We understand, through data and consulting, the pros and cons of the various business models, and we have seen what it takes to be successful in any model. Please don't misinterpret our conversation as condemnation. Our objective is to see all advisors-and all advisory practices-thrive, in whatever model best allows that to occur.
Rebecca Pomering is a principal in
Moss Adams LLP, and consults with financial advisory practices on
matters related to strategy, compensation, organizational design and
financial management. She is the co-author of the book, Practice Made
Perfect, and leads the human capital consulting practice and industry
benchmarking studies at Moss Adams. She may be reached at