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Growing An Advisory Firm’s Org(anization) Chart As The Advisory Firm Grows

May 20, 2019 07:05 am 0 Comments CATEGORY: Practice Management

One of the fundamental challenges in growing an advisory firm beyond just the founder (and a handful of people to support him/her) is that a growing number of employees necessitates a greater amount of organizational infrastructure to support the people. From a human resources person (or eventually team) to the emergence of mid-level management, and the eventual erosion of decision-making efficiency as more partners/owners are introduced… it’s not uncommon for advisory firms that are growing to suddenly lose momentum, precisely because their growth causes the current structure of their organizational chart to break down and lose its effectiveness.

In this guest post, practice management guru Philip Palaveev of The Ensemble Practice shares his perspective on how, exactly, an advisory firm’s “org chart” should change an evolve as the business grows. Because the reality is that when it comes to advisory firms, one size does not fit all when it comes to the proper structure of an org chart… not just because different advisory firms have a different focus and style, but because the needs of the organization itself will vary depending on whether there are 10, 25, or 50+ employees.

The starting point of a formal organizational chart structure typically emerges by the 10^th employee, when it’s not enough to just have “people” who accomplish various roles in the business. Instead, formal (and increasingly specialized) roles begin to emerge in the firm, and the firm begins to set forth “positions” (that certain people may fill), rather than just gather together a growing number of people.

By 15+ employee, the growing specialization of positions within the firm begins to form departments, where multiple employees who share in a certain functional role within the firm (e.g., the investment team, the operations team, the advisory team) begin to form into groups, with multiple tiers of positions within the department that begin to create the future career tracks within the firm.

With continued growth past 25 employees, the advisory firm becomes so large and complex that there is typically a need for “full-time” management of the firm (e.g., a Chief Operating Officer), beyond just having founders who wear the hat of owner, leader, and advisor with clients. In fact, by 25+ employees, it’s not uncommon for ownership and management to begin to separate altogether, as not all partners necessarily can (or need to) have a role in the actual management of employees.

By the 40-employee headcount, the founders are often so distant from the end-employees and the meetings they’re having (both internally, and with clients), that true "culture" begins to emerge… a standardized set of norms that define what typically occurs in the firm even when no one is watching. Which in turn necessitates a growing focus on defining what the firm’s formal culture is… because it’s simply not possible for the founders to fully manage (or have much interaction at all) with everyone in the org chart.

And as advisory firms cross the 50-employee threshold, the size of the firm often mandates a “representative governance” model, as the firm often introduces enough owners/partners that it’s not even effective to give every partner a “seat at the table” anymore. Instead, a Board of Directors tends to form, and decisions are made by the Board and the firm’s management team, which the partners represented by certain members of the Board (but without the direct involvement of them all).

The key point, though, is simply to recognize that advisory firms tend to go through consistent challenges as their employee headcount and “org chart” reach a certain size and complexity thresholds… which, notably, are based not primarily on revenue, but actually on the number of people in the org chart (who must be connected to each other and managed). For which, hopefully, this article will serve as a helpful guide about how advisory firms who are “stuck” on how best to design (or restructure) their own Org Chart can move on to the next level.

Weekend Reading for Financial Planners (May 18-19)

May 17, 2019 02:53 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the huge industry news that mega-RIA United Capital has been sold in a mega-deal to Goldman Sachs for a whopping $750M, in what is both an eye-popping valuation (nearly 3X revenue) that strongly validates the industry's RIA trend and also signals a major shift for Wall Street itself as Goldman Sachs enters its biggest deal in nearly 20 years to move into the RIA business itself.

Also in the news this week was the announcement that, after years of relying on the Broker Protocol to recruit breakaway brokers from wirehouses, HighTower is now shifting to an RIA-acquisition model and dropping its own no-longer-relevant participation in the Broker Protocol. And the CFP Board has released a new guide with suggestions for what fee-only advisors should be mindful of with the new CFP Board Standards of Conduct coming this fall... as the reality is that it's not only the broker-dealer community that is impacted by the new rules.

From there, we have several insurance-related articles, including the news that John Hancock is going to start offering LTC policyowners the chance to add a co-pay to their policy benefits as a way to mitigate premium increases, a look at what to consider when evaluating a hybrid LTC insurance policy for a client, and a broader industry look at the ongoing trends in the LTC insurance marketplace (from the ongoing rise of hybrid LTC policies that now outsell traditional LTC insurance almost 4:1, to the emergence of basic LTC coverage attached to Medicare Advantage plans).

We also have a few articles on the rise of video in financial advisor marketing, from tips and best practices in recording and sharing videos (it's OK to record vertically, but it's time to add subtitles!), additional tips to prepare if you're about to start doing video for the first time, and a look at how it's becoming increasingly common to record a video for your website when changing firms to explain the switch to your clients (both as a means to more personably get the message out to them all at once, and also because it's easier to navigate the Broker Protocol if the former clients come to you and your website!).

We wrap up with three interesting articles, all around the theme of what's changing (and what's not) in the world of financial advice: the first looks at the divide between the "historians" (who suggest that the financial services industry has faced technology disruption before, and always ends out on top) versus the disruptors (who believe this time is really different) and which side is likely to win; the second explores a fascinating study that finds, in the aggregate, that the financial services industry has actually managed to maintain an aggregate fee that amounts to about 1.5% to 2% of all-in costs since the late 1800s (as the industry's services and products evolve, but its "cut" remains almost exactly the same in the end!); and the last is a fascinating thought experiment from industry commentator Bob Veres about how the financial planning profession, in particular, will likely look different 20 years from now (when he predicts the transition from our product-based roots to our advice-centric value propositions will be complete, and the entire nature of the role of the financial advisor will look fundamentally different than it does today).

Enjoy the "light" reading!

Kitces & Carl Ep 07: Authenticity Vs. Professional Credibility And Admitting Your Own Financial Sins

May 16, 2019 07:03 am 1 Comment CATEGORY: Kitces & Carl Podcast Personal/Career Development

As a financial advisor, credibility is crucial to the advisor-client relationship; after all, if clients don’t believe the advisor’s advice is credible, then they’re not likely to follow through on it (and/or may not be willing to hire the advisor in the first place). Which, similar to professionals in other knowledge-based fields, often results in feeling the pressure to always have all the answers, and always have your own financial house in order… out of fear that a client may not trust and find credible the advice of an advisor who has made poor financial decisions themselves and hasn’t followed their own advice. Except the reality is that financial advisors are human beings too, we can all make mistakes, and in practice, it’s often our prior negative financial experiences as advisors that actually lead us to want to help others with their money in the first place. Which can actually make the financial advisor more authentic and relatable to clients who are experiencing similar challenges themselves!

In our seventh episode of “Kitces & Carl”, Michael Kitces and financial advisor communication guru Carl Richards sit down to debunk some long-standing myths around what it really means to be a “credible” financial advisor, why authentically owning up to your personal financial mistakes actually helps build trust and credibility (and might even end up helping you gain new clients), and why being relatable as a human being (who makes mistakes from time to time) may be one of the more important traits you can bring to the table as a financial advisor.

As a professional (whose fruits of that profession literally keep the lights powered on), one of the hardest things to do show your own vulnerability by admitting that you’ve made poor financial decisions yourself in the past, and/or don’t have all the answers to every question or problem. But the reality is that, if we can own up to our own poor financial decisions and mistakes that we’ve made along the way, both to ourselves and to our clients, it puts us in a much better position to meet our clients with empathy. Which in turn allows us to be less judgmental (and for clients themselves to feel less judged), and in a much better position to not only help them with the technical aspects of implementing the sound financial advice we give them, but to support their financial wellness as well (which is our ultimate goal in the end).

Because to achieve that goal and get clients to be honest with us, and themselves, about what they really value so that we can help them apply their capital towards what’s most important to them, it’s crucial to make sure that clients can relate to us as advisors. Which often means trying to bring yourself off the “advisor pedestal”, and meeting your clients where they are. Getting clients to talk openly about the financial mistakes they’ve made isn’t easy, but if you are open to sharing your own story, then you can help make them feel more comfortable by making it clear that you aren’t sitting there judging them (because you’ve “been there”, too).

And while there is such a thing as “over-sharing”, the key point is that authentically and openly admitting that you don’t know everything, and don’t always make optimal financial decisions, can ultimately help the people that you want to serve, and by extension, strengthen you own credibility as a professional in the process. Because all that fear that you have about feeling judged if you own up to your mistakes is the exact fear that every client who comes into your office has about being judged themselves by someone who they (wrongly) think has all the answers.

Due Diligence For Life Insurance: Going Beyond The Hypothetical Policy Illustration

May 15, 2019 07:08 am 7 Comments CATEGORY: Insurance

In theory, the whole point of having a “product illustration” is to show how the product is anticipated to work… whether it’s a mechanical device, or an intangible like a life insurance policy. Except the caveat is that, ironically, intangible assets like life insurance policies sometimes have even more “moving parts” than a mechanical device, making it remarkably difficult to understand how it actually works. Or even to determine the underlying “mechanical” assumptions that are driving the outcomes of the illustration in the first place.

In this guest post, life insurance expert Barry Flagg, founder of Veralytic (a company that produces life insurance due diligence tools), highlights the challenges of effectively identifying and understanding the moving parts in a typical life insurance policy illustration. Which over the years have become so problematic, that recently issued regulations from the New York Department of Financial Services (NY DFS Regulation 187) have suggested that life insurance illustrations should no longer be permitted as a means to compare life insurance policies… because, in essence, they’re too vague and uncertain for fiduciaries to actually rely upon!

For instance, while the core of any life insurance policy (or any other) illustration is its projected earnings or growth, after being reduced by its projected Cost Of Insurance (COI) charges and other expenses, the reality is that not all life insurance companies illustrate these costs and expected returns in the same manner. For instance, sometimes COI charges are “pure” and include only the raw Cost Of Insurance expenses, but in other times COIs are “loaded” with distribution or other costs. Certain “premium loads” may apply charges based on the premiums paid, but use an underlying “target premium” calculation to determine those charges, rather than uniformly applying them to all premiums. And while life insurance policies do typically get projected at a specified rate of return, insurance companies can and sometimes do add additional – but not necessarily guaranteed – return assumptions on top, which means even insurance policies with the same projected return input are not necessarily being projected at the same rate of return!

The challenge of these dynamics in life insurance policy illustrations is not only that it’s sometimes difficult to call what costs are or are not being included, and what the “real” projected rate of return is, but that the potential to not have results that align with (non-guaranteed) assumptions means that two otherwise-identical life insurance policy illustrations may have a substantively different level of risk about whether the assumptions will actually be fulfilled. A risk that, itself, is not typically reflected in a life insurance policy illustration.

As a result, the reality is that “best practices” in doing due diligence on a life insurance policy illustration entails far more than just looking at the illustration to see which policy is projected to maintain the death benefit the longest, or accumulate the highest (not-necessarily-guaranteed-or-even-likely) cash flow. Instead, effective due diligence for life insurance policies must dig deeper, or use third-party support tools, to truly understand the costs and risks underlying the projected opportunity.

#FASuccess Ep 124: Insourcing Vs Outsourcing To Manage Overhead Expense Ratios While Scaling An Advisory Firm, with Shirl Penney

May 14, 2019 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 124th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Shirl Penney. Shirl is the co-founder and CEO of Dynasty Financial Partners, a back and middle-office service provider for large independent RIAs that has more than $32 billion on their platform across 47 advisory firms that they support.

What's unique about Shirl, though, is the way that Dynasty has focused itself purely to be a highly scaled service provider for RIAs while allowing the firm's services to remain completely independent and without any requirement to buy in or tuck in or exchange equity for participation, and the particular focus they've taken on providing all that necessary infrastructure and support for large wirehouse breakaway teams and sizable RIAs with hundreds of millions or more in assets under management.

In this episode, we talk in depth about the Dynasty model. The four key service lines it offers, including transition support and consulting for breakaway brokers, its broad investment platform, including an in-house TAMP as well as a wide range of third-party SMA, UMA, and alternative investment solutions, its core business of mid-office support services for advisory firms, covering everything from compliance to marketing to technology, and its new Dynasty Capital Strategies line that does direct lending to advisory firms for everything from financing acquisitions, succession plan financing, to offering what they call revenue anticipation notes to allow advisory firm owners to partially monetize the equity of their firms to generate additional capital to reinvest for more growth and acquisitions, and still giving the firms a chance to buy their revenue back if they decide they want to in the future.

We also talk about the cost of outsourcing an advisory firm's core operations and middle office. The Dynasty model of charging an average of about 15% of revenue to provide its back and middle-office services, the typical gross margins that firms that leverage Dynasty's core services have and how they compare to the overhead expense ratios and gross margins of typical advisory firms, and why it's so challenging for advisory firms to maintain their margins as they grow on that path to $1 billion of AUM and beyond because the need for specialized and dedicated roles tends to emerge before the firm can really fully afford to hire full-time employees for each.

And be certain to listen to the end, where Shirl talks about his own perspective on the broader trends in the industry. Why he's so upbeat on the RIA model, the key lessons he's learned in how to build and scale a business from zero to 70 employees in 10 years, and how Shirl maintained his own focus and perseverance when it took more than 2 and a half years before he was able to take his own first paycheck out of the business for his family.

FPA Revamps Its OneFPA Network Initiative But What’s Their Actual Goal?

May 13, 2019 07:05 am 8 Comments CATEGORY: Planning Profession

Last November, the FPA National leadership made its bombshell announcement that it was planning to dissolve its 86 independent chapters and nationalize them into a single consolidated entity. The new initiative, dubbed the “OneFPA Network”, was being rolled out under the auspices of trying to create better alignment and integration between National and its chapters… by literally integrating them into a single unit.

Yet while the FPA’s independent chapter structure arguably is a relic of a bygone era – when the association’s predecessor was first being founded, there were no computers or fax machines, so chapters had to be decentralized – the backlash from the membership was fast and fierce. Some raised concerns that the shift would amount to a power grab by National. Others suggested it could be a money grab for the cash in chapter coffers. Few trusted the way that FPA was unilaterally rolling out its chapter dissolution plan.

And so after a nearly-4-month “Listening Tour” for chapter feedback, the FPA has now announced “We Listened. We Learned. We Adapted.” And is rolling out a new second iteration of the OneFPA Network plan... that does not include a requirement for chapters to dissolve, and will instead begin to more gently “beta test” some of the integrated technology, accounting, and staffing initiatives. But only after a 45-day Public Comment period, that gives all stakeholders an opportunity to share their thoughts and concerns.

Yet while the second version of the OneFPA Network plan is certainly more palatable than the first, its "Participatory Governance" structure is literally not participatory governance at all (as it doesn't actually give any governing and oversight power to its chapters in the first place), and it’s also sparser than the prior version on many of the key details, from what the Key Performance Indicators will be for the chapter beta test (and whether it’s even possible for the test to “fail” or if the OneFPA Network is still a fait accompli), to what the Master Services Agreement will be that the chapters must sign in the future (a key point of contention in the original plan), and even what the overriding goals and key metrics of success are for the entire OneFPA Network in the first place… so members can provide feedback on whether or not they believe the OneFPA Network really is the best path to making FPA more viable, strong, impactful, and relevant.

Though perhaps the greatest concern is simply that as a culmination of its Listening Tour, the FPA leadership observed that “Stakeholders want a greater voice”, “Better technology is required”, “Chapter autonomy is paramount”, and “Collaboration among FPA and its communities is needed”. All of which were actually previously cited in a key 2014 Consultant’s Report to FPA. Which, ironically, was used by the FPA to justify the OneFPA Network in the first place… despite now recognizing that its OneFPA Network proposal failed to achieve any of those objectives as stated 5 years ago (and still today).

All of which raises the question of whether the FPA is still jumping the gun by asking for feedback in a Public Comment period about how best to implement the OneFPA Network in the future… when the real question should be whether the OneFPA Network is the right step to take in the first place, what goals the leadership is really trying to accomplish, and whether there might be a better way to get the same results… without spending $1M of FPA’s cash reserves and thousands of hours of volunteer energy for an initiative that may not substantively solve any of the problems that FPA actually faces.

At a minimum, though, it’s time for the FPA National leadership to get clear and concrete about what their goals actually are, and how exactly the OneFPA Network may accomplish them. Or not. So if the FPA once again fails to grow as a result of the OneFPA Network, the leadership will at least, for once, be held accountable for its results.