Cannon Financial Institute

Mega Trends We Cannot Ignore #3


Wealth Management teams in the Private Banks, Family offices and mega RIAs are winning the fight for the high net worth.  Many others are seeking to develop some similar form of team approach to compete.  Those seeking to emulate these models are discovering for the business model to work, the  ownership structure and orientation to compensation are quite different than other models   in order to generate  reasonable profitability.

For the most part Wealth Management team based business models are not staffed primarily with multiple producing Financial Advisors, but role specific specialist.  Multiple FA business models are generally partnerships, with a goal of generating income streams for the producers with support staff viewed as an expense.  Wealth team models will generally have one or a few owners (with some form of equity participation) and have salaried employees with specific roles who participate in  some form of bonus plan.  This allows the business owners to manage service and product costs in alignment with fees.  This is true whether one is an organization with many teams, in this case the organization is the owner, or an individual is creating a single team to compete in the local market.

Understanding the differences in business model orientation is important.  The multiple producer FA partnerships have a focus of maximum income generation for producers.  The Wealth team model’s objective is to build equity and manage profitability margins.  Wealth team business models are oriented to generate retained earnings and make structured reinvestment in the practice.  Reinvestment is viewed as the path to build the value of the Practice.  Producer Partnerships generally see these efforts as expenses and take away from personal income.  Comingling orientations creates confusion and disharmony, generally resulting in failed teams.

For some organizations seeking to create Wealth teams a move to this model is problematic. The challenge isn’t creating the wealth team; it is challenging the assumptions about the drivers of success.  Is the Advisor the product and therefore the driver of success or is the Wealth Advisory process the product and executing well the driver of success?  The answer to the question determines whether there can be commitment to a new model. Though the answer might seem obvious, the past assumptions are so familiar they are very hard to let go and commit to a new model. What is the history and what are the current consequences that make this difficult?

Over the years, organizations in many different channels deployed the commissioned Producer model to  gain the “sales” capability to acquire new relationships.  Mantra’s like “investments are sold not bought” “customers must be lead to the right decision” anchored the need for sales people to “sell to clients” in order to distribute products and services.  This orientation, a need for sales people then validated the commission based producer approach because it allowed the cost of distribution and the risk of moving into a new area for the firm to be a variable cost.  The good news for organizations who had clients that could be cross sold into investments and insurance was the cost of entry had little expense risk. Management could affor  a proven salesperson and solicit an experienced advisor. The objective? Convert the organizations clients to users of these new products.   For commissioned producers the personal goal of maximizing their current income in an environment of on warm leads was in delightful alignment with the organizations objectives..

There are however some unintended consequences surfacing as a result of this approach.  Commissioned producing Advisors no matter who they work for anchor their orientation on client ownership the same way, “I sold them something, I will retain and service them, therefore the relationship is built with me and where I go so probably will the client”.  In some respects, the firm’s client relationships were hijacked as an unintended consequence of the commissioned producer model.

Certainly some firm’s have addressed this, and set from the beginning clear expectations about who owns the client relationship and providing service on behalf of the firm is the role the Advisor is performing.  Many others though are just now dealing with the unintended consequence of losing the long term economic value of their clients through this transference of relationship based “ownership”.  For firms having selected this model many years ago a large percentage of their advisors are now closing in on retirement.  As one might expect, emulating peers who are selling their books of business to monetize their careers and augment their retirement nest egg seems a natural course of action.   This creates a catch 22 for these advisors firms.  They can address the client ownership issue now and potentially see these advisors accelerate their departure or formulate a costly sunsetter package to retain these advisors.  Even then some may still “shop” their book thus potentially creating a bidding war for the firm’s own clients.

It made sense as firms moved into a new line of business that in order to attract and retain sales capability, the commissioned producer model had advantages.   On the back end however, some firms  may have lost long-term claim to the clients they  assigned these Advisors to serve.  In effect, they have subsidized the Advisor’s ability to monetize their careers by gifting the client and its value in the form of transferability.

Haven’t we been aware of this for many years?  For some yes but considering these business units were started several decades ago and most program are into their fourth or fifth generation of management it is understandable that the can was kicked down the road. When spread over a period of years as a few advisors moved their practices out of their firms, the financial effect to the firm was subtle. And generally recruiting new Advisors with a book could replace lost revenues. The urgency that now exists for these organizations to find alternative solutions is due to the significant volume of advisors who are entering the phase of their career where, if they are going to make a move to independence, the next few years are the door through which if they are going to pass they must open .   To compound the urgency to act is the timing of this  is happening just when these financial organizations have started to rely on their wealth management units to contribute an ever increasing percentage of total EPS growth.

How does this tie into the trend of Wealth teams being so successful? Organizations in this situaiton that purposely deal with the challenge  may find potential help for all parties in forming  Wealth Teams.  Merrill Lynch’s move to a team model with the OPM (optimal practice management) strategy is a sign that well formed wealth management teams, even those crafted from traditional commission based producer roles can be big winners. The wealth management business is complicated and the competition fierce, the Sole Practitioners model in the high net worth and ultra high net worth space has always been handicapped  competing in this market. Firms can learn from the movement of Independent Sole Practitioners  moving to the Ensemble model (multiple Advisors joining together to leverage different role expertise).  This movement  creates some very interesting and dynamic results.  First, the act of comingling books of business forces each contributor to examine what they enjoy, where their role strength and passion lie and are they interested in co-creating something larger then what they could create as a Sole Practitioner. This examination has the potential to reinvigorate Advisors in their late stage career, keeping them engage longer and in creating new meaning in the next phase of their professional life.  Second the formation of a complimentary set of strengths and role preferences into a Wealth management team creates critical mass.  This not only provides for financial stability, but opportunity for professional growth.  As deeper role expertise is developed and the team members contribute more targeted and effective efforts, the team benefits from stronger results. Something the Sole Practitioner cannot accomplish because their efforts in any one area are constrained as they must also perform all the other tasks in the practice.  This can potentially reduce stress, lead to deeper level of satisfaction and open the mind to different possibilities and orientations to alternatives and change.

Another observation we have made is Wealth teams who operate on a hybrid (commission and fee) platform seem to be the emerging winners.  We also see a key to success for the firms deploying wealth management teams is helping these teams work well together.  This means building real competency for the specific roles the various members play within the team in order to  create a sustainable practice  The obvious benefits a team provides are creating scale, peer motivation, group support, and capital (human and financial) to generate momentum.  Our conclusion is that firms addressing a strategy to develop wealth teams will need to place resources against:

  • Refining the firm’s team strategy and developing the skills to put these teams together
  • Helping the team leaders gain a new skill set around managing and coaching peer relationships.  These leaders will need coaching and leadership skills to drive the performance of their team.
  • Since individuals in the team each have discrete role responsibility programs and resources are  needed to develop their functional capabilities. And the individuals need to be pulled together with a clear path to integrate all the roles into the overall functioning of the team.

Wealth team strategy and execution will be a differentiator in winning the high net worth and ultra high net worth market space.  The ability to deal with client retention during this period of tenured advisor succession will impact the future of many firms over the next 5 to 7 years.

In our next installment of 6 Mega Trends We Cannot Ignore, we will explore how regulations and the risk management process might be addressed through creating outsourcing solutions similar to the how and why of the emergence of clearing firms in the 70’s.

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