RIAs are ready to make the 'golden hire' and more painlessly add another $1 billion of AUM
The cost of hiring a COO is pretty staggering and so are the potential rewards of solid operational control
Brooke’s Note: Our webinar this Thursday tackles the vexing question of turning a booming lifestyle practice into an organization. We are looking at it through the prism of making a “Golden Hire” — somebody who plays a role of becoming an alpha-manager who also becomes the manager of managers or at least a cornerstone of a real management team. The RIA business is at a nexus where it is both in need of, and financially capable of, making those big hires. The panel we’ve assembled is composed of RIAs that have made these hires and are starting to see the returns on their effort. Our hope is that this conversation will get at the heart of this issue and will give listeners a more gold-plated knowledge than they had when they dialed in.
Call a big RIA a “roll-up” then stand back and watch the principal go into paroxysms of refutation. It is a label associated (wrongly it seems) with irresponsible inorganic growth that comes back to bite you in the end. See: Why the term 'roll-up’ should stay in the RIA vocabulary.
Yet roll-ups are hardly alone among RIAs in facing a level of growth that rapidly outstrips the ability of management to control it.
There are now hundreds of RIAs with $1 billion or more in AUM and thousands with $500 million or more. That means a firm could be making as much as $10 million in revenue with maybe 20 employees and one copy machine. Compare that to real- world small businesses like Dunkin’ Donuts where a single successful shop might make $1 million a year in revenues operating seven days a week. You’d need to own 10 such stores with a combined 400 employees to generate that level of business — a giant managerial task.
Reaching 'enterprise value’
The ability of RIA firms to do so much with so little may make them an anomaly in business history. This is a replicable mom-and-pop business model that not only makes big-time revenues but big-time profits and gets up to speed in relatively short order — often less than a decade. Throw in the fact that most RIA principals have a business life that involves seldom missing their children’s school plays and you really have something. See: The 10 biggest threats to the RIA business heading into 2014.
But the opportunity itself is so good that it has created a whole generation of firms that got there, by small business standards, inorganically. It was the basis of the Mark Hurley theory that maybe only 50 RIAs in America even have “enterprise value” and the rest are essentially lifestyle businesses on steroids. See: What to make of Mark Hurley’s latest prophesy that most RIA firms will go out with a whimper.
Lacking any true managerial infrastructure, these practices are fated (over-simplistically stated) to hit a wall — exist on a happy plateau and then either fade or be sold as chunks of assets, Hurley supposed. See: Bob Veres’ level-headed response to Mark Hurley on valuation.
The question then is whether this inorganic growth can be transform itself into an operational Swiss watch without acts of God. We are not all Jack Welch.
The emerging answer to this question would seem to be definite maybe because of one really good option: making an outsized bet on one great manager. A good example is Brouwer & Janachowski. See: How one $1.3-billion RIA in Tiburon found its woman by taking the 'grueling’ route.
Of course, it can only work if RIAs can fish in a pool of talented operational managers and if they can be had for the right price.
But if those two factors come together, then a sort of golden hire can be made to begin stamping out the sins of decades of building a giant and lucrative practice without building a business as a lasting foundation.
There is good news here, too. The RIA business is in effect helping to make its own luck by hastening the demise of fat profit margins on Wall Street. As the margins shrink, the ability to keep middle managers aboard or give good opportunities to upper management diminishes. The friction rubs off a sufficient managerial pool that has a general knowledge of the financial advice business.
The era of the breakaway broker may give way to the era of the breakaway chief operating officer. See: HighTower adds two battle-hardened T. Rowe generals to the 401(k) field.
To participate in this webinar, RIAs Can Take Their Practices to the Next Level with a 'Golden Hire,’ go here.
Emigrant Bank 'doubles down' to send Mark Hurley packing and fire up Fiduciary Network, its RIA deal machine
The billionaire-owned New York bank eschewed the quick buck of a top-of-market sale to bet Karl Heckenberg can make Fiduciary Network function even better as its new CEO