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Prior to having three kids (in three years, by the way), I never fully grasped what a precarious position it is to be in the middle. Mid-sized advisor firms, upon graduating from being a one- or two-person operation, find themselves contending with all sorts of growing pains. All of a sudden they have the marketing issues of a larger firm – with an infrastructure that hasn’t caught up. Here’s my best advice to escape the trap of the mid-sized advisor firm.
The mid-sized advisor market is ripe for mergers
Take a look at the advisor landscape and it’s clear why mid-sized firms are gaining more popularity than Kim, Kourtney, Khloe, Kendall and Kylie.
- The average advisor age is about 51.
- The average advisors’ assets under management is less than $100 million for 72% of RIA firms.
If you combine those two facts, you have a situation where a whole slew of firms are going to need a succession plan. But many of them dwell in what I once termed The Small RIA Firm Poverty Trap and don’t have the wherewithal to execute it themselves. They don’t have a suitable 28-year old to take over the business who has the experience, skill and, most importantly, gets along with your clients. Then, during the assimilation process, you can only hope that this person won’t decide to jump ship and take your business with them.
It’s no wonder why so many small RIA firms are scratching their heads…
That’s where RIA-consolidator firms such as Focus Financial, Hightower and Dynasty step in and gobble up advisors – by offering to put in place a succession strategy that they manage. But professional roll-ups aren’t the only ones at the party. Many advisor firms are turning to acquisitions as a way to expand, as an alternative to growing organically “the old-fashioned way.”
You also have massive shrinkage in the broker-dealer space, which is likely to continue. Smaller broker-dealer firms are are becoming less and less common. This bodes well for firms like Cetera or Piper Jaffrey that can scoop up firms struggling under the crushing weight of regulation and that are forced to rethink their business models.
These integrators are praying for a recession, which will wound more small firms for them to prey upon. Whether in broker-dealer or RIA world, firms are consolidating up like Fruit Roll Ups and this is the entree du jour for the foreseeable future.
The mid-sized advisor trap is a dinner with three toddlers
Let’s say you’re an advisory firm growing by acquisition. You used to be a small operation with one advisor and an administrative assistant. Now you start buying up “breakaway” advisor firms or you merge with another practice. The market has a few good years and next thing you know you’ve hit $1 billion.
On paper it may look good to have $1 billion in assets and 10 advisors, but the marketing strategy in these firms is as chaotic as my dining room during mealtime. You wind up with the financial equivalent of leaking sippy cups, orange juice soaked placemats and Cheerios stuck to the wall. For example:
- The CEO used to be around, but now he or she is nowhere to be found. His or her priorities now lie elsewhere – trying to recruit more advisors, assist with transition, or make sure everything is simpatico with the firms they’ve acquired.
- The chief operations officer is always on the phone with an attorney at a rate of a million dollars an hour trying to straighten out any non-compete issues that the acquired reps may have with their previous firms.
- There was a chief compliance officer who lived in a shoe, who had so many reps to oversee he didn’t know what to do. He now has three times the amount of reps to oversee without an increase in pay – which rubs salt in the wound!
- All 10 advisors want a new website, but nobody can agree upon how to represent the fee structure because some advisors are hybrid registered while others are solely broker-dealer reps.
- Some advisors want to hire a social-media person to put up postings on LinkedIn, and some advisors don’t believe social media works at all and won’t use it. They want to postcard campaigns instead.
- You can’t agree on a firm tagline because all 10 advisors have run their practices different ways and other than the overall characteristic of being successful with clients there are no commonalities shared.
- A minor compliance violation (or two or three) that shouldn’t have happened but somehow managed to slip through the cracks.
- A major compliance violation (or two or three) that shouldn’t have happened but somehow managed to slip through the cracks.
I could go on, but mid-sized firms that have grown by acquisition will find a bunch of Cheerios stuck to the wall.
The healthy way keeps the lawyers away
Chaos is the harbinger of progress, and a necessary byproduct of rapid growth. The problem is that inevitably it leads to something getting messed up.
Here’s the stone-cold truth: if you want to grow, do it “the healthy way that keeps the lawyers away.”
Get the right compliance person. This is even more critical than having the right marketing person – I’ll explain why in a minute.
How do you find the right compliance person?
The right compliance person is one who is dedicated, qualified and who participates actively in social media.
Dedicated
Don’t take your chief operations person and give them another hat to wear. I’ve seen this happen over and over again.
A $200,000 FINRA fee is a big deal for a mid-sized firm. FINRA shells those out constantly, sometimes just to make an example of you. What you pay your compliance person in salary you’ll make up in legal fees you’ll avoid.
Many medium-sized advisor firms suffer from weak compliance controls. If you want to grow right, in a healthy way that keeps the lawyers away, a strong, thorough governance system has to be the foundation.
The compliance person has to be dedicated because you need the power to make it clear that their sole purpose is to keep you out of harm’s way. Compliance violations are 100% avoidable through effort and diligence.
If they steer you clear of them, they’re worth every dime. If they don’t, then kick them to the curb because they’ve failed to fulfill their one purpose at the firm. You can’t say that if the compliance officer is doing multiple jobs.
Qualified
There are some jobs like airplane pilots where unqualified people more than invite trouble.
The right compliance person should have experience as a compliance officer. This sounds obvious but you would be surprised how many people are put in this role with the acceptance that there will be a learning curve. Maybe a little bit (like how to turn on their new computer), but nothing more than that should have to be learned.
Cough up the dough and hire someone with a law degree and licenses.
Participates actively in social media
I am constantly frustrated by compliance people who pretend to be in control of something they don’t understand.
Let’s say, for example, I am an advisor who recently attended a seminar with an accounting firm partner of mine. I want to post a picture of the event on LinkedIn and tag the accounting firm so that it shows up as a mention on their LinkedIn page.
The compliance officer needs to understand what “tagging” means in order to judge if this is permissible or not. Issues could arise. Let’s say, for example, I tag the post to the accountant’s page and then someone posts a misleading or untrue statement about me or my firm on the accountant’s page. Then what do we do? Potentially there is an issue, but if the compliance officer doesn’t comprehend all the details of what is going on, how can he or she protect your firm?
There are hundreds of nuances on social media just like this. Some other examples:
- What is a thumbnail image? When does it need a disclaimer, and when doesn’t it?
- Is it okay to post a discussion in LinkedIn Groups?
- Do I have the ability to turn off the ability to comment on posts in LinkedIn?
- How do I approve a Facebook advertisement if there’s no way to see the final ad before it gets posted to the system?
- Can a third party post to my social media pages on my behalf? If so, can I grant them control of my page or can they log on as an administrator?
Social media may seem simple but the reality is that it’s a piece of software and it can get very intricate. Don’t underestimate the level of study it takes to know what you’re doing well enough to make proper judgements.
Your compliance person should either get social media training or be an avid, active participant. If they aren’t, they’ll fail to exercise proper oversight.
Don’t ask a naïve, hopeful question like, “Are you on social media” because they’ll say “yes.” They’re compliance people, for heaven’s sake, of course they’re not going to expose themselves! They are too street smart to confess their way into unemployment.
Do a random audit of the last month’s social media postings and ask them to explain in depth how they arrived at certain judgements.
You’ll hear some pretty creative explanations, trust me!
Sara’s upshot
I have several other suggestions for mid-sized firms, but the reality is that this article has gotten too long. I may write another one on this topic but if you’re curious about anything I’ve mentioned here in the meantime please message me through APViewpoint.
Sara Grillo, CFA, is a top financial writer with a focus on marketing and branding for investment management, financial planning, and RIA firms. Prior to launching her own firm, she was a financial advisor and worked at Lehman Brothers. Sara graduated from Harvard with a degree in English literature and has an MBA from NYU Stern in Quantitative Finance.
Read more articles by Sara Grillo
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
