Experts at The 6th Annual Financial Advisor Symposium outlined what it takes for advisory firms to be among the best in the country.

Although their firms are nearly 3,000 miles apart, David H. Bugen and Tim Kochis have taken some similar steps that have made their financial advisory practices among the most successful in the nation.

What have they done? RegentAtlantic Capital LLC in Chatham, N.J., and Kochis Fitz Tracy Fitzhugh & Gott Inc. in San Francisco, are fee-only, comprehensive wealth management firms that have identified their core services and target clients (see sidebar on page 64). They've stressed cooperation instead of competition among employees by making them part of teams and by viewing clients as belonging to the firm instead of individual advisors. They've set up incentive compensation plans so that every employee can earn bonuses and a share of profits when certain goals are met. Both firms are profitable.

Mark Tibergien, a principal in Moss Adams LLP in Seattle, Wash., cites these firms and a handful of others as among the country's best financial planning practices. Other entities, including financial publications, also have recognized them as being tops in the profession.

Tibergien spoke at length about the characteristics of the best financial advisory practices during his closing address in September at The 6th Annual Financial Advisor Symposium in Chicago, which was attended by more than 1,000 advisors. Charles "Chip" Roame, managing principal of Tiburon Strategic Advisors in Tiburon, Calif., also spoke at the conference about what makes advisory firms successful.

Tibergien for several years has produced an annual compensation and staffing study for the Financial Planning Association. It looks at compensation, staffing and financial performance of financial planning practices. He noted during his symposium presentation that the business environment for financial advisors is changing. Today, competition is increasing from new sources, specialization and boutique practices are on the rise, consolidation is accelerating, rapid changes in technology are happening and pricing pressures are growing. Revenues are declining while assets are rising. Expenses are rising, too, so margins are being squeezed.

The challenge is making your practice function as a dynamic business, he said. "Most people don't get into this business with a desire to run a business. Most got into it to fundamentally impact the lives of their clients," he commented.

Most practices are poorly leveraged, and they have a limited capacity to serve more clients, Tibergien continued. Adding people, such as a junior advisor, can increase productivity and leverage, but most advisors have a phobia about adding people, he said. At the same time, most advisors don't use their time wisely. Said Tibergien, "The typical advisor spends 39% of his time on clients and the rest is spent on crap."

He said the very best practices:

Have a clear position. They can say which clients they are serving and why.

Look at leverage and capacity. Firms that do often find they are doing things they shouldn't.

Manage profitability. If your gross profit is down, Tibergien said, it's a result of poor pricing or productivity, or problems with product or client mix. If your operating profit is down, it's from low gross profit, not enough revenue volume, or poor cost control. "Every practice I've looked at has trouble with creepers," he said. "Those are costs that conspire at night to cut your throat."

The very best practices look at strategies. "Strategy is not the market. It's a singular focus on how you commit your resources," he said.

In your business, where will you focus? Tibergien explained a firm should look at its client base. The best practices have a method of getting systematic feedback, and they tend to be more profitable and lose fewer clients, he said. A matrix is helpful in assessing your client base, he said. Down the side list your top 20 clients, and across the top create columns for their occupations and the services and products your firm provides to them. The idea is to try to identify whether a pattern exists in your client base, Tibergien said.

Then look at what issues those clients are going to face over the next five years and develop a plan for serving those needs. He added firms must weed out clients so they're left with the ones offering greater growth potential.

Tibergien, who has studied the best solo and ensemble firms, said advisory practices should examine their organizational model. The traditional model includes one advisor who is helped by an administrative assistant, but solo practitioners face more pressure from other firms and bring in less revenue per client, Tibergien maintained.

A better choice is the multi-discipline model, which recognizes core clients and then ties in specialists, he said. Better yet is the optimal model, in which an advisor serves as the relationship manager and works with three associate advisors. The clients are clients of the firm, not of the individual advisors. "Let the junior advisors focus on the tactical issues. You focus on making the greatest impact. Now you can multiply the number of families you can handle by three," Tibergien said.

Bigger firms have more revenue per client. They have deeper relationships and become more efficient. But most importantly, he added, they have a bigger market presence.

The best ensemble firms generated $500,000 in revenue per professional, while the best solo firms generated $420,396. Since each ensemble firm would have at least two professionals, that means they were generating at least $1 million in revenue, he noted.

The median revenue per client also was higher for ensemble firms than for solo practices: $5,708 versus $2,634, he said. But perhaps the most dramatic difference was Tibergien's comparison of the median pre-tax income per owner. In solo firms that amounted to $384,900, compared with $762,287 in ensemble firms.

"Most people in the business today are only getting rewarded for their labor. Those building ensemble practices also are getting rewarded for other people's labor," Tibergien said.

Advisors also need to look at their human capital strategy. Are people an expense or an asset? "The politically correct answer is they're an asset, but most view them as an expense," Tibergien maintained.

An organization's structure needs to have clear reporting, efficient staffing and offer career paths. Owners need to know the nature of an employee's work, the worker and the workplace. "If you can define roles of people, you can match them to roles you are trying to fill," he said.

A big mistake many practices make is to offer bonuses at the holidays as opposed to incentives tied to expectations, or specific goals, he noted. "Create an internship model with what steps they have to take to be equal to you," Tibergien said. "People will rise to your expectations."

How will you win the talent war? It's all about leverage, Tibergien said, and follow these pointers:

Embrace the talent mindset.

Craft an employee value proposition.

Weave development into your organization.

Hire quality over experience.

For years now, Tiburon's Roame also has been looking for those key traits and strategies that make investment advisor firms successful. Today, three years after creating his national benchmarking surveys (more than 3,000 firms now tell Roame exactly what they do and how they do it every year), he has pinpointed a number of trends and practices that set bigger, more profitable firms apart. Interestingly, the surveys provide critical insight into what advisors aren't doing so well, if at all. This allows Roame and his team of consultants to zero in on some fairly predictable industry deficits-such as lack of marketing-which are likely to become much more pronounced as competition for the same wealthy clients escalates in coming years.

"It's true that everyone wants to be in your industry," Roame told symposium attendees. "They've figured out that the fee-based advisory business is their bread and butter. That's the bad news. The good news is that advisor assets are growing faster than any other competitor's."

He said independent advisors have gained a significant number of high-net-worth households in a short period of time-from holding 13% of wealthy household assets in 1998 to more than 27% in 2002.

"There is enormous opportunity and tremendous wealth out there," Roame said. Investable assets will only increase as baby boomers pass through their peak earning years and what he likes to call their subsequent "liquefaction years." Tiburon coined the phrase "liquefaction" to describe how boomers will sell assets, such as homes and businesses, and transfer retirement plans, thereby putting into play essentially billions of potential investment dollars.

But to truly capitalize on these changes, advisors will have to work smarter than ever before, the consultant says. The way to do that? "Have one business model and kick the living daylights out of it," Roame says. Unfortunately, according to Tiburon's research, only 41% of independent firms even have a business plan.

The "wrong answer" business plan is: "I serve a smattering of everyone," Roame says. The size of clients' portfolios really matters when it comes to building a profitable firm. As independent reps and advisors increase total firm revenues, they create a practice that serves bigger but fewer clients. That point is illustrated by the findings of Tiburon's surveys.

At smaller independent shops with total annual revenues of up to $249,000, 30% of clients have less than $100,000. Only 28% have $1 million or more to invest. That's in sharp contrast to firms with $750,000 to $999,000 in annual revenues. At these firms, 49% of clients have $1 million or more to invest and only 13% have less than $100,000.

Why does it matter? The size of your firm and asset level of your clients dictates your per-client revenues. Small firms generate average total revenues of just $703 per client, per year, Roame explained, while larger firms generate an average of $3,641 per client, per year, essentially for the same amount of work.

"It's important to increase investable asset levels and identify the source of assets," Roame says. What he's found on the latter score is a real eye-opener. Advisors are already reporting that 44% of their new-client assets come from retirement plan rollovers, but few do anything to actively court the market.

"Everyone has an IRA rollover marketing campaign, right?" Roame asked, almost rhetorically, since none of the symposium attendees raised their hands. "IRAs will define your industry every year, so it's time to get a campaign," the consultant preached.

Boomers alone will transfer $201 billion in retirement assets to IRAs this year and that number will climb every year until it hits $467 billion in 2010, according to Tiburon. Those numbers almost by themselves make it a good time to be just about any kind of financial advisor, provided you target the rollover market, Roame maintains.

If advisors are failures when it comes to actively going after IRA rollovers, they're absolute ninnies about soliciting new clients. Tiburon finds that most firms are overly dependent on the happenstance of client word-of-mouth. More than 43% of all new advisor assets come from passive referrals, making it the No. 1 source of new money, he said. In contrast, only 11% of new assets come from proactive client referrals. "We hear you never ask for referrals," Roame told planners at the symposium. "Your business is built on them, and competition may cause passive referrals, your main source of new assets, to slow down."

Other ways to win clients? Consider creating a niche as a fee-based wealth manager who offers alternative investments, the consultant says. The movement toward fee accounts dominated the past few years. Fee-based accounts grew from $82 billion in 1992 to $769 billion in 2002, Tiburon finds. Alternative investments like hedge fund assets grew tenfold to $550 billion in the same time period. Marketing wealth management services as opposed to just investment management, Roame added, allows advisors to offer and charge for a host of services, such as private banking, risk management and wealth transfer, which aging boomers need.

A Tale Of Two Practices

RegentAtlantic Capital wanted to become a bigger, more profitable advisory firm, but its owners found that they had to make major changes in strategy to achieve that goal.

Three or four years ago, the Chatham, N.J.-based firm thought the way to expand would be to hire a CEO to help it acquire or merge with other firms. It also increased its office space, took out a large loan and hired more staff. But those moves didn't produce the desired result. RegentAtlantic did complete one acquisition, but found other firms it approached weren't interested, says owner David H. Bugen. Profitability declined, and the firm lost money in 2001.

In January 2002, RegentAtlantic hired Seattle-based Moss Adams to review its strategy and do a comprehensive compensation study. By March of last year, changes were underway.

"What the study said was to focus on our core business," Bugen says. "We had been looking at adding trust and tax services. We needed to focus on our core business and limit acquisitions, focus internally and find solutions for our legacy clients."

Although the CEO had done a good job, the firm didn't need one if it wasn't going to be doing a lot of mergers and acquisitions, so he was let go, Bugen says. Eliminating that position and cutting other costs reduced expenses by $300,000 to $400,000, he notes.

Another important step RegentAtlantic took was to create teams and institutionalize its revenue stream, so clients belong to the firm as opposed to any one advisor. Each of its six wealth managers leads a team that also includes an analyst who is a CFP licensee or in the CFP program, as well as a client services administrator.

The firm also developed a compensation plan that distinguishes between labor and ownership. Owners are now paid salaries based on the fair-market value of the job they do, and they receive a percentage of any profits based on their ownership.

RegentAtlantic, which has 18 employees including five owners, also established an incentive compensation plan for all employees based on targets for firm profitability, revenue growth, the number of new clients and client retention, Bugen says. "Everyone in the company gets a percentage of their pay if we hit those targets," he explains.

The plan began in July 2002. The company ended last year with a 7.7% profit margin, and expects to hit at least 18% this year. Bugen would like to get to a 25% profit margin.

"Everyone is more attentive, and we share financial information with employees on a quarterly basis. We don't share individual compensation, but we share revenues and expenses and what the profits are," he says.

The Moss Adams study also recommended that the firm increase its number of clients, based on the size of its staff. Since then, the firm has added about 100 clients and now has between 450 and 500, Bugen says, and each new client must pay at least $10,000 a year in annual fees. The firm's average portfolio increased from about $1 million to about $3 million, he adds.

Also, the firm now won't add a new owner until revenue increases by $1.5 million, and new owners must buy shares, either with revenue coming from a merger or by writing a check, Bugen says. Advisor Bill Knox, who spent 25 years as a tax attorney, became an owner in the last year by writing a check for his shares, Bugen notes.

Kochis Fitz Tracy Fitzhugh & Gott also has been very successful at building a bigger, more profitable firm. Its strategy has been fairly consistent since Tim Kochis and Linda Fitz started the firm in 1991. The two have worked together since 1982 at firms that include Deloitte Touche and Bank of America.

Early on, they acknowledged the desirability of expanding equity ownership. In fact, over the years they've added several partners, and the 24-person firm now has seven. "In order to be able to attract and retain people, we didn't have any choice," Kochis says. "It wasn't that we had to be dragged into it. We were eager to do it because we feel it's a very important part of our business."

The firm now has 10 planners, six of whom are owners. Another owner is the firm's chief financial and administrative officer. Supporting the planning professionals are administrative and operations staffs.

Moss Adams also did some compensation consulting for Kochis Fitz, but the firm already had made progress on revising its compensation structure, Kochis adds.

Today, the firm has a plan for nonshareholders and shareholders. The arrangement for nonshareholders includes three components: base salary depending on the market value of the job, a team bonus or profit-sharing that's distributed equally, and an individual bonus that's a percentage of base salary and based on individual goals, he says. Shareholders have a similar plan, but it also includes a fourth component: a dividend based on percentage of ownership.

The firm has made money pretty much from the outset, Kochis says, but it's hard to accurately measure its profitability in the earlier years. That's because it was only three or four years ago that the firm began paying salaries to shareholders based on the jobs they do, he says. Before that, owners didn't actually get a salary but rather a share of the profits, he says, so no dollar amount had been put on their labor contribution.

Kochis believes one aspect of the firm's culture is a key to its success: "We are a firm that does not tolerate internal competition. Everything is set up so that all the clients are clients of the firm. Compensation is not at all a function of the business you bring in or the business you're responsible for," he says.

The firm's portfolio minimum is $3 million, and it has about 270 clients. It generally charges a fee for planning and one for investment management. "We want to remain a classic wealth management firm that does wealth management and financial planning," Kochis says. "Clients can't hire us to do one of those things."