Skip navigation
businessman-briefcase-steps.jpg Phototalker/iStock/Getty Images Plus

An Alternative Perspective to the Most-Debated Practice Management Topics

A critical viewpoint to help you decide what’s right for your business.

In building an advisory business, it can be tempting to latch onto ideas from others, simply because it appears to offer a readymade roadmap to success. But far too often, firm leaders travel great distances with these maps before realizing they’re not getting anywhere.

In this column, I am going to give you an alternative perspective to the most debated practice management topics for the benefit of your 2022 business planning. In my many years of consulting work, our consultants have encouraged the leaders we consult to think deeper about their business beliefs, the advice and information they read, and to stay open and consider alternative perspectives.

The goal of this column is to give you an alternative, critical perspective to help you decide what’s right for your business. So, without further ado, here are four different perspectives about the most debated practice management topics.

“To build your business, segment your clients.” There’s a widespread belief in the wealth management industry that the practice of client segmentation is necessary in growing an advisory firm. The thinking usually centers around smaller accounts that are less profitable, and so those clients should receive a circumscribed set of services, with the full array of a firm’s offerings reserved for its largest accounts. This is often done to increase the profitability of the firm and manage advisor capacity. Thus, organizations end up with a categorization system of A, B and C clients.

Looking at client segmentation from a different perspective, you’ll find it contains a fundamental problem when it comes to financial advisory business, most especially now that valuations are at high levels. Embracing the approach means that the leaders of the business view the net present value of its future cash flows as less important than profits. In other words, profits first and future cash flows second.

Small accounts grow, many of them into substantial accounts over years of recurring client savings, and retirement. If small clients are treated as second-or third-tier priorities, they are twice as likely to leave the firm once their assets grow to the point of higher profitability.

Not unlike time, value of money and compounding interest, those small accounts become your future revenues (and valuation) if you make the investment in them. Remember, the wealth management industry was built by investment managers, who understood the value of a future cash flow, while not all their chosen stocks will appreciate, many will—and they can power substantial portfolio growth.

“Do a deal—or perish.” The risk of firm consolidation has been a debated topic for over 20 years. The idea that mergers and acquisitions (M&A) activity increasing will spur consolidation into bigger and bigger firms. And, as a result, small advisory firms would be unable to compete and doomed to extinction.

Today, there is (still) absolutely no proof that industrywide consolidation is an actual threat, but it is an important activity to watch, most especially in the coming years. Between 2000 and 2020, the number of SEC-registered independent RIA firms has grown by 19%, for a total of 13,880, according to NRS. If consolidation was a threat in the past, we’d see the total number of advisory firms shrinking, not expanding.

For the past 20 years, small firms could compete with larger firms, due to innovation within certain segments of clients, most especially smaller accounts. As a firm grows larger, the propensity of leadership to shave off smaller accounts helped the small firms grow. Shaving off small accounts and establishing minimum account sizes gave small firms an opportunity to service a smaller account better than it was serviced by a larger firm. In doing so, the smaller firms focused on the future cash flows providing a balance against a potential threat of consolidation.

Knowing this, the biggest threat to industrywide consolidation is if the larger firms began to build programs to serve all clients better than what a smaller firm could do. As is with many industries, innovation within certain segments of clients tends to be the greatest threat.

“Advisory fees are shrinking.” Fee compression in the financial advice business has been a hot-button topic for several years now. Are fees shrinking? We are seeing mounting evidence that they are shifting, most especially within the younger generations of savers.

In the past, the industry has charged for investment advice and included financial planning as a giveaway. But that equation is now being reversed: Advisors are increasingly using investment management as the loss leader and charging for financial planning. In doing so, it’s making fees for service even more transparent.

The commoditization of investment management has questioned the rationale for charging 1% or so to manage portfolios. And it has allowed advisors—even obliged them—to change their value proposition. More and more advisors are providing investment management for a lower price and charging their clients for financial planning services.

Some may be surprised to learn that the shift to planning fees is bolstering, rather than undercutting, advisors’ revenues, and profits. An advisor who charges a 1% AUM fee on a $250,000 account earns revenue of $2,500 a year. But the average flat fee for services for a comparable account is $315 per month, or $3,780.

“Market now, hire later.” Many leaders of advisory firms believe that investments in marketing yield the highest return on organic growth. I’d argue that the best investment a firm can make in growth is balancing the capacity to grow. And businesses that are built around human advisors serving clients grow fastest by adding advisors.

Today we often see independent RIA firms building digital client experiences and then layering marketing on top of it. Those marketing budgets can reach upwards of 10% of firm revenues. The problem is they assign new clients to the existing corps of advisors, without expanding capacity to meet the marketing success. In many cases this formula results in advisors attempting to adequately serve 250-plus or more clients.

When firms load advisors with new clients, client service will suffer, burnout and turnover increases, and clients, especially existing ones, notice. This hurts future cash flows of the firm, forcing firms to solve the growth problem through profitability, often resulting in segmentation of the client base. Add on top of it, in today’s environment, consumers expect an unprecedented level of responsiveness regardless of account size.

When an advisor is too busy juggling an overloaded client base and cannot return a call or email quickly, clients are presented with the opportunity to look for a different advisor. They’re also less likely to act as advocates for an unresponsive organization—understandably so—which decreases client referrals.

The backbone of building a great advisory firm hinges on having talent to service clients, generating client referrals and retaining clients for the benefit of future cash flows, first.

My advice to business leaders is to question and take a critical look at all wisdom gained in building their business. Not unlike other industries, how you build an advisory business changes over time. Taking a deeper, more critical look may be initially more challenging, but doing so will help you gain more clarity in what you are trying to accomplish in the longer term.


Angie Herbers is the founder and CEO of Herbers & Co, a consultancy firm for financial advisors.

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.