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With an ever-growing wave of mergers and acquisitions, and industry consolidation, amongst both broker-dealers and RIAs, there is an increasingly common view that the solo financial advisor is "doomed" in the coming years. Whether due to the burdens of managing the firm, meeting the rising volume of fiduciary compliance obligations, handling increasingly complex investment or insurance solutions, or just doing all the financial planning work… the presumption is that all together it will simply become “unmanageable” – or at least impossible to do in a cost-effective manner – for the typical solo financial advisor in the future. Thus requiring solo advisors to either be acquired, or at least be "tucked in" to larger firms, in order to access their resources and have better economies of scale. Yet the reality is that "the death of the solo financial advisor" has been forecasted for nearly two decades now, and in the meantime solo financial advisors have actually become more profitable than ever!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we take a deeper dive into the current state of the solo advisor, why it's actually becoming easier to be a successful independent solo financial advisor, and why the coming decade is more likely to be the GOLDEN AGE of solo financial advisors than the death of them!

As a starting point, it is helpful to pause and reflect on the current state of solo financial advisors as they exist today, nearly 20 years after Mark Hurley famously issued his 1999 report forecasting the death of the solo advisor. Because the current industry benchmarking studies reveal some striking trends, including that the best solo financial advisors take home as much hard-dollar cash compensation as the typical partner in a billion dollar advisory firm! In fact, the top solo advisors are keeping in their pocket as much as 70 to nearly 90 cents of every dollar of revenue that they generate, after accounting for all expenses (technology, office space, staff, etc.). In hard dollar terms, the typical standout solo advisor is netting almost $600,000 per year in take-home profits, on $700,000 to $800,000 of total revenue. So to put it mildly, solo advisory firms are not exactly struggling and dying in today’s marketplace! And while these figures are based on about the top 25% of solo firms - so clearly not all solo advisors are doing this well - even the average solo advisor can do very well on much lower levels of revenue with the potential for a 60% to 80% profit margin!

Accordingly, even if costs rise substantially (say, another 10% on overhead), solo advisors would still have ample profit margins to absorb the impact, and top solo advisors could still be taking home nearly half a million dollars a year in take-home pay. Even an advisor generating "just" $250,0000 in gross revenue and running a 60% profit margin would still be taking home $150,000, which is still almost 3 times the median household income in the U.S. Simply put, there’s a lot of room to succeed as a solo advisor, even if costs rise.

Furthermore, it's really not even clear if we should expect costs to rise for solo advisors in the future, as the reality is that the cost of what it takes to operate an advisory firm today compared to 20 years ago has been reduced tremendously, due to technology. Tools that make it more efficient to be a solo financial advisor – scheduling software, rebalancing software, tax updates built into powerful planning software rather than proprietary spreadsheets, account aggregation tools that automatically update financial plans, etc. – have all reduced the costs of being a solo financial advisor, in terms of both time and money. And while 20 to 30 years ago the "best" technology was at the wirehouse firms that had the resources to develop them, today almost all of the best solutions are provided by independent technology firms, and accessible for the average solo financial advisor (because the independent technology provider can achieve economies of scale, which transfers down to the individual advisor using the software!).

With all this being said, I don’t want to be insensitive to the plight of many of today’s solo financial advisors today who are not running 60% (or 80%-plus) profit margins, and are not taking home half a million dollars or more in compensation from their firms. For many solo advisory firms, there is often a complaint with growth that “the business isn’t scaling”, which is typically code for "this isn’t getting any easier as my firm gets bigger, so when are all of these efficiencies coming along?" But the real struggles for solo advisory firms, particularly once they cross about 50 clients, aren't actually the result of being too small to survive, but instead are a result of not having enough focus. Because the reality is that it is time intensive and hard to scale if each client you serve is different and you don't have a clear target market where you can create a consistent solution. But that means the key to success isn't more size and staff and growth... it's finding better focus. Otherwise, growing bigger just makes the problem worse, because you add even more inefficient clients and then throw staff and money at the problem, which doesn’t actually make it more efficient, and just makes you miserable because now you have to manage more and more staff on top of your inefficient business!

However, it's important to recognize that there is one real challenge that solo advisory firms do face in the future: the marketing challenge of getting new clients, and differentiating yourself, given the coming (and even current) landscape of advisory firms. Because while there was a time where just being a comprehensive financial planner was a sufficient differentiator, but that is no longer the case. Solo advisors have to compete with over 80,000 other CFP certificants now, and every major broker-dealer has been making a big push into financial planning for years. And while it is true that solo financial advisors can often still go deeper than those firms, and have more relevant expertise, and be more specialized.... unfortunately, few solo advisors are. Many are still just generalist financial planners. And there is a problem with trying to outmarket a firm that’s 100 or a 1,000 times your size, or even larger, when all you do is the same generalist financial planning advice that they do. Which means focusing and specializing into a niche helps both your client service efficiency and your marketing!

The bottom line, though, is just to recognize that not only is the solo financial advisor not dying… and I’d argue that there’s never been a better time to become a solo advisor, thanks to the rise of the internet and all this amazing technology that allows us to be solo advisors and leverage that technology at a fraction of the cost of traditional staff members. However, the fact that you can be more efficient than ever as a solo won’t help in the future if you can’t differentiate yourself. But when you get all that right, as the benchmarking studies have shown already, solo financial advisors can make an incredible income (sometimes not even working full time!)! Which means being a solo financial advisor can still be amazing... at least, once you have focus!

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As we enter the new year, many advisors will be thinking about ways they can improve their business in 2018. Yet one of the more interesting trends that I have been seeing lately is the rise of advisory firms where the biggest challenge is not the success and growth of the business... but that the advisory firm owners themselves are unhappy, or downright miserable. This seems to particularly occur within the RIA community, and especially amongst those firms managing between approximately $100 million and $300 million of AUM... a subcategory of firms I call "accidental business owners". Because the source of their stress is that they may have built successful and profitable businesses - and now find themselves responsible for managing it - despite the fact that they never actually intended to build a firm that they would have to spend so much time managing in the first place!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss what is causing so many advisory firms to become accidental business owners, why they occur in the first place, the problem with being an accidental business owner, and what financial advisors can do if they find themselves in this situation to become happier (and regain control of their lives).

To understand the phenomenon of the accidental business owner, it’s important to first point out that the word “business owner” is being used in a very specific way. We often talk about advisory firms as being “businesses”, but there's a distinction between true "businesses", and advisory firm practices. The difference is that a practice is built around an individual advisor. The practice is you, and while you may have a staff member or two, it's primarily about the services you provide to clients. By contrast, an advisory firm business – a true business – goes beyond just you as the founder advisor. There are other advisors, who manage clients, and who are responsible for helping to bring in new revenue. Historically, almost all financial advisors were salespeople, and most salespeople simply have practices - as evidenced by the fact that if the advisor-salesperson did not go out and selling new insurance or investment products, income dropped precipitously and the business would die. But with the rise of the AUM model, and phenomenally high retention rates amongst advisory firms, advisors began being able to accrue clients over time and actually build large and scalable businesses – businesses that truly needed to hire other advisors to come in and manage relationships – often even without trying to do so. The clients just accrued until the point that it was a business. Thus, they became "accidental" business owners.

But the fundamental problem that crops up for those financial advisors who become accidental business owners is that the job of running an advisory business is different than the job of being a successful advisory practice. A successful practice as a financial advisor is all about your ability to effectively service your own clients. By contrast, running a successful advisory business requires you to be in the role of teaching and training other financial advisors to be good at business development, financial planning, servicing clients, and managing relationships (in addition to managing the firm, hiring staff, making technology decisions, and actually being a leader of the firm). Which means if the primary reason you started your firm in the first place was because you like to be a financial advisor, and give people advice, and help them, and have those client relationships… then being an advisory firm business owner is going to be pretty miserable, because you don't get to do any of that stuff anymore. Which ultimately tends to occur as firms grow to around $100 to $300 million in AUM, because this is the point at which an advisor (or a small team of 2-3 advisors) truly crosses the threshold where they are at capacity and have to add more advisors and other employees and start to scale their practice up to a business.

So with all this being said, if you do find yourself in the position of being one of those unhappy accidental business owners, what should you do about it? The key is to acknowledge that is that there is effectively a fork in the road. The path on the left is to embrace your new role as a business owner. You may not have set out to do it, but here you are, and this is your opportunity to grow, to learn something new, and to do this well. You may recognize that you need help, but that's OK. If you’re a more visionary type, and you can see what needs to be built, but you’re really not the good manager to build and integrate it all together, then make the reinvestment to hire a Chief Operating Officer to be your right hand for implementation.

On the other hand, the path to the right is to go back to being a successful solo advisory practice again. This is by far the more painful path for most of us. Because it basically means downsizing the firm and the number of clients you serve, which to many can feel like "failure". Except it turns out that it may be the single fastest step to actually make you happy again in your business. Because, due to the 80/20 rule, many or even most advisors can maintain their current take-home pay by scaling back to (just) their top 20% of clients while freeing up additional expenses and a lot of time and effort.

But the bottom line is that as you get started here in the new year, take a good long look at what you’ve built. Is it a practice, or a business? And more importantly, what do you want it to be. Do you really want to build a business, and make the reinvestments – financial, time, effort, and learning new skills – that it takes to lead the business? Or do you really just want to run a successful practice, make good money, and regain control of your time? Either path is truly okay, but you have to decide what you want to build towards. And if you’ve found yourself accidentally going down the “wrong” path – you’re an accidental business owner that doesn’t really want to be anymore – recognize that going back to a lifestyle practice is an acceptable answer, and it may be the path that truly leads to greater happiness!

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