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 truths:
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
[email protected].