The Eight Ways to Broker Nirvana

There is a memorable passage in Lewis Carroll's Alice's Adventures in Wonderland, where Alice is confronted with a fork in the road. She asks the Cheshire Cat, Cheshire Puss, would you please tell me which way I ought to go from here? The cat, perched in a tree, responds, That depends a good deal on where you want to get to. Where is it that you'd like to go? To which Alice replies, I don't care where

There is a memorable passage in Lewis Carroll's Alice's Adventures in Wonderland, where Alice is confronted with a fork in the road. She asks the Cheshire Cat, “Cheshire Puss, would you please tell me which way I ought to go from here?” The cat, perched in a tree, responds, “That depends a good deal on where you want to get to. Where is it that you'd like to go?” To which Alice replies, “I don't care where so long as it is somewhere.” The cat responds, “Then it doesn't matter which way you go.”

If you are taking stock of your business at the start of the new year, remember Carroll's lesson. It's easy to just go somewhere. But to really get where you want to go, you need to ask the right questions. To become a better broker, it's not enough to say, “I want to gather lots of assets and be the best in my town.”

What successful brokers and advisors need to do is to create a business plan, a road map that takes them to a specific professional goal. That means starting with the right questions about your strongest skills, your most likely target audience, etc. It may not matter whether you choose to be an absolute return expert or a managed account maven. “The real issue in building a 21st century practice is determining what business you're in and what type of client you want to attract,” says Matt Oechsli, of the financial services consulting firm Oechsli Institute, and a columnist for Registered Rep.

Moss Adams, a Seattle-based accounting firm, recently surveyed more than 800 brokerage and advisory practices and identified eight different strategies, any one of which can work and, in many successful practices, are used in combination. (The study was conducted with the Financial Planning Association in Atlanta and SEI Investments in Oaks, Pa.) The key is choosing a strategy that fits your skills and your interests and then committing the resources necessary to make it work.

Clearly, there are variations on these models and combinations that make sense. But there are some clear patterns in the results. For example, you can succeed by using a solo-practitioner model, but you can expect greater returns if you team up. Median revenue per client among top solo firms was $2,056, compared to $4,519 for group practices, according to Moss Adams. Still, when you're on your own, you also don't have the headaches of managing a larger firm. It comes down to a matter of individual choice — and making sure you do it right.

Here are the eight paths to broker success that Moss Adams identifies:

  • Niche market

    These firms specialize in serving the specific needs of a particular market — doctors, say, or retired telecommunications executives — and developing a reputation for understanding the products and services that cohort needs. Such was the case at Christopher Street Financial in New York. Founded in 1980 to serve gay and lesbian clients, the idea behind the firm was that that community had unique financial needs not being met by other practices. “A lot of our clients have continued to be very closeted and wouldn't risk going to their local Merrill Lynch on the corner and being exposed,” says managing partner Jennifer Hatch.

    Besides, same-sex couples face a variety of financial issues not encountered by heterosexuals, particularly in estate planning. Now, Christopher Street Financial has a national reputation — about 35 to 40 percent of its clients are from outside the New York area. Assets under management are about $125 million. That's not a small sum, considering that until recently the firm charged on a commission basis and only started charging an annual fee for assets under management about two years ago. Still, with 2,000 clients, the firm is now taking a hard look at its focus with the hope of capturing higher-net-worth individuals.

    How can you develop a niche strategy? Start by analyzing the top 25 percent or so of your clients and determining the predominant groups they belong to. Six years after launching Financial Development/Mutual Service in Atlanta in 1980, Kay Shirley began to take a close look at her client base. Shirley realized the vast majority were people retiring from or leaving the telecommunications industry. So, she threw herself into targeting that group, focusing on ways to maximize income from severance packages, 401(k)s and the like. It worked: She runs a solo practice, with 12 assistants and has $353 million in assets under management.

  • Dominant local firm

    That means becoming one of the top three players in one market. Often this is accomplished through mergers and acquisitions. The benefits can be huge. The top three firms in an area have twice as much opportunity to do business as the fourth-largest player, according to Moss Adams. They also make more money. The survey found that median pretax income for firms following this strategy was $113,244, the highest of any of the eight models; median revenue per professional was also high, at $254,173.

    A company can also become a dominant firm by broadening services or offering an array of expertise. “To compete against big established players, these firms need to build cross-functional practices,” says Mark Tibergien, a principal at Moss Adams. Washington, D.C.-based Sullivan, Bruyette, Speros & Blayney, for example, has $850 million in assets under management partly thanks to its four founders' breadth of expertise; each has a particular area of strength, such as estate planning and taxation.

  • Technical specialty

    These practices focus on a particular type of service, like estate planning, or a product, such as long-term care insurance. San Francisco-based planning firm Kochis, Fitz, Tracy, Fitzhugh & Gott, for example, specializes in issues facing corporate executives, such as stock options, retirement planning, deferred compensation and other benefits. Six years ago, the 11-year-old firm developed a proprietary software program that allows clients to manage their options by tapping into the company Web site. The firm now has 10 staff advisors, boasts 270 clients and more than $700 million under management. Because of the firm's expertise, companies hire Kochis Fitz to provide services to their executives.

  • Unique sales method

    With this strategy, firms use unusual ways to attract clients, from trade shows and TV appearances to seminars and joint ventures. “Being known in the community helps bring people in the door,” says advisor Meg Green, of Meg Green & Associates in North Miami Beach, Fla. “That's why I stay high-profile.” She did so by hosting a four-hour radio talk show for four years and weekly appearances on a local TV show for another eight years. In addition, she regularly gives talks at lunches and other special events. Five years ago, for example, she led a seminar for the wives of NFL football players. Over the past 18 years, relying on that program of radio and TV appearances, and an assortment of speaking engagements, Green has built a thriving nine-person practice serving 600 clients a year.

  • Local presence of a major brand

    You can do this by affiliating with such recognizable names as American Express Financial Advisors, AXA Advisors, Raymond James, LPL, etc. Your choice of products and pricing may be somewhat limited, but you may be perceived as carrying more clout with a national brand name on your card. On top of that, you would benefit from significant operational help from central headquarters.

    Ray LaPalme, a veteran planner with American Express, likes the Amex financial planning software, marketing materials and ongoing courses. He also says he gets a lot out of the regional meetings with 100 other advisors in the area, held every other month because they can trade advice. The downside for this model is that the clients tend to be smaller, and reps need to see a lot of them to make money. In fact, these practices in general have a low annual revenue per active client of $1,138, according to Tibergien. That compares with, say, $3,283, for a dominant local firm. LaPalme's clients have household incomes of $80,000 or less. He schedules at least 25 appointments a week. Still, “I like serving this group,” he says. “I find they're more receptive to my advice” than more-affluent clients.

  • Selling more services to existing clients

    This approach is generally used solely by practices serving the clients of an affiliated CPA firm. It's a way of revving up revenue, by leveraging existing relationships, without going through the expense of starting from scratch. And it's not a bad way to make a go of it. Pretax income per owner, according to Moss Adams' study, was a respectable $92,093. There is, of course, one big downside — serving someone else's clients. Plus, it's not a good fit for someone seeking a fully independent operation.

  • Famous person

    These firms rely on the reputation of one of its owners to attract clients. Having an effective rainmaker on board, of course, has the potential to reap big rewards: Median pretax profit per owner was $97,344. But, that's only among firms able to control the hefty expenses generally needed to maintain the individual's high profile. Shirley, for example, streamlines her operation by employing 12 assistants, each of whom is responsible for highly specific duties, like media communications or technology.

    Here's how 800 firms sampled by Moss Adams fared in 2001, grouped according to strategy
    Median Pretax Income Per Partner/Principal
    Low Cost Provider $45,722
    Local Presence of a Brand $55,567
    Niche Market Firm $70,912
    Unique Sales Method $83,190
    More Services to Existing Clients $92,093
    Technical Specialty $94,912
    Famous Person $97,344
    Dominant Local Firm $113,244
    Median Revenue Per Professional
    Local Presence of a Brand $121,000
    Low Cost Provider $129,262
    Unique Sales Method $148,000
    More Services to Existing Clients $171,893
    Famous Person $175,000
    Niche Market Firm $181,741
    Technical Specialty $200,200
    Dominant Local Firm $254,173
    Source: Moss Adams
  • Low-cost provider

    While Moss Adams identifies this as a viable strategy — to grab more business by undercutting the fees of rivals — it also found it was a method that was not being used successfully. With a high volume of clients, a large number of advisors and a standardized set of services, this strategy has the potential to succeed. But if you don't get all those factors in sync, says Tibergien, “It won't work.”

In the Moss Adams survey, a few practices were succeeding with this strategy. The result: Low-cost providers had the lowest median pretax income per owner of any group, just $45,722. The common problem is that firms hired the staff needed to handle a large client base — but never found enough clients to benefit from the economies of scale. Of the firms surveyed, that low-cost provider group had the lowest number of clients per advisor. In short, the surveyed low-cost provider firms were misallocating their resources. “Those firms didn't achieve the critical mass needed to increase their bottom line,” says Tibergien.

Naturally, there are other factors that play a key role in determining whether a particular strategy succeeds. Some are hard-to-quantify factors, such as smart management and chemistry (teamwork).

And there are external forces that advisors need to overcome to be successful. Industrywide, profits for independent firms are down — a drop largely attributable to an increase in salaries paid to support staff, according to the Financial Planning Association. Why? As practices have become more complex, advisors have been hiring more support staff and, as a result, increasing overhead — and eating into profits.

To increase productivity, Green uses a computer-based system in which all her staff members enter comments every time they do just about anything, from the date a particular letter was sent, with a description of its contents, to the specifics of a message left for a client. Result: When clients call, their questions can be answered by just about anyone on staff, by logging onto the system and calling the client's file up.

Another critical factor is how to charge. As margins increasingly become squeezed, industry observers say advisors will need to rethink their approach. It's a tricky question since, “the No. 1 area of dissatisfaction among upper-middle-class and affluent customers is with the value they perceive they're receiving for fees and commissions,” says Oechsli.

Still, successful reps are using a variety of methods. At Kochis Fitz, for example, advisors charge $50 to $500 an hour for producing plans, plus a retainer ranging from $2,000 to $12,000, and a percentage of assets under management. Polstra & Dardaman in Norcross, Ga., charges a $10,000 to $25,000 planning fee in the first year, plus a wealth management fee, a percentage of assets under management. On the other side of the coin, at Garrett Planning Network, a national network of about 100 planners based in Shawnee, Kan., advisors charge an hourly rate of $150 to $180.

Does it matter whether a firm has multiple advisors? Can a solo outfit make it or do you have to forge a team, or as Moss Adams says, an ensemble? Ultimately, “Firms that want to be big will have to be ensemble,” says Rebecca Pomering at Moss Adams. And, a top solo practitioner just won't make the bucks that the bigger fry can.” Median revenue per client among top solo firms was $2,056, compared to $4,519 for group practices, according to Moss Adams. Still, when you're on your own, you also don't have the headaches of managing a larger firm. It comes down to a matter of individual choice — and making sure you do it right.

Which One's for You?

Following any of these eight strategies can create a successful practice. But you have to find the right fit.

Definition Pluses Minuses
Niche Market Firm Specializes in serving the unique needs of a particular market Efficient way to focus resources There are only so many niches, developing necessary expertise can be costly
Dominant Local Firm One of the three largest firms in a specific market You'll probably make more money than you would with any other strategy; easier to achieve operational efficiencies Can be expensive, owners of bigger firms have more management headaches
Technical Specialty Firm Specializes in a type of service, such as estate planning, or product, like long-term care insurance Effective way to focus resources You have to be top in the field to attract clients, requires more time and money to train staff
Unique Sales Method Employs a particular sales method, like running seminars You attract a high volume of clients Can be copied easily
Local Presence of a Major Brand Affiliates with a national branded company Can leverage off reputation of brand, can get access to resources from the company Clients tend to be smaller, you may have less control over your business
Sell More Services to Existing Clients Affiliates with a CPA firm and serves the clients of that firm It's cheaper to target existing clients than to find new ones If you lose the relationship, you lose a lot of business
Famous Person Relies on the reputation of one of its owners to attract clients Easy way to pull in clients Hard to build a transferable business, risky if something happens to the famous person
Low Cost Provider Competes primarily on the basis of lower fees Can attract underserved clients not targeted by other firms Need to serve a high volume of clients, can't provide a lot of customer service
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