Cooperation drives survival, and even success, in rough seas.

The clever clownfish has the right idea-pick trustworthy and powerful colleagues. In one of the most amazing symbiotic relationships on the planet, the endearing clown of the reef uses its specialized skills to bargain with the normally fish-devouring sea anemone. The clownfish cleans the anemone, keeping it free of parasites and debris; meanwhile, the anemone's poisonous tentacles provide its groom with shelter and protection. The result of this unusual teamwork? Significantly improved standings for both creatures in a cutthroat, survival-of-the-fittest world.

Cooperation among professionals with differing specialties often yields the same results for advisory firms. Data from the 2003 FPA Compensation & Staffing Study, compiled and analyzed by Moss Adams LLP and sponsored by SEI Investments, reveals a clear picture of those who are truly navigating the rough market and those who are floundering to keep afloat. Moss Adams has found that ensemble firms, wherein multiple professionals collaborate to provide services, consistently outperform solos, or single professionals working in isolation. Additionally, the data unmistakably indicates that the greater the degree of specialization, the better the firm's performance. A sure measure of this success is the level of pretax income per owner. High-profit ensemble owners (the top quartile of ensembles, as measured by owner income) make, on the median, 33%, or $80,700, more than high-profit solos (the top quartile of solos). Cooperation increases the size of the pie at a faster rate than the increasing size of the partnership and staff.

However, simply working together does not offer a complete picture of the source of this success. Just as the clownfish collaborates with an organism from a separate branch of the animal kingdom, rather than schooling with other clownfish, so advisors also optimize their chances of success when teamed with professionals of distinct talents rather than flocking with colleagues of like plumage. When asked to describe their service model, half of the survey participants said they were multi-service generalists, or professionals who individually provide an array of services including planning, investment, estate, tax, risk management, etc., to their clients. Only about one-tenth of respondents indicated that they were wealth managers, or firms with at least three professionals representing different specialties and serving clients as a team. Although nearly half of the generalists worked for an ensemble firm, they did not seem to be deriving the expected benefits thereof. The "safety in numbers" technique, where those with similar skills school together, is not as compelling or effective for advisors as the multi-skill collaboration template. The disparity in owner income between the two is dramatic. Wealth management firm owners are, on median, earning more than twice what their generalist counterparts do-a difference of almost $136,000 in 2002.

A profile of the specific characteristics for success emerges after delving deeper into the financial performance of these firms. Key aspects of top firms include:

Fewer (per professional), broader and closer client relationships

Leveragable staffing structure

Productive owners

Large clients ($750,000 minimum)

Higher revenues and higher profits as a result

Client Relationships

Ensemble firm professionals in general, and wealth management professionals in particular, are able to focus their energies on a much smaller body of clients. This leaves time for more personal attention to clients and the opportunity to offer services more individualized to each client's needs. The smaller number of relationships per professional does not translate into reduced revenue potential, however. It is likely that at least two, and as many as all, professionals at a wealth management firm will have a relationship with each client-meaning that each client is generating at least two times higher fees than at a firm with more numerous but shallower relationships. In fact, ensemble and wealth management firms consistently show higher revenues per client and much higher revenues overall.

Comparing high-profit ensemble and high-profit solo firms leads to the sobering realization that solo firm owners are working harder and faster for less reward. The typical high-profit solo firm owner maintains 155 active client relationships, more than three times the number that a professional at a high-profit ensemble firm serves. Even taking into consideration the greater amount of time that an ensemble firm client will likely require (because they tend to have larger clients with more complex financial issues), this is an extreme difference. The high-profit solo owner has traded time for income-such a high number of active relationships demands late nights, working weekends and limited or nonexistent vacations.

This trend is borne out between wealth managers and generalists, too. While the burden is less severe than in the solo case, generalists are still hard-pressed at 100 relationships, twice the number served by a wealth management professional. The vision conjured up by this statistic is exhausting to consider, given the array of services that the single individual is attempting to provide alone.

Staffing And Production

While Moss Adams comes across many firms that struggle to really get staffing right, the ensemble and wealth management firms typically come closer to the target. Ideally, owners and senior professionals will have the freedom to generate new business and solve complex client issues because they have talented professional and subordinate staff to manage technical work, client service, compliance and administration. In essence, leverage means that it should be cheaper for others to do the bulk of the work than for the owner to do it herself.

High-profit solo firms, which typically consist of one support staff person (such as a paraplanner), and one administrative staff person (such as a secretary) in addition to the owner, suffer most acutely from the limitations of their organizational structure. Three factors squeeze the solo owner due to the lack of personnel leverage. First, there is no one to pass the professional work on to. Next, there are only 24 hours in a day and 365 days in a year, which place a physical limit on the owner's ability to serve and acquire clients. Lastly, if a client has an issue outside of the solo owner's realm of expertise, the owner will necessarily lose that part of the client's business unless they have a trustworthy referral relationship with an outside practice. Combined, these limitations place a ceiling on both client and company size that solos simply will not be able to break through.

High-profit ensemble firms have addressed this issue to a certain extent. The typical staffing structure consists of two owners, two professionals, two support staff and two administrative staff. While more people certainly share the burden than in the solo case, the relative lack of support staff indicates that the typical high-profit ensemble could become more efficient if junior employees were available to take over more of the professionals' routine workload.

Wealth management firms are closest to the mark. The typical wealth management firm has three owners, three professionals, five support staff and three administrative staff. This provides the kind of structure that can really free the owners up for more sales opportunities. However, data indicates that wealth management salary expenditure is somewhat high as a percentage of revenue, indicating that they have yet to "grow into" the staffing structure of their firm. This may change as the market improves. Many firms added new staff over 2002 and may not have had the chance for revenue growth to catch up with the increased personnel expense.

Although strongly correlated to pricing and client size, it is important to point out the differences in production between the more and less successful firms. High-profit ensemble owners are generating almost 75% more revenue apiece than the typical high-profit solo owner. Part of this substantial difference is attributable to their increased capacity, thanks to their professional staff.

Client Size

So why is the clownfish's technique so lucrative for advisory firms? Because it attracts big clients. The specialized knowledge and teamwork at a wealth management firm offer many things that a solo operator or service generalist cannot compete with:

More professional degrees and designations

More specialized areas of expertise

More personal attention

More capability for developing individualized solutions rather than offering products

More of a corporate atmosphere

Consequently, many wealth management firms are in a position to set a minimum account size of $1 million or greater. Those participating in this study were somewhat smaller, but nevertheless show client account sizes of nearly four times that of a generalist firm. The high-profit ensemble and high-profit solo figures were very similar to those shown in the adjoining graph, with high profit ensembles showing significantly higher assets under management per client than their high-profit solo counterparts.

Revenue

A natural consequence of the differences between firms of different organization structure and service model is annual revenue size. On median, high-profit ensemble firms brought in $1.3 million in 2002, 2.9 times the revenue of high-profit solos.

The difference between wealth managers and generalists is even wider. On median, in 2002 wealth managers had revenues of $2 million, over six times the median revenue of generalist firms.

A Warning From The Clownfish

Studies performed at the Sydney Aquarium in Australia have revealed a more sinister side of the relationship between anemones and clownfish. When first introduced to a new anemone, a cautious clownfish circles and gradually draws close to it, finally touching the anemone as it starts to groom. At first, the tentacles stick to the fish, indicating the anemone is injecting its poison, but as the clownfish carefully repeats the exercise the anemone accepts it and allows it to roam at will through the tentacles. However, an unwary clownfish that rushes in prematurely is quickly killed and eaten.

The lure of the upsides of specialization and cooperation may lead to a hasty merger with a lawyer and a CPA or two. But beware: Until trust is developed, your potential ally is your erstwhile competition. Unfortunately, Moss Adams encounters many firms that have rushed into an ill-matched merger begun in the blinding glare of revenue growth potential. That said, the growth potential is not an illusion, if the allies are tested for a good fit and chosen following a carefully thought-out strategy. Advisors should heed the lesson of the clownfish: specialize, collaborate and succeed.

Bethany Carlson, CFA, is a business consulting analyst for Moss Adams LLP focusing on financial and operational analysis, financial forecasting and modeling, and compensation program analysis and design. She can be reached at [email protected].