There is a clever use of terms and concepts in this industry such as describing the organizational structures of independent fi nancial practices as “silos” or
“ensembles.” The basic notion is that a silo is a single book of business. The term ensemble is reserved for an actual business with multiple professionals who truly work together as a team, pooling their resources and cash fl ows, creating a bottom line, and then distributing profi ts to the owners of that business.
Silos can exist as part of a group, or they can exist as stand‐alone offi ces, but effectively, they each have their own books of business regardless of the employment or compensation approach. Almost every one of the advisors we’ve ever worked with technically falls into the silo category. Even most of the advisors who have been around for 30 years or more and own fast‐
growing limited liability companies (LLCs) and call themselves ensembles are most often a group of silos. That has been our fi rsthand experience year after year. In fact, if we restrict our discussion to advisors with a value of
$25 million or less, those for whom we have seen the data and that comprise most of the independent industry (at least in terms of a head count), we come across just a handful of true ensembles every year, out of thousands of engagements—that’s it.
Still, these terms have been very useful in that they have focused atten- tion on what you are building, and how you are building it. We couldn’t agree more that correct structuring is critical to building an enduring business model; building the foundation is the prequel to the succession planning pro- cess. In his book The Ensemble Practice ( John Wiley & Sons, 2013), Philip Palaveev made this statement: “When you arrive at the conclusion that you want to build an ensemble practice, you will fi nd that hiring professionals with less experience and helping them grow into lead advisors is perhaps the most
CHAPTER 3 3
Transforming Your Practice into a Business
reliable and most available path to building an institutionalized, valuable, large fi rm.” And he’s absolutely right.
Let’s build on that point and take stock of what you’ve accomplished to date. What have you built? One of the points we’ve consistently tried to make in this book is that, as an independent owner of what you do, you need different and more appropriate tools to work with than you’ve been given. To help you assess your position and to help you set your goals for the future more accurately and explain them to your stakeholders, we think a simple and intuitive shift in terminology will aid in the process. Consider these time‐honored labels and the industry‐specifi c descriptions that follow as guides for determining where you are today, and where you’d like to be fi ve or 10 years from now:
■ A job
■ A practice
■ A business
■ A fi rm
We’ll be the fi rst to admit that these categories, as described in more detail next, will need to evolve and become better defi ned through actual usage over time, but here’s a good starting point as to how these practical labels seem to break down in our experience:
A jobexists as long as you, the advisor or fi nancial professional, do it.
You are independent, and you own what you do, for the most part.
It is your “book.” Whether W‐2 or 1099, registered rep or invest- ment advisor or insurance professional, it makes no difference—
they can all fi t equally well under this category. But when you stop and someone else starts, it’s their job to do, not yours, and the cash fl ow attached to that job belongs in whole or in substantial part to the person doing the job. Of course it is about production; in fact, it is about nothing else. You work under someone else’s roof, you own none of the infrastructure, you have no real obligations to the business other than to produce and get paid while taking care of your clients. The value of a job is tied almost entirely to how much money the producer or advisor takes home every year. There is no need for a succession plan or a continuity plan. You don’t sell a job;
you leave it.
A practice is more than just a job, often involving support staff around the practitioner and basic infrastructure owned by the practitioner (phone system, computers, customer relationship management [CRM]
system, a payroll, etc.). But like a job, a practice exists only as long as the practitioner can individually provide the services and exper- tise. Practices are limited to one generation of ownership, and then someone else takes over—the practice is sold, or the practice is dis- solved and the clients fi nd their way to another advisor. Practices have one owner, whether formally in an entity structure or infor- mally in terms of control over the client relationships (a book). The value of a practice typically is limited to about $1 million for a variety of reasons. The focus is entirely on revenue strength; there is little need for enterprise strength at this level. The primary suc- cession plan is attrition, followed in second position by selling to a third party. Continuity agreements are rare, and life insurance is the primary solution, at least for the practitioner; the clients are on their own. There is little or no bottom line, and there doesn’t need to be—no one invests in this model.
Here’s where the bigger shift occurs. If the engine of produc- tion (the means of making money) rests solely or primarily in your hands and you cannot or will not change that dynamic, then you cannot build an enduring business that will outlive you; if that is the case, you own a job or a practice. A business, if that is your goal, is designed to make the founder replaceable at some point, even as the business continues on.
A business must have certain foundational elements in place: an entity structure, a proper organizational structure, and a compensation structure that give it the ability to attract and retain talent and ad- ditional advisors who enable this model to outlive its founder. A business is built to be enduring and transferable from one genera- tion to the next and, as a result, is more likely than not to have an internal succession plan fueled by multiple owners from multiple generations. It operates from a bottom‐line approach, and earn- ings, for the fi rst time, begin to reward ownership and investment in the business. Many businesses still bear the name of the founder, and are working through compensation issues and the effects of revenue‐sharing arrangements and are prone to creating competi- tors rather than collaborators, though they see the problem and are taking steps to try to address the challenges; the leadership is aware. Culture is increasingly important, though many businesses fi nd that they may need to adjust and adapt to a different culture in the future. Continuity agreements are common and take the form of a shareholder agreement or a buy‐sell agreement. The value of an independent fi nancial services or advisory business ranges from
at least $1 million up to about $10 million. A business gains its momentum and cash fl ow from revenue strength, and its durability and staying power by developing enterprise strength.
A fi rmis an established business, but in addition, it has achieved its value in excess of $10 million, at a minimum, by building a strong foundation of ownership and leadership by recruiting and retaining the very best people in the industry. A fi rm has multiple generations of ownership with key staff members vying for an opportunity to earn the right to become a partner and invest in the fi rm. It operates primarily from a bottom‐line approach, and earnings are the measure of success, at least as important as production and growth rates. Profi t distributions are the variable portion of an owner’s compensation. Continuity agreements are a given, and the fi rm assumes the natural ability to weather the deaths or early retirements of its current leadership group over time. Collaboration among owners and staff is the rule.
A fi rm emphasizes company‐wide coordination of decision making, a group identity, teamwork, and an institutional commitment. The goal isn’t to have the best professionals, but rather to have the best fi rm. Getting into a fi rm as a new hire is diffi cult. New hires not only must have the requisite skill set, but they also must fi t into the culture and help it to thrive even as they work hard to support everyone around them.
In this book, from this point forward, when we use terms like practice or business or fi rm , those terms will be used specifi cally and within the context of the preceding defi nitions. We think the independent industry, in terms of a head count, fi ts into each of these categories approximately as illustrated in Figure 3.1 .
Remember that while this is an industry with a relatively high average age, the typical level of production or revenue generation per fi nancial profes- sional or advisor at the major independent broker‐dealers, custodians, and insurance companies is less than $200,000 per year—in many cases, much less. These professionals represent an incredible opportunity for business builders and for one‐generational practices that need a second generation of talent to work with, mentor, and plan for, or even possibly just to acquire.
FIGURE 3.1 Four Industry Categories PRACTICE (25%)
JOB (70%) BUSINESS (4%) FIRM (1%)
It really depends on what your end game strategy is: What do you want your practice to do for you as you grow older? Do you want to build a business that can provide you with a lifetime of income and benefi ts and purpose? You do have a choice, if you build with the right tools and execute a sound plan with the right goals in mind.