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Best advice for 2012: Risk being a bit boring and focus on the organic growth of your practice

Growth from within is a challenge across all channels and needs to be addressed

Monday, February 20, 2012 – 7:03 AM by Guest Columnist Philip Palaveev
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Philip Palaveev: The more icy and snowy the road the less you want to hit the accelerator or the brake.

Brooke’s Note: We all talk about organic growth but we’re more riveted by the opportunities for inorganic growth. We believe there’s some sorcery that can take us somewhere just by being a little clever. Maybe this works for a few. But Philip Palaveev gives a good talking to here about why really and truly your focus should be on building a practice brick by brick. For more on Philip, See: What exactly is Fusion Advisor Network and who did it draw to Las Vegas last week.

In the present times of consolidation, high valuation, technology integration and general agitation, the focus of advisors should be on a very familiar, even to some boring, fundamental – organic growth. See: What is the value proposition of a financial advisor — and how is a budding RIA culture upping the ante?.

Today, the investment advisory industry has more clients, revenues, assets, firms, advisors, employees and profits than it ever has before. However, as my grandma liked to say “the seeds of destruction are sown in good times.” It is easy to be distracted by the deals, the regulatory noise or the market volatility.

It easy to be lured by new business models, new deals and new technologies and in the noise of the ever-changing market, it is easy not to notice the slow but potentially dangerous undertow. See: Purchasing too much technology has its own dangers for RIAs. Organic growth is becoming harder and harder to generate but that doesn’t mean that it shouldn’t be the primary focus of your growth efforts.

Back to basics

The days of the 20% growth by default are gone. Growing a firm today requires intense focus, differentiation and persistence. There is a reason why the valuations of advisory firms and recruiting bonuses are getting higher and higher — growing a firm is becoming harder and starting a firm from scratch is quickly turning next to impossible. See: Tibergien uses brutal honesty to captivate big Schwab RIAs and others at San Francisco event.

Mergers, acquisitions and private-equity transactions may seem to reshape market shares but they are just rocks thrown in deep water – they make a splash and then some minor waves and then the lake is still again. The industry has been and always will be shaped by the decisions made by advisors. Advisors have to cherish, celebrate and accept that responsibility and sow the right seeds. The questions are simple but the answers are not:

1) How to grow?
2) Should I do it alone or partner?
3) Do I take the check or keep growing my own business?
4) Am I really independent?
5) Where is the difference between reaction and response?

Chain reaction

Growth is imperative in any business but especially financial advice. Growth creates opportunity, opportunity attracts people and people drive the business forward – they bring clients, services, revenues and growth to the firm. Growth creates more growth. The market used to create growth for all firms until it quit in 2008 and firms were left to figure it out on their own. As a result, the overall average growth in assets under management from 2007 to the beginning of 2011 was a rather anemic 13% with clear vulnerability to the market, according to the Wealth Manager- 2011 Top Wealth Managers Survey published by AdvisorOne.com.

As a result:

- Small practices have to figure out how to develop new client relationships when market returns are close to zero or negative – Larger practices have to find out a way to grow beyond their owners and involve their younger advisors in the growth process – The largest firms are trying to see if they can grow past the initial group of founding partners – The broker-dealers are struggling to grow in a tough recruiting market without having to buy the business – The custodians are uncertain how to grow when wirehouse recruits are few and far between and all RIAs seem spoken for – Wirehouses are out of acquisition options and have driven recruiting bonuses to absurd levels

At all levels in the industry the answer has to do with growth from within — no one has the money, the margins or the capital to buy business anymore – it simply doesn’t work. Organic growth will dominate the business plans in 2012 as firms have to develop their own advisors (it is very difficult to recruit them from the outside), create referrals from existing clients (referral channels are fewer and more difficult to capture) and foster opportunities within the firm.

I remember looking at acquisition models and business plans in 2004 and 2005 that projected 25% growth each year for 10 years. The logic was that the market will give you 15% and anybody can grow new assets by 10% – how can you fail? At those rates of growth, you could buy any RIA or broker-dealer and make tremendous returns. Those days are gone and with them many of the organizations that were using those spreadsheets. The math today is different – 5% from the market (let’s be optimistic) and 10% from the hard-earned internal growth.

This is why in 2012 most advisory firms are looking to create a more reliable business development process, invest in their reputation and brand and patiently harvest the slow (but reliable) cycle of internal referrals and few (but highly involved) referral relationships. That’s why most broker-dealers are looking to create practice management capabilities and assist their advisors in creating opportunities. The same is true for custodians – they are enhancing programs focused on existing clients. No one is quitting on recruiting or sales but that is no longer the engine driving the business forward. Growing what you have is the theme of 2012. See: TD Ameritrade takes on Schwab with big consulting push.

2012: The year of the merger?

The tougher the journey the more you need friends to travel with. The uncertainty, the slow growth and the competition for talent have all driven firms and practices of every size to consider mergers as a way of pooling resources, improving the stability of the firm and finding “friends” to share the burden with. Close to 6% of all firms in the Wealth Manager Survey have gone through a merger in the past and my experience has been that many are considering it in the future. The motivation is slightly different in every case but ultimately the goal is the same — a bigger firm with more resources and more stability — a firm that is difficult to create on your own. See: Fidelity races to develop M&A program ahead of looming merger boom.

Mergers are difficult to negotiate and execute — after all, if you merge with another firm you give up your control over your own practice, you share your clients and employees with a stranger and you have to adapt and change to accommodate them. For all of that disruption and risk you get no check or cash and you dilute your stock with somebody else’s. Why merger if you can sell? That’s why there are very few mergers in times when acquisitions abound. You have to remember that the three little piggies did not merge practices in the same house until the big bad wolf had blown down two of the houses.

In 2012 we are very likely to see continued trend towards more mergers between firms of every size. Small independent firms are especially likely to go through such transactions since their resources are more constraint. They are also finding it harder to recruit employees and advisors as a micro-employer and mergers can address this issue. Large RIAs executed several such transactions in 2010 and 2011 and the trend will continue as the firms seek to establish a brand and move beyond the founding group. Succession is luring in the background for many firms as well.

It is actually surprising that we are not seeing more mergers between independent broker-dealers. After all, the big bad wolf of losses and liabilities from private placements blew down a couple of dozen straw houses in 2011. Mergers between smaller- and medium-sized independent broker-dealers make so much sense — they will create a larger firm with more resources, more diversified risk and deeper talent pool. Unfortunately, it seems that the fear of closeted skeletons and the distraction of the high-acquisition prices offered by fearless acquirers may prevent firms from making that logical step.

Do I take the money?

The recruiting climate should have no bearing on the typical advisory practice – after all most advisors will tell you that they hate changing broker-dealers or custodians and would rather never do that again in their career. Recruiting however drives the business metrics and growth of the broker-dealers and custodians and they devote and enormous amount of money and more money to put the recruiting issue front and center for advisors. In 2011 recruiting bonuses reached 250% (or higher) in some wirehouse deals and even independents got into the game especially around the Securities America race.

The recruiting strategies of broker-dealers should be nothing but a distraction for the vast majority of practitioners. Still, why is that a full 28% of the respondents of the Registered Rep compensation survey say that they are likely to change broker-dealers in the future. It is not because they are unhappy – when asked about their satisfaction with their current firm in the same survey, advisors said that they are pretty happy. The median satisfaction score reported was 3.3 on a scale of 1 to 5 with 5.0 being the highest satisfaction possible. So why are they looking to change? The answer is money – recruiting and retention bonuses unfortunately became the norm in the industry.

The proliferation of recruiting bonuses is likely to continue in 2012 and will continue to drive the recruiting strategy of firms large and small (surprisingly!). Still, sooner or later the recruiting chickens have to come to roost and the firms who paid for their business will have to show that they can help them grow organically. Buying business will only take an organization so far – sooner or later that business has to take off on its own.

Does independence matter?

When I type the words “independent financial advisor” in an Internet search engine I get the following results – the FPA website, the NAPFA website, the Merrill Lynch website (sponsored link), the LPL website, the Wells Fargo website (sponsored) and Dan Goldie Financial Services – a $500 million RIA and bestselling book author. See: Dan Goldie tells how his NY Times bestselling book has changed his practice, and how his co-author affected his life. In other words, you get pretty much everybody.

Consumers have always been confused about who is independent. Still they have always been attracted to the notion of independence as signifying higher level of objectivity. Marketing however has worn out the term. Today, most firms market using the same key phrases and words, including the word “independent.” In the 2011 Registered Rep survey of financial advisors more wirehouse advisors (84.7%) described their services as “financial planning” than advisors who have a registered investment advisor — only 73.9% of RIAs use that description.

What is more, many of the wirehouse firms started offering quasi-independent models where advisors have their own offices, cover their own expenses and even market under their own name. On the other side of the “Berlin Wall of independence” many of the RIAs were acquired by consolidators, banks, CPA firms and others and became just as large as the firms they compete with. We need not look any further than this publication for signs of the convergence of the channels – after all, this is Registered Rep magazine discussing trends amongst RIAs as well as broker-dealers. This convergence will continue through 2012 and beyond and the day is not far when the word independence will have little meaning in marketing positioning. Still, the words “business owner” will always have a real bearing on the behavior and practice of the advisors who are indeed entrepreneurs.

The courage to do nothing

In an environment of change and uncertainty very often the most difficult task is to do nothing. However, that is often the wisest decision – the more icy and snowy the road the less you want to hit the accelerator or the brake. The year 2012 will likely bring more dramatic changes: broker-dealers will go down in flames and acquire each other, custodians will announce “industry changing” programs, technology vendors will roll out “killer applications” that will redefine the application-applying space, consolidators will continue consolidating. For most advisors, the best decision may very well be to ignore those distractions and focus on their practice and its goals – where do you want to be in future, how will you grow, who will help you grow, what resources do you need and how will you obtain them? Once again, the future of the industry will be defined by advisors and their daily decisions — that means by you and your partners and staff. So good luck and cheers to a great start of the year!

Philip Palaveev is the president of Fusion Advisor Network — a $50 million revenue franchise network of independent advisors that provides business management and collective bargaining services to its members. As president, Palaveev is responsible for the strategy of the firm and leads the practice management development for Fusion, focusing on helping the 200+ advisors grow their businesses.


Mentioned in this article:

The Ensemble Practice LLC
Consulting Firm
Top Executive: Philip Palaveev




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