We have spoken to hundreds of advisors over the last several years. We have spoken to advisors of all shapes and sizes and from all around the country. Across the board, the most common complaint we hear from them is that growth has hit a wall and they are unsure how to get over it. With retirement age fast approaching, there is growing concern they may not achieve their own financial goals and retirement many look very different than expected.
Unfortunately, the problem is not going away anytime soon.
The long and consistent secular bull market of the 1980s and 1990s put asset growth on autopilot, relieved advisors of some of the responsibility for building a small business and allowed them to concentrate on their craft — delivering comprehensive wealth management services to clients – rather than their businesses. As a consequence, there was a proliferation of small independent wealth management firms.
With the advent of the secular bear market in 2000, that business model no longer works and this fact is evident in the absence of adequate growth among emerging firms. Think about the changes that have taken place …
- Revenue Growth. In the 1980s and 1990s, stock and bond markets appreciated in value lifting assets under management higher to the tune of 10-20% per annum. There was no need for an advisor to actively engage in new business development. Since 2000, markets have been flat or down more often than not. Assets under management are no longer growing. Advisors must now actively engage in new business development to maintain revenues during down markets and grow them in flat markets. A considerable new allocation of time and resources that was not required before.
- Client Service. In the 1980s and 1990s, advisors who may have wanted to meet with there clients 2-4x per annum often found their clients unwilling to meet that often. Client wealth was steadily growing and they did not feel the need to spend as much time with their advisors. Client satisfaction was high and hand holding was less necessary. Since 2000, investment markets have taken clients on two significant roller coaster rides with the Tech Bust in 2000 and the Credit Bust in 2008. The markets are uncertain and clients require more handholding. Another meaningful new allocation of time and resources.
- Portfolio Management. In the 1980s and 1990s, investment markets climbed steadily higher and passive “Buy and Hold” investment strategies worked like clockwork. There was very little allocation of time and resources necessary after the initial asset allocation and security selection. Since 2000, advisors and clients have experienced considerable volatility and virtually no forward progress in asset growth. Clients have remained patient with the passive strategies that their advisors recommended, but with no end to the volatility in sight, advisors are increasingly concerned that clients may lose patience in the next market downturn if they continue with the same passive strategies – three strikes and you’re out! Since the European market meltdown in the summer of 2011, clients and advisors want a more risk-managed tactical investment program. But, of course, a more active program requires a greater investment of time and resources by the advisor: time to tactically manage the portfolio and resources for more sophisticated technology and third party research.
- Compliance. While compliance has never been fun, in the aftermath of the 2008 Credit Bust, we all know that the compliance headache has been dialed up a notch requiring another new allocation of time and resources.
In other words, without the tailwind of the secular bull market, emerging advisors find themselves spending more time and more money to do the same job at exactly the time that they need to find more time and resources for new business development that supports growth. Economies of scale matter again and the lion’s share of advisors today do not have it.
Fortunately, a few forward thinking firms have launched businesses to provide advisors with varying combinations of investment management, back office, marketing and business consulting services that enable advisors to get over the growth wall without sacrificing their independence. We note two examples below …
- Hightower Advisors. HighTower’s original model was to acquire an equity position in large advisory teams looking to break-away from wirehouse firms in exchange for providing a strong investment and back office platform. More recently, they have started to offer the platform on an outsourced basis. HighTower works with firms with more than $400MM AUM.
- Pinnacle Advisor Solutions. A division of Pinnacle Advisory Group, one of the leading independent wealth management firms in the nation, Pinnacle Advisor Solutions lends its economies of scale and its “formula for success” to emerging firms with AUM of $20-400MM while allowing them to remain independent.
Reference Case: Impact of Turnkey Program on Growth
While we cannot speak to the success advisors have had with HighTower and others, we can speak to the impact that Pinnacle Advisor Solutions is already having on its partners in a short amount of time. So the partner we will discuss is not overwhelmed with phone calls, we will refer to him as Partner#1.
Partner#1 is an independent wealth management firm with about $35MM AUM that provides financial planning and investment management services. He had run his practice as a lifestyle practice so he could spend time with family. Now in his mid-50s, the kids have left the nest and with retirement in sight, Partner#1 wants to redouble the efforts in his business to meet his retirement goals.
To do this, Partner#1 needed to find a solution that would free his time to focus on the part of the business he loves – working with clients to solve their financial planning needs – and leave enough time left over to focus on new business development. In addition, he had traditionally delivered a passive investment program to clients and recognized that a more risk-managed investment approach was required in this environment. He needed a partner with considerably greater resources to deliver such a program.
Pinnacle Advisor Solutions’ Strategic Partnership Program was his answer. Not only did our program address some important gaps in his business like continuity planning, but it started the firm growing again and, perhaps most importantly, Partner#1 tells us that he is having fun again!
The first goal of the program is to free advisor time while also improving the product to clients (lend our economies of scale). By partnering with Pinnacle Advisor Solutions to deliver a risk-managed tactical investment to clients and partnering with FocusPoint Solutions to outsource the back office, the Strategic Partnership Program freed an estimated 60% of Partner#1’s time and eliminated any future capacity constraints on growth while remaining an independent solo practitioner. And without those capacity constraints, Partner#1 has grown by more than 10% in the first six months after on-boarding his existing clients.
Not only did the partnership relieve his capacity constraints, it also upgraded the caliber of his investment product and back office support. In a world littered with new investment strategies that guarantee strong performance and risk management based on theoretical back-tested strategies, Pinnacle offers a 10-year GIPS compliant track record of consistently beating the benchmarks with less risk. That track record reflects actual returns on actual client assets and has been verified by a third-party auditor. And FocusPoint, considerably adds to his ability to service customers: an improved technology platform puts more information at his fingertips and adds new functionality such as online document management, more flexible reporting and an online client web portal.
The second goal of the program is to help the advisor leverage that newfound time to build the business (lend our “formula for success”). With capacity constraints addressed, we are now focused on the future. Pinnacle CEO John Hill is working one-on-one with Partner#1 to establish long-term business objectives and a marketing plan for 2013 as part of our Strategic Business Consulting offering. Plus Pinnacle is making available all the marketing collateral (videos, white papers, presentations, investment communications etc…) that it uses in its own practice to Partner#1 on a co-branded basis to support his communications with current and prospective clients.
And finally, by partnering and pooling resources with two billion-dollar plus firms, Partner#1 has also gone a long way to address his contingency planning needs as a solo practitioner. Should he be hit by the proverbial bus, Partner#1 and his clients can feel comfortable knowing that the money will continue to be managed and the back office will continue to support whomever assumes his client responsibilities. The next step (already in progress) is to participate in a new continuity planning program that Pinnacle rolled out in the third quarter. This new program is a complete continuity planning solution that will protect his clients and his family. To learn more about this program, please take a look at our note Getting Real about “Getting Hit by a Bus” published on October 15th.
