Organic Growth

The recent Focus Financial earnings conference call identified numerous questions without credible answers.  The market price agreed and now the RIA industry needs to examine what Focus has gotten right and where the firm needs to improve.  Our blog this week will try and answer these questions and also provide a historic perspective of how we  got here.

History

History does not repeat itself but it does rhyme.  Wealth Advisory firms need to understand who their recruiting targets are and create a program to transition the professionals from their old business model to their new firm’s culture.  Understanding the advisors’ history is an effective place to start.  I have made the mistake of hiring people that shared my history in the brokerage industry.  This approach has failed and I have examined why.  The first place to start is to compare the professional focus of the advisors’ old firm.  What was their compensation plan and what products and services were they trained to offer their clients?  Defining this for their old firms and establishing our firm's culture will facilitate the transition. Most firms are hoping to grow and our warning is to not grow by hiring  people that look like you.  A diversified approach works for investment portfolios and since the advisor is one of a firm’s most valuable assets taking a diversified recruiting approach should increase the value of your firm.  The asset classes we have identified are accountants, brokers (insurance & stock), attorneys, second profession individuals and recent graduates from schools like Texas Tech.   Each professional should provide a unique contribution that complements their colleagues and helps the firm achieve their goals.  Remember past performance is not a guarantee of future results.            

Fee schedules

Rudy was repetitively asked the impact market volatility had on current and future fees.  He did not answer so we will.  Industry statistics show that 50% of advisory firms charge fees in arrears and the other 50% charge fees in advance.  Market volatility will have an impact.  Hopefully Focus will break down how many teams charge in advance and how many charge in arrears.  There is no correct answer but we and analysts need to know. Over time this is not important, but in the short term it will have an impact.  We wonder how Focus uses this fee reality when they are valuing firms to acquire. Rudy and his team know the answer and so should the public shareholders who are learning the intricacies of the independent wealth advisory business.  The final alarming answer to the analyst’s questions is focussing on legacy statistics when the industry is changing.  Basing your business strategy on stats like 97% client retention and growth from displaced Wall Street clients has been proven by recent custodian surveys to be yesterday’s news.

Training

After we define the skills needed for each segment of our wealth management firm we must build a training program to support and emphasize our plan.  Our August 6, 2017 blog referenced several training firms that can help.  New firms that combined history and current technology should be added to our list.  Legacy training programs forcussed on how to offer the firm's primary products and services not the services offered by fiduciary focused advisory firms.  We understand the fiduciary standard but we need to educate our professionals on how to deliver their new message. Finance IQ and Seth Godin’s new book can help.

We were thrilled when Focus priced their IPO.  It felt like validation of our emerging industry.  Unfortunately heroes can disappoint too.