As a financial advisor, are you operating a practice or a business?

Perhaps the answer is neither. You could be in a transitional phase, a sort of “no man’s land,” if you will, between the two models. And you might not even be aware of it.

Just as single-cell organisms were the first phase of life, solo practitioners were the origin of the financial planning profession. Later, just as life forms merged with others (OK, this analogy is a stretch, but work with me here, people) you may have joined or created a practice with one or two other professionals. 

You might even have a handful of advisors and staff in your practice at this point, causing you to believe that you’re now operating a true business enterprise.

I hate to be the bearer of bad news, but your fledgling practice is not a business. Not yet, anyway. You see, many talented financial advisors don’t own a business; they merely own their jobs. And because of the competitive, technological, regulatory, branding and economic/market challenges, those who own their jobs will die, just like the dinosaurs. And death will be swift, just as it was for them. For us, it won’t be a meteor (BOOM!) that kills off most advisors. Instead, it will be new regulations (the DOL is offering a taste with the fiduciary rule—BOOM!—that will flat out shut down lots of products, entire companies, some broker-dealers and insurance firms). Robo-advisors? BOOM! Underperforming markets? BOOM!

But many animals survived the meteor, and many advisors will survive, even thrive, during the explosions yet to come. Make sure you’re one of them. 

You can start by identifying where you are in the financial advisor evolutionary scale. And to help, we’ll shift to a shoe store analogy.

Level 1. If you’re like most advisors, you began by clerking. Think back to when you talked to your very first prospective clients. What product did you sell them? A stock? A bond? A mutual fund? I bet you sold them whatever they were willing to buy. Just as shoe store clerks don’t really sell you a pair of shoes, you didn’t sell the investment. At the shoe store, customers point to a pair they like and ask whether it is in their size. The clerk trundles off to the back room and delivers the order. He simply gives them what they asked for. 

And that’s how most advisors start. You had a client who wanted tax-free income, so you sold him or her a municipal bond. Another wanted stocks, a third liked to trade options, and still others liked mutual funds. The product mix in your book was as eclectic as your clients. And while most advisors start out this way, some stay at this level forever. Maybe this is still where you are. 

Level 2. Talented advisors evolve from “clerks” into “salespeople.” The latter term may seem pejorative, but it isn’t. A good salesman gives people what they need and uses effective strategies to do so. (Con artists are the ones who sell people products they don’t need.) And if you’re unable to persuade people to do what’s in their best interest, you won’t be a successful advisor.

Think about the shoe store again. When someone tries on a pair of boots that look terrible on them, the clerk-turned-salesman recommends a different pair that better suit the needs of the customer (even if they cost less).

Financial planners who are good salespeople don’t merely give clients what they say they want. Instead, they tell clients what they need to do and recommend products to meet those needs. Thus, salesmanship is an elevation of the advisor’s career.

Level 3. Salespeople simply move from prospect to prospect. Their work is transactional, and all that matters is finding the next prospect. But successful financial planners have ongoing contact with clients—people who previously bought something from them—and realize they don’t have the luxury of spending all their time hunting for new ones. Old clients call you, and you have to make time for them. This requires you to develop operational efficiency, and that’s when you find yourself at this new level. Congratulations! You’re now actually operating a real practice.

But this is where many advisors stop. They’re frozen at Level 3. That’s been fine, until now. Because, as we’ve discussed, external forces will interfere with your ability to sustain yourself at this level. You must move on. 

Level 4. It is here that you deal with profit-and-loss statements, and you find that you’ve hired not just more advisors but also experts in other fields to help your firm operate and grow. People in such fields as IT, HR, operations, compliance, trading, marketing and more.

It is at this level that you’ve done something remarkable. Few Americans have ever contemplated it, even fewer have attempted it and only a tiny number have accomplished it: You’ve created something that has a value all its own. 

Advisors at Levels 1 through 3 have one thing in common: They have jobs. They earn income from those jobs, and if they quit, their income stops. Even planners at Level 3 don’t have anything that anyone would buy for any material amount. But here, at Level 4, you’ve built something real. Something that can survive you, meaning that it has a material value. The question for you now is: How can you maximize its value? 

If you don’t focus on this question, you run the risk of having that value dissipate. 

Level 5. This is the ultimate level, a rarified achievement: You’re now managing a very large company, one worth hundreds of millions of dollars that one day will be acquired or launched as an IPO. 

It’s not necessary for you to have such lofty goals of achieving Level 5, but getting to Level 4 is important. Everyone below these levels is at risk of being swept away by the shock waves of the next BOOM!

You can stay where you are. But I warn you, most who do won’t be in this business 10 years from now. Plan now for your retirement or for starting another career. 

Or plan to merge with another practice similar to yours. Creating scale can help you withstand the boom when it hits. 

Finally, you can join one of the firms already at Level 4 or 5. Hundreds of advisory firms, even those at Level 4, are in discussions with counterparts as you read this. The biggest, most successful firms will become bigger and more successful. Joining them will help you do that too. 

Ask yourself which level best describes your operation, and how you’ll get yourself to the next one. 
 

Ric Edelman, chairman and CEO of Edelman Financial Services LLC, a registered investment advisor, is an investment advisor representative who offers advisory services through EFS and is a registered principal offering securities through SMH. Advisory services offered through Edelman Financial Services LLC. Securities offered through Sanders Morris Harris Inc., an affiliated broker-dealer, member FINRA/SIPC. You can connect with him on LinkedIn or on Facebook at www.facebook.com/RicEdelman. Follow him on Twitter at @RicEdelman.