What I learned at Harvard Business School that doubled my RIA assets to $3.3 billion in two years

Brooke’s Note: We consistently cover people advancing in the RIA business by redoubling sales efforts, developing an acquisitions strategy, starting a TAMP or starting an online RIA business. We haven’t written about an RIA undertaking all of them at once — and with demonstrable success. Well, we still haven’t because Brent Brodeski also agreed to write his own article about how he is doing all of those things — a heck of a story.

I was a bit of an odd duck at the Harvard Business School classes I attended in March 2011.

All around me at the Leading Professional Service Firms seven-day seminar were 120 executives at multinational legal and accounting firms (like PriceWaterhouse Coopers). See: Why making partner at Deloitte Touche helped convince a CPA to join a $2 billion DFA RIA 2,300 miles away.

I had always felt fine about my education at a lesser-known Midwestern state university but I decided to spend the $13,000 and fly to Boston because I was sensing that what had made me a successful owner of a big financial advisory practice could impede taking my company, Savant Capital, to the next level.

Though I was a bit out of place in this corporate atmosphere, it was also comforting to learn how the big consultancies face many of the same people, pay, ownership, communication and leadership issues as we do back in my little community of Rockford, Ill.

Magic number

I madly took notes throughout the week and ended up with a list of nearly 350 points. But there was one overarching takeaway that I couldn’t shake as I left that straight-A atmosphere: Professional service firms growing less than 15% per year are essentially dying on the vine.

As a seasoned businessperson, I have heard similar points made my entire career but I’m a numbers guy and nobody had ever proven it to me numerically.

Why 15%? The professor demonstrated, pretty much irrefutably, that this rate of growth is necessary to continue providing the revenue and crucial opportunities necessary to develop, incent and retain top new talent. Without this level of growth, professional service firms need to have an up-and-out policy (regularly encouraging their top new talent to leave); close the doors and have a lifestyle practice (regularly retraining staff members since they will continually seek greener pastures); or run the business as a non-profit.

At first I thought Savant was in good shape. Historically we had grown nearly 25% per year and our advised assets were over $1.5 billion. Even during the “lost decade” of 2000 to 2009 we had grown more than 20% annually. It seemed on the surface that 20%-plus growth was easy when we were small. All the founders needed to do was bring on a few new accounts each year and we remained a high-growth firm. And when we were small we didn’t even need the other advisors at the firm to help develop new business. The three owners, fighting the big banks and brokers, wearing our “fiduciary” branded armor, and working hard, were able to generate 20%-plus growth.

Table stakes

Then I calculated the level of new assets the three owners needed to generate during the next five years now that we were a $1.5 billion AUM firm. Thus, the ah-ha, Harvard-induced, cold-sweat moment. Clearly what got us here would not let us remain a robust and healthy growth company. Fast-forward to today and the challenge is even greater. For example, assuming no market growth, client deaths or any client defections, at $3 billion in AUM, we would need to add $450 million per year just to achieve the 15% growth Harvard claims to be table stakes.

After I shared the growth conundrum and scary math with my partners, we united in our quest for transformation. See: How a swath of billion-dollar-plus RIAs are posing a threat to indie advisors.

Realizing that my co-founders and I might win battles but not the war if we remained on the frontlines, we revamped our advisor compensation system and training program. The old program simply encouraged great client service by providing a high base salary and only a modest incentive to bring in new business. The new system encouraged great service by linking base and bonus directly to client revenue and retention but likewise incented our entire advisory team to develop business—not just the founders. See: How I advise advisors to run an advisory business from my pulpit.

As part of this restructuring, we took steps to assure that key people participated more in the risk and reward of ownership — and encouraged them to look internally for greener pastures. So we created a new legal and governance structure that allowed us to expand ownership. Our new capital structure is designed to operate like a large company that has a real board, and real professional management. The structure also allows shareholders to redeem their stock when they retire. We now have 18 owners. See: By hiring a Fidelity sales veteran, National Advisors Trust goes after the $1 million to $10 million client who use $500 million RIAs.

From $1.5 billion to $3 billion

We got some initial pushback to the changes from the ranks. Some of our advisors worried that they might not be able to adequately serve clients if they had sales goals. Other advisors worried that we were trying to create a sales culture. See: 10 advisors explain how they build sales without getting 'salesy’. Still, we were confident that the new program balanced the incentives for servicing clients, developing new business, mentoring junior advisors, effective delegation, and creating firm-wide intellectual capital and rewarding the entire team for achieving companywide 15% growth.

While optimizing our advisory team pay system and focus was not exactly simple, in the end we got everyone on board. This involved modeling and communicating the new plan and working one-on-one with each advisory team member to help them see how the new system gave them unlimited upside potential, empowered them to increase their income, allowed them to focus on their unique abilities and accomplish more work in the same time via enhanced teamwork.

Suffice it to say that it was very exciting when it became clear that the new system worked. Just over two years ago. nearly 80% of the new business came from the three founders. Today founders will produce less than 25% of new AUM while at the same time total business development has nearly doubled. This rethink, combined with a merger, allowed us to increase our $1.5 billion AUM to nearly $3.3 billion. See: Why a pair of Zero Alpha RIAs are combining and out-and-out avoiding roll-ups and private-equity money.

Why start from scratch?

Even though we’ve directed more efforts to sales, our client retention rate has remained very high, and more clients referred assets to us last year than ever before. The key was that our advisory team quickly learned that the easiest way to attract new clients was to dial up the quality of the service experience they provided to our existing clients. By getting more engaged, our clients, too, became more engaged. More referrals and additional wallet share from current clients came out of this more intensive interaction. See: How one charmed referral set Michael Chasnoff on the path to $900 million of AUM.

Though this restructuring process paid big dividends, the challenge of the 15% growth still loomed large for the long haul, so we were mindful of other approaches we could take in achieving it — including buying it. We had experience with startups in places such as Madison, Wis., and Peoria, Ill., where we had set up advisors to build local practices. It had taken years to build those offices up to $100 million and $60 million, respectively

The long timeframe required to start a new green field office was part of what convinced us that the best way to recruit advisors and move into new growth markets was not by recruiting well-established advisors from the brokerage world but rather by merging with like-minded RIAs. See: Why the Moss Adams-Rowling Dold merger came apart despite looking picture-perfect on paper.

Passive, fiduciary, focus on planning

We are not, and don’t want to be in the roll-up business per se. Many financial buyers in our industry focus primarily on financial engineering and providing growth capital and liquidity to founding shareholders with the hopes of someday going public, or selling their large business for huge multiples to an even larger buyer. Our focus needs to stay squarely on helping our clients. We want to unimpeachably be in the business of creating ideal futures for our community, clients and our own team.

To make this happen, we needed to speed up the process of adding like-minded fiduciary advisors to our team. These advisors could then sell to and service more clients in both current and new markets.

We set the bar high. Our requirements for the firms we’d consider buying: a passive approach to investments, no market timing, a growth orientation, a fiduciary approach, and not making financial planning an afterthought.

And since life is short, we decided we only wanted to merge with other firms that employed advisors we liked and with whom we shared similar values. The good news is that there are tens of thousands of advisors out there — and not many deals getting done. See: Schwab 2013 RIA M&A data show hope but also futility. This abundance of firms allowed us to focus on prospective merger candidates located in desirable geography that was likewise compatible with our long-term growth strategy.

Where the roll-ups (financial buyers) need to do many transactions per year just to keep their venture capital partners happy, we don’t. In fact, we realized we didn’t even want to do more than one or two deals annually and would prefer to do none in a year rather than concede to doing a marginal one. See: This generation of advisor aggregators puts the roll-up ghosts to bed, for now.

Baby TAMPs

So far, so good. Our first merger with $500 million AUM The Monitor Group Inc. in McLean, Va., has been a success in just the nine months since we closed the transaction. We already knew TMG from our long-term participation in Zero Alpha Group. This relationship made the deal less risky.

The two firms are now almost fully integrated. TMG clients are happy (less than 4% attrition), the entire advisory team remained intact after closing and we have realized significant cost savings. We can now provide enhanced service and capabilities to our new McLean, Va. (“Savant East”) clients and we are rapidly building up our new East Coast office. A nice byproduct of the TMG deal: We joined the aRIA study group. See: John Furey is creating a think-tank out of six big RIAs that want to grow like roll-ups without the pressures of an IPO.

As our firm achieved greater efficiencies of scale, we also recognized that we had the opportunity to become an outsourcer for advisors that liked our investment strategies, marketing capabilities, technology and brand, but still prefer to remain independent or are located in a place that did not fit our long-term growth plan.

This led us to develop turnkey asset management program platforms in late 2012 for both our investment management and 401(k) plan capabilities. This has opened up a whole new way for us to offer our services to clients that want a top advisor but who would otherwise never know about us. While this part of our business is still in its infancy, we are on track to add over $100 million in AUM in this distribution channel in 2013 alone. See: LPL Financial rolls up an unusual RIA to use as a cornerstone of its TAMP-like mass-market venture.

Final iron in the fire

Despite finding ways to grow more rapidly by organic, inorganic and selling TAMP services, we discovered that that Harvard-stoked paranoia was still finding its voice. I felt that we could still be blindsided by a paradigm shift in technology. I noticed how Netflix killed Blockbuster and Wikipedia crushed World Book. Of course iTunes made record stores obsolete. Amazon Kindle beat bookstores at their own game and GPS did the same to map makers. See: Why Joe Duran believes that classic RIA firms face extinction.

Closer to my financial advisory home, I also began to notice a flurry of online players with offerings focused on winning over my clients. See: NestWise is starting to take shape and take flight under LPL’s wing — and from under Schwab’s shadow.

At first glance these algorithmic online investment solutions that relied on computers (versus people) and focused on the commodity parts of the business (index funds and asset allocation) versus integrated wealth management seemed harmless enough. See: Wealthfront raises a cool $20 million from VCs to pursue a big slice of a $1 trillion market.

But, as I pondered this threat further, my cold sweats returned. I concluded that we were pretty safe preserving our existing long-term (mostly older) clients but began to worry that our traditional business development and service model might not appeal to the next generation of investors — ones plenty comfortable with purchasing goods and services from online providers.

So we just announced eSavantAdvisor.com, our online offering. We weren’t willing to bet the farm and cannibalize our existing business but decided to invest in the low hundreds of thousands of dollars on a new website and a sub-brand. and build a new team and process.

'Amazon of RIAs’

It took a bit of a different mindset to take this leap. Other big RIAs do deals, restructure management and staff and rent out capabilities in a TAMP model. Starting online firms is usually reserved for Boston- or San Jose-proximate souls with the brass to risk millions of dollars of other people’s money.

To convince myself and my partners to invest real capital and attention in this direction, we needed a no-lose proposition. We wanted to position ourselves to become the Amazon of RIAs. eSavantAdvisor.com clients get a dedicated advisor and are offered full comprehensive planning and wealth management services that may include retirement, tax, estate, cash flow and education planning, and coordination of insurance and banking needs. In addition, each eSavantAdvisor.com client is assigned a dedicated client service team member to make his or her life simple.

At the same time, we believe that the worst thing that can happen is that it spurs us to become a much more efficient firm in prospecting and servicing existing clients. It’s a skunk works. It’s a beachhead. We can get return on investment in multiple ways. It will allow us to provide better access to non-local clients. We can better serve such clients by communicating with them on their terms, at the time that is best for them, and wherever their laptop, smartphone or mobile device allows them to travel. If fee compression someday actually happens, we may be able to maintain our profit margins by serving clients more cost efficiently using technology.

One last thing…

One more thing: How do I feel about spending the $13,000 fee to be told that I needed to expand my business? It was more than I spent for an entire year of college back at my alma mater, Northern Illinois University. The actual price was also not $13,000. It was $26,000. I found that I wasn’t able to capture all that I learned and pass it on to my partners vicariously. So I ended up sending one of them to the same course at the same cost. (I suppose that’s a pretty good endorsement for the learning generated by the program.) But I hope you found this article articulate enough that you won’t necessarily come to the same conclusion.

Brent R. Brodeski, MBA, CFP®,CFA, CPA, AIFA® is the chief executive and a co-founder of Savant Capital Manaagement Inc. Savant is a wealth management firm with approximately $3.3 billion in assets under management, 3,000 clients, 94 employees and nine offices, in Illinois, Wisconsin, and Virginia.