[This blog was originally published by The Alliance Report at www.TheAllianceReport.com]
To say that the wealth advisory business faces many headwinds is merely to state the obvious. Let’s start with the fact that many firms aren’t businesses at all in any useful sense. Working with wealthy families is fun and interesting, and as a result most firms in the business are really lifestyle partnerships. They have one or two senior people, a few junior people, everyone makes a decent income, and when the seniors hang it up the firm collapses or sells out for a song. It’s more like a small law firm than a true business.
Or look at the sad state of the wealth advisory business model. Almost any good wealth advisor will add significant value to a family – given what wealth advisors do, it’s hard not to add value. Yet the same families who will pay money managers 1% – or hedge funds 2 & 20%! – balk at paying fifteen basis points to a wealth advisor. The money managers will, on the whole, subtract value from the families’ portfolios, so trying to make a profit on a fifteen basis point business isn’t for the meek.
Even if a few lucky firms successfully overcome these obstacles, the issue that is likely to sink them is more of a “stealth” problem: human capital.
Consider that most of the leaders in the wealth advisory business today are in their late fifties and early sixties, and will likely soon retire. But these aging leaders aren’t just another generation passing on – these are the men and women who founded the industry. They are, on the whole, extraordinary people who are simultaneously entrepreneurs, financial advisors, rainmakers, and executives. It is not just that they won’t be replaced, it is that they can’t be replaced for the simple reason that the industry is now more mature and can no longer attract such people.
Fortunately, the industry has matured and it no longer needs this specific type of entrepreneurial visionary. What wealth advisory firms do need is to attract and keep three different kinds of professionals, all of whom are rare and expensive, and some of whom can hardly be found at any cost. These people include:
• Financial professionals who can competently advise VHMW families,
• Rainmakers who can attract VHNW clients, and
• Executives who can manage wealth advisory firms.
Let’s take these in order. Financial professionals, in the narrow sense we refer to here (capable of advising VHNW families) are the crème de la crème of the industry. They are not brokers or financial planners or investment analysts. They don’t grow on trees. The good ones are in very high demand, they don’t like to relocate, and they don’t work cheap. A hiring mistake here can be disastrous.
Rainmakers are everywhere and at all times very rare, and rainmakers who can gain the confidence and trust of VHNW families are worth their weight in gold bullion. In fact, most wealth advisory firms were founded by this sort of person and hence most firms boast one example of the species. Very few firms have more than one.
Finally, rare as rainmakers are in the industry, talented business managers are even more rare – indeed, they are almost non-existent. When wealth advisory firms started up, they were too small to worry about management talent. Later, when they could have used such talent, the founding entrepreneur was usually in the way – and few entrepreneurs are good managers. Today, a good financial industry executive can make big bucks working for one of the mega firms, so even when a boutique wealth advisor has the good sense to go out looking for a manager, there are usually none to be found.
Obviously, there are no quick fixes for the human capital problem, but here are some suggestions for a way out of the morass.
- Grow your own. If your business model depends on continually hiring top advisory talent from the outside, you are doomed. As mentioned above, hiring mistakes here are very costly and very frequent. And if you are not only hiring a new senior client advisor but also opening a new office, you have just squared your chances of failure.
Growing your own isn’t exactly like falling out of bed, but it is a better and more certain approach than trying to hire outside talent. You can hire able young analysts right out of college or business school, you can underwrite the CFA program for them, and you can organize in-house training sessions. True, most of these young people won’t progress beyond the junior or senior analyst role, but at least those are inexpensive mistakes. A few of these young people, however, will grow into senior advisory partners, thus assuring the firm’s survival into a second and even a third generation.
Rainmakers can’t be home-grown, unfortunately, and they are even more expensive than senior advisory talent. The challenge here is to be willing to pay up for the right person, and to structure a compensation program that is simultaneously generous and rigorous, hoping to avoid the many pitfalls of managing rainmaking talent – which tends to be like herding bobcats.
- Dedicate resources to business development and marketing. As businesses mature rainmakers become relatively less important and institutionalized marketing – business development – becomes ever more important. Marketing a wealth advisory firm is a huge challenge, but most firms aren’t even executing on the obvious blocking and tackling issues: hiring a good marketing executive, preferably someone who has experience in the VHNW space; developing attractive collateral materials that tell your story in a compelling way; building out your brand through publications, public speaking and public relations; assembling your referral networks with care and attention.
- Focus on building out an exceptional management team. Recruiting solid executive management is probably the biggest challenge of all for boutique wealth managers, for the reasons mentioned above. But even if you can find a good manager, and even if you are willing (and able!) to pay up for him or her, cultural issues will often raise their ugly heads. Is the founder still around and vetoing the manager’s decisions? Do the senior advisors (and, especially, the rainmakers) resent the manager and passively resist decisions? Does the manager understand the nature of the wealth advisory business and its special challenges?
The main point is that those responsible for the success of their wealth advisory firms need to wake up every morning thinking about human capital issues. The firms that pay the most sustained attention to human capital will be those that survive to fight another day.
Please note that this article is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.