Deloitte, Wells Fargo FiNet study independent advisory growth

Many independent teams of financial advisors are growing significantly, but a new study reveals at least three specific factors that separate the fastest and slowest expanding firms.

The charts below highlight seven key questions at the core of running an effective independent advisory practice, from staffing and client lead generation to M&A deals. The findings stem from a survey of more than 500 financial advisors in the Wells Fargo Advisors Financial Network, analyzed in a recent Deloitte Consulting report. The study identified both best practices as well as common pitfalls in advisory firms” efforts to expand their client base and grow their business.

Beyond the general observation that clients prefer working with healthy, well-run practices, the interviewers and report authors focused on digging into the “building blocks” of effective organic and inorganic growth, said Jeffrey Levi, a principal and head of the financial services unit of Deloitte Consulting. Firms need to identify who their ideal clients are, what size they want to reach and the types of teams they intend to recruit or acquire, Levi noted. The study synthesized the findings into a graphic that illustrates the “key growth steps” for independent advisory teams that want to expand.

“When practices are nascent or early days it’s really important that they think about the foundations required to grow,” Levi said. “It starts to put in place the steps needed to drive the changes in the practice to ultimately reach the desired outcomes. … There are a lot of different models in the marketplace that we can articulate, but it’s really important to have some clarity in the picture around the direction of travel.”

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The ‘central dilemma’

As advisors and their teams consider whether to use a brokerage or go full RIA, if they should hire staff and, if so, which team roles and what types of marketing to invest in for the most successful leads, they have an array of options. And they’ll have to address some vexing concerns along the way.

“Growth-minded independent advisor practice owners face a central dilemma: balancing the competing priorities of growing their practice, nurturing their individual client books, responding to shifting market conditions and managing the increasing complexities of a larger business,” the report said. “As practices expand, owners often find themselves overwhelmed by administrative tasks and business management responsibilities, leaving less time to focus on client interactions and external growth opportunities. This tension can hinder the overall growth and efficiency of the practice.”

The response often leads to staffing up, but compensation represents the biggest expense of any advisory practice. So the teams need to deploy their resources thoughtfully. At the same time, the report documented the advantages of scale: The annualized assets under management growth rates for large teams ($2 billion to $5 billion of AUM) was 18.6%, while “medium” firms ($1 billion to $1.5 billion in AUM) grew at a 10.5% rate. “Small” teams ($200 million to $500 million in AUM) expanded their AUM at a 6.7% rate.

To keep up with their business goals, advisory teams often hire portfolio managers and other support staff. Some embrace ideas like having an advisor who acts as a single relationship manager assisting the clients of every other advisor on the team, or hiring client “recruiters” who set out to “find high net worth people and bring them into the practice,” said Simon Hoyle, founder of recruiting and consulting firm RIA Choice. But those tough decisions tie into the particular approach of each independent advisory team.

Firms typically add portfolio managers only when they reach a size that requires one, since larger scale demands “someone doing that for the whole group,” Hoyle said. The single relationship manager role, meanwhile, is “happening more and more throughout the industry.”

Marketing vacuum?

In such a relationship-driven business, growth directly ties into client leads and marketing’s role in generating them. The study revealed how independent advisory teams remain “heavily reliant on client referrals” as a “very reliable and trustworthy” source of convertible leads, Levi said. But that could distract some teams from pursuing digital marketing and other techniques such as client events, whitepapers and thought leadership that would bulk up the brand and the possible referrals, he noted.

“It obviously creates a strong level of interest if you have a client who’s searching for this advice and has someone that they know who’s satisfied,” Levi said. “We see the role of marketing as really evolving from supporting those referral-type behaviors to providing the infrastructure and apparatus to support a much broader set of capabilities.”

And that’s where marketing can pose difficulties for many advisory teams and an area where some advisors say even large firms are failing to provide them with the best tools. The study asked the independent advisors to rate their sources of organic growth on a scale of zero to 10.

“Historically, advisor practices have relied heavily on ‘legacy’ channels for generating client leads, with referrals and traditional prospecting being the most impactful methods. While these approaches may have been effective in the past, they are performed by each individual advisor, most times with little support from their practice,” the study said. “Current usage of digital marketing strategies is very limited. On average, practice owners rated their usage of local online advertising, pay-per-click advertising and search engine optimization as less than three out of 10. Owners rated their use of professional networking sites (e.g., LinkedIn) marginally higher at 4.8 out of 10, on average.”

That concern, and issues like the potential for M&A deals, will inevitably lead independent advisors to find their own paths to achieve business goals, Levi said. But they all have one thing in common.

“Not every advisor, not every practice has the same ambition, and, frankly, not every practice has a strong aspiration to drive overall growth,” he said. “Most advisors are probably spending, rough guess, call it 40%, of their time on things that they could probably allocate to someone else pretty easily, and then reallocate that 40% to something more productive.”

For seven charts on the key findings of Deloitte’s survey of more than 500 independent advisory practices at the Wells Fargo Advisors Financial Network, scroll down. The study stemmed from a poll of 125 FiNet practices managing more than $61 billion in assets in 30 different states and qualitative findings from 15 subsequent interviews.

Find additional Financial Planning analysis of reports tracking the growth of independent wealth management companies and registered investment advisory firms here:

Are advisors ignoring the potential of marketing?

“Marketing represents a significant, yet underutilized, avenue for practice owners to stimulate organic growth within their practices,” the report said. “Practice owners have the opportunity to leverage more digital marketing strategies to boost the overall brand of their practices and thus benefit both the overall practice and the individual advisors. By adopting modern marketing techniques, practices can create a cohesive and compelling brand presence that attracts new clients and advisors alike. These strategies have the added benefit of being relatively low cost and can typically fit into the budget of practices of all sizes.”

Is the practice ready for M&A deals?

“Before diving into the process of finding acquisition targets, it is important to align on the strategy from the outset. Having a clear and agreed-upon approach will guide the efforts and ensure that everyone involved is working toward the same goals,” the report said. “Regardless of acquiree status, the pitch should also highlight the value proposition of the acquiring firm for the acquiree — showcasing the administrative, operational, and marketing support available, allowing advisors to focus on client service and driving growth. The pitch should also demonstrate the acquiring firm’s values, vision and client management practices to help ensure a seamless transition.”

Are advisory teams focusing performance metrics on growth?

“Measuring the success of a strategic plan through key performance indicator metrics is a good way to drive accountability and alignment and identify any potential opportunity areas in the execution of a practice’s strategy,” the report said. “For practice owners determined to grow via inorganic means, the strategic plan should incorporate the details that are essential to any expansion strategy.”

Is the practice ready to staff up?

“Many practice owners are initially reluctant to hire support staff because these roles do not directly contribute to revenue generation and represent a fixed cost in a capital-light business,” the report said. “Additionally, because these owners built their businesses themselves, often wearing many hats along the way, there can be cultural inertia to delegating tasks. Our findings indicate that by hiring appropriate non-advisor staff, practices can make their advisors more productive by effectively centralizing administrative tasks and allowing advisors to spend more time with their clients and in the market drumming up new business.”

Which support roles should a practice fill first?

“There was broad consensus around the most important (and more frequently occurring) non-advisor roles across size cohorts,” the report said. “The most important support roles are executive assistants, client service associates and branch managers.”

Time to hire a PM?

“Practices that have centralized portfolio management via the hiring of a dedicated practice portfolio manager have 16% higher productivity than those practices that do not have that role,” the report said. “As clients continue to demand and expect increasingly personalized advice, advisors will need to shift to spend their time on high-touch activities that benefit that customized advice delivery like financial planning, relationship management and succession planning.”

What’s the impact of growing effectively?

“While the concept of ‘growth’ is a key priority for most practices, it is crucial to recognize that practices may have varying views of their own growth aspirations and objectives, which in turn influence their strategic approaches,” the report said. “Some firms may prioritize growth through an internal apprenticeship model, fostering a culture of mentorship and gradual development of talent. This approach focuses on bringing in junior advisors early in their careers and pairing them with seasoned individual advisors aligned with the practice’s philosophy. On the other hand, there are firms that aim to accelerate their growth trajectory by acquiring new advisor teams or merging with other practices.”