The Ensemble Practice

A Team-Based Approach to Building a Superior Wealth Management Firm

P. Palaveev

• Publisher: Bloomberg Press
• Year: 2012
• Print ISBN: 9781118209547
• eBook ISBN: 9781118231388
• Edition: 1
• Topic: Business
• Subtopic: Investimenti e titoli
• Index: Business

A detailed road map for wealth managers who want to build an ensemble firm or team and achieve sustained growth, profitability and high valuations

Why do ten percent of wealth management firms grow faster than the rest of the industry, often despite the turbulence of the markets? The answer, according to industry consultant and researcher, P. Palaveev, is that the most successful firms are those which, create and promote a team-based service model that serves as the foundation of their enterprise.

• Find out how and why a team-based service model can play a decisive role in the future growth and sustained success of your wealth management firm
• Discover the key factors for building a successful ensemble firm and profit from the best practices top team-based firms employ
• Profit from the author's years of experience working with the world's top wealth management firms and the data he has compiled as a pre-eminent industry researcher
• Learn about the various organizational structures, partnership models and career path options and how to put them to work building an ensemble practice
• Get the lowdown on how the savviest traditional broker-dealer firms have formed dynamic ensemble teams within their organizations and learn of the results they've achieved

Part I

Structuring an Ensemble

Chapter 1

The Ensemble Defined

“I like building a business; I just don’t like managing people!” This oxymoronic phrase has defined the landscape of the financial advisory industry for decades as financial advisors have consistently focused on “hunting and gathering” new clients rather than the “unnatural” act of collaborating with other professionals. As a result, the majority of financial advisory practices today still function as “solos”—one man (or woman), alone against the markets and the tax code. This simple practice model unfortunately has always been fragile and inefficient, and it leaves no legacy behind when the advisor retires.

I believe there is a better model of practice—one that combines the skills and energy of multiple professionals and focuses on the cultivation of relationships with clients and employees to build a profitable and lasting structure. I know many advisors will agree with this statement since the multiprofessional practice we call ensemble is already being adopted and perfected by thousands of practices. The results are rewarding to the advisors who embark on building an ensemble and are changing our industry.

For the last 12 years I have had a chance to work with many financial advisory firms as a management consultant and observe their strategies, their plans, their culture, and their checkbooks. Many were following the traditional model of one-person-one-practice, but many were already building large and complex organizations. All of them were in some process of change and transformation—after all, the financial advisory industry is relatively new and quickly changing. What I found was that while the changes were purely quantitative for most solo practices (i.e., more revenue, more clients, but the same kind of practice), the multiprofessional ensembles I worked with were able to make qualitative changes that transformed them into better competitors and more valuable businesses.

I can’t resist comparing the solo practice model with the hunter-gatherers of ancient times. Human beings have been roaming the earth for roughly 200,000 years. In the first 195,000 of years of their existence, however, they left very little trace of their activities,1 their efforts, and their achievements. All that remains is a few arrowheads and doodles on cave walls—items of little interest to anyone outside the scientific community and which often prove to be pranks by drunken college students. It wasn’t until several thousand years ago2 that human beings started developing civilizations—complex societies that produced great cultural artifacts such as magnificent buildings, libraries full of books, scientific discoveries, and beautiful works of art. How is it that hundreds of thousands of years left so little trace but several centuries lead to such an explosion of knowledge and culture?

The answer lies in the discovery of agriculture and with it, the large, complex, and team-based societies that required carefully structured organization and provided enough resources to allow some of the members of those societies to focus on specialized tasks such as science, art, and religion. Once humans did not have to spend all of their time hunting or picking up fruits and berries, their creativity and inventiveness blossomed, and they started to write, to debate, and to pass knowledge and resources from one to another and from one generation to another.

In a similar way, the vast majority of financial professionals worked with their clients for decades and then retired with their practice dissipating behind them and the clients scattering to other advisors. The one-person practice has been the building block of the financial advisory industry for decades. That one person, the molecule of the profession, has always been a hunter-gatherer and has primarily been consumed with finding new clients. Since until the 1990s the business was mostly commission-based. “Hunting” (i.e., sales) was the primary activity and, just as it happened to our ancient predecessors, hunting left little time to write books or design pyramids. The best “hunters” dominated the brokerage “tribes” of the 1980s, and the quieter “engineer” types were poorly regarded, encouraged to learn to hunt, and often did not survive. To quote Michael Cera’s character in the important movie Year One, who was in a prehistoric tribe, “We have two job descriptions here—hunters and gatherers—and you are obviously not good at hunting.”

Fee-based financial advice was to the financial industry what agriculture was to our predecessors. As clients started to pay to have a percent of their assets managed for the ongoing advice of the professional,3 suddenly there was a need for a completely new type of organization, new types of skills, and ultimately a new type of culture and values—“growing” became more important than hunting and “cultivating” more productive than gathering. Nurturing and preserving existing client relationships produces a reliable and predictable stream of revenues for the advisors and favors those that can retain clients rather than jumping from one client and transaction to the next. What is more, the fee-based advisory business created a surplus of time and resources, paving the way for the emergence of specialized responsibilities and a team-based, rather than individualistic, organizational structure.

This is very important to understand before we start building an ensemble—the recurring and predictable nature of the revenues allows an ensemble to exist. The more recurring and predictable the revenues are, the more the practice can have the patience to cultivate relationships and to train and develop staff. The more the practice has to constantly search for new revenues, the less likely it is to have this long-term focus and build an ensemble. If you don’t believe me, try reading this book on an empty stomach and see how well you can focus on the page rather than the fridge.

The Ensemble Concept

The ensemble practice is a team of financial advisory professionals that relies on the team rather than an individual to service and manage client relationships. The ensemble practice involves multiple professionals who often have specialized roles and bring different skills and knowledge. Ensembles also employ different levels of professionals, combining the enthusiasm, energy, and lower cost of less experienced advisors with the experience, wisdom, relationships, and network of highly experienced team principals—a process we will call leverage. Most of all, an ensemble is defined not only by its organizational structure but by its culture—a collective behavior that focuses on the team goal rather than individual agendas and says “we” more than it says “I.”

As a result of leverage (multiple levels of professionals), specialization, the larger pool of combined resources, and the “two heads think better than one” effect, ensembles have performed better than other types of financial advisory practices. In fact, ensemble practices have proved to grow faster, attract larger client relationships, achieve higher levels of profitability, and create long-term value for their principals. What is more, they tend to survive the founding generation and pass their resources and knowledge to a new generation of professionals. Ensemble practices tend to create and invent more successfully—they develop new methods and ways of servicing clients and original analysis and planning processes. Last but perhaps most important is the fact that clients have shown a clear preference for working with ensemble practices and have overwhelmingly gone to firms that have been early adopters of the ensemble concept.

These are strong statements, and I will certainly try to substantiate each with statistical data, case studies, and examples from my experience as a consultant, starting with this chapter. As strong as the evidence in favor of ensembles may be, though, the majority of the advisory industry today still practices in individual solo practice with only one advisor responsible for business development (sales), service, research, operations, and everything else. Many firms, while consisting of multiple professionals, still perform like hunter-gatherers—that’s why our criteria for an ensemble will focus on culture as much as we focus on the organizational structure. While the advantages of being an ensemble practice are accepted by most, the process of building such a practice is difficult, and the obstacles have led many advisors to prefer the control and path of less resistance of operating on their own. The industry today has more solo and silo practices (we will define them in a second) than ensembles.

Not all nonensemble practices are solo. There are many firms that have multiple professionals and even multiple partners but still do not practice a team-based service model. It is very common in the industry to see practices that have multiple principals but where each principal works with his or her own clients and to a substantial degree derives income from his or her own client base. We will call such firms silos. There is no clear way of differentiating a silo firm from an ensemble firm, but usually the most telling sign is the presence (or absence) of a shared bottom line that significantly impacts the income of the owners. In other words, if 40 percent or 50 percent of the income of a principal depends on the shared result of the practice, we are certainly working with an ensemble firm. If, on the other hand, the shared bottom line only determines 5 percent to 10 percent of the principal income while the personal results determine the remaining 90 percent to 95 percent, the firm is most likely better classified as a silo.

So to summarize, by their organizational characteristics (roles and responsibilities in the delivery of services to clients), here are the three types of practices we are discussing:

1. Ensembles—multiprofessional practices that deliver services as a team and pool all resources and profits.

2. Solos—individual practices with only one professional advisor. The solo practice usually has some support staff, that is, an administrative assistant or client services administrator, but does not have other professionals.

3. Silos—practices that have multiple professionals, but those professionals maintain their own clients and their own profits, in essence only sharing office space and a fax machine.

Note that ensembles do not necessarily describe the affiliation characteristics of the practice. How the practice is registered with regulators and how it works with its broker-dealer and other support resources (affiliation model) is not a critical factor, as we can find ensemble practices in every affiliation model.

Ensemble Demographics

The practice of advisors working together in a team structure began to take hold in the late 1990s, particularly among independent financial advisors—those that own and operate their own practice as opposed to working as employees for a large firm. (The term “ensemble” itself was first used in 2001 in a research report published by Moss Adams LLP,4 and I had the privilege to be part of the team that wrote that report.) There are reasons why independents developed and adopted the ensemble concept faster than the larger national firms, and the reasons have to do with culture and resources.

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Key Terminology

• Independents—firms that are majority owned and operated by the advisors who work in them. While by definition independents tend to be smaller, size is not the criterion—a large 30-partner firm is independent because the partners/owners are also the advisors, while a small bank-owned practice is not independent. The independents tend to practice in two primary affiliation models—registered investment advisors (RIAs) and independent broker-dealer affiliated advisors (IBD advisors).
• Large firms also known as wirehouses—big national firms such as Bank of America Merrill Lynch, Wells Fargo, Morgan Stanley Smith Barney, and UBS, where the advisors are employees of the firm rather than owners of their own practice. This employee model applies also to smaller firms where advisors work FOR the firm rather than on their own.
• Regional firms, insurance firms, and other types of firms—between affiliation models where the advisors are owners and models where advisors are clearly employees, there are many business models where the advisors have significant ownership of the practice but still are closely supervised and managed by a home office. This is true for many of the regional brokerage firms, the investment practices inside insurance firms, and even the branch offices of some of the independent broker-dealers. Again, the team-based ensemble model equally applies in this environment with some modifications for the areas of practice controlled by the home office.

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We can try to explain why the independents have adopted the ensemble model more readily. The culture among the large investment firms in the late 1990s was still one of hunting. The firms encouraged and focused on production—that is, sales—and held in high regard those that produced the most (high producers). Production (sales) numbers were made public, rankings were released monthly, and there were many prizes and recognition associated with “hitting the numbers.” Those that hit the number went on lavish trips and were given plaques to put on their desks, and those that missed the numbers were typically “coached” and treated as the main cabin on a trans-Atlantic flight (i.e., don’t you dare use the first-class restrooms). This individualistic culture tended to favor and encourage big egos, and collaboration was simply not a value that was rewarded. In fact, I have met wirehouse advisors who would introduce themselves by their place in the production ranking—for example, “My name is John Scott. I am the third largest producer in our office.” Branch manager compensation was based on production, so not surprisingly managers were not very likely to encourage the teaming of advisors even if the advisors themselves had an interest in doing that.

In contrast, advisors that were starting their own independent firm were often “refugees” from the producer cultures and resented the production-driven mentality. Many of the founders of independent firms left the larger firms precisely because of that sales culture. Many were actually encouraged to leave as they were not producing enough—turns out that they could not hunt deer but they could sure grow turnips.

The second factor for the emergence of ensembles among the independents was simply economic necessity, as startup independent firms had little resources and often needed to pool their limited capital and staff in order to achieve their goals. Many of the future partnerships started essentially as “roommates”—the advisors agreed to share an office and assistant because they could not afford to have their own. What started as sharing agreements often developed into a full-blown partnership; soon they were sharing clients, marketing, revenues, decisions, and ultimately sharing profits.

While the term ensemble was initially associated with independent firms, today it applies and is used in many large firms. Many advisors inside large national firms practice as a team with the same characteristics of team-based culture, specialization, and a multiprofessional service model. In fact, many large firms actively promote and encourage their professionals to form teams or join teams. While the producer culture certainly still creates r...

Table of contents

• Cover
• Contents
• Title
• Copyright
• Dedication
• Introduction
• Acknowledgments
• Part I: Structuring an Ensemble
• Part II: Managing an Ensemble
• Part III: What Happens Next
• About the Author
• Index