The secret decoder ring to advisor scale

I was at a broker-dealer meeting recently, listening to a colleague present on the topic of “The value of an advisor” – and how it’s more than the value of the fee they charge – and the equitable distribution of services at different client revenue amounts. It struck me that the scatter plot we often use in our practice management program to depict where an advisor’s clients fall in terms of the revenue they generate relative to the service effort they require from the advisory team, tells only one part of the story that advisors wrestle with. During my 16 years on the road as a regional director, I have always been amazed by the proliferation of products – shiny objects – that continue to find their way into the books of many financial advisors. The hot dot products that attract large amounts of cash flow are always there every year, but their names change about every 18 months. But this becomes problematic when you ask the question: “How many securities, funds, or programs can a financial advisor keep track of?” Of course, there is no uniform answer. Over the years, advisors have shared their statistics with me. Usually they report having approximately 300 – 400 CUSIPS in their book. I have heard one broker-dealer executive state that their firm’s average is 1,947 CUSIPS per advisor. The high water mark response I’ve received is: 2,200. It is because of this trend that I started addressing the product and service matrix as a white board presentation with advisors. Over the years I had done this hundreds of times, in many cases more than once to the same audience, but just a little louder than the previous version. It’s a 20-minute practice management primer, if you will. I change the title of the discussion on different occasions, but for the most part it has been: “The secret decoder ring to advisor scale.” The matrix is below: Chart I simply lay out the idea of smaller, mid-sized, and then larger client segments across the X-axis, and the product and service categories along the Y-axis. The demarcation between the clients segments is up to the advisor, but often $100,000 in assets under management (AUM) (or advisor program minimum) is the line between small and medium, while $1,000,000 tends to the line between medium and large. I then typically point out to the audience that if the advisor can find the optimal (smallest) set of products that
  • solve the investment conundrum of their different client types
  • create a scalable service model for each
then scale would be achieved. But, this issue will only be “decoded” once the number of holdings across the advisor’s entire book is manageable. In some situations during my tenure in the field, I have met advisors with $200,000,000 in AUM and hundreds of holdings in their books. They would claim to have a great service model along with a small staff. Invariably, that prompted me to simply ask one question: “Can you grow? Or is the business running you?” Conversely, I also know of successful advisors who are still growing even after they’ve surpassed $250,000,000 in AUM, but they continue to hire more staff along the way. This didn’t hit home until I received a complimentary voice mail from a long-time advisor friend. He stated that he had just crossed $110,000,000 in AUM, 70% of which he has chosen to hold with Russell. He thanked me for my guidance over the years related to scale, practice management, etc. It’s just this one advisor, an assistant, and an operations associate. When I saw him at a recent Russell conference, we laughed a bit at the picture I had painted for him 10 years prior, when he had only $8,000,000 in AUM – all in A shares, at another firm. At the time, the idea of getting over $100,000,000 in advisory AUM seemed farfetched at best. We decided to celebrate again when he crosses $250,000,000 in AUM and has the same size team! I’ll keep an eye out for a plastic decoder ring in a cereal box to mark the occasion. Naturally (for me), before we parted ways at the conference, I asked my friend how many CUSIPS are in his business. I had a hunch that it was lower than the numbers I had heard from other advisors and broker-dealers. When I heard his response I smiled: at 40 CUSIPS it was even better than I expected! That gives me even more confidence in his ability to double, or even triple, his AUM while maintaining the same size team. It gets even better: my friend relayed the story of another advisor who has close to $500,000,000 in AUM and a three-person team. The number of CUSIPS in that advisor’s book? Fewer than 40. I wasn’t surprised.

The bottom line

Managing the number of holdings and keeping it to a rational amount creates the scale to grow. The leverage created allows for more focus on the service experience delivered to clients, which in turn creates viral marketing and thus referrals. I’ve often found that when an advisor spends the majority of their time on the service model for mid-sized and larger clients (ideally the target clients of the business), while delivering scalable service to smaller clients, advisors experience the most success. If you ask me, yes – scale is a beautiful concept that works for the business and many times for the clients who never put the shiny objects in their portfolio.