One of the top concerns for advisory firm owners is growing revenue. When the 2010 InvestmentNews/Moss Adams Financial Performance Study of Advisory Firms asked participants what they wanted to improve in their firm, the top response by a large margin was "marketing and business development." Interestingly, the second highest priority for participants was "refine our strategic plan," which in the mind of most advisors means developing a more distinctive identity and positioning in their markets.
Business development challenges have intensified in the last couple of years as advisors attempt to replenish assets and clients lost in the market cataclysm. Building the firm has become a pressing issue for lead advisors who often lack the time or interest to further expand their personal book of clients, but want to see their overall business grow. These issues reflect a pressing need for most firms to get to scale by attracting more of the right clients who will pay appropriate fees for the value delivered.
Advisors deploy a number of standard tactics to generate new business:
- Wait for the phone to ring.
- Systematically harvest referrals from existing clients and centers of influence.
- Train their staff to build centers of influence and develop consultative sales skills.
- Employ a marketing specialist to generate leads for the advisors.
- Seek referrals from their custodian, or in the case of brand name brokerage firms, leverage the firm's advertising and presence.
- Engage a professional solicitor.
Advisory firms that rely mostly on external sources for new business risk a dangerous dynamic that could imperil profitability and control. Referral programs, for example, can be a good source of additional clients—the cream on the top, if you will—but rarely provide a solid foundation for sustained growth; they depend on the whims of the branch office providing the leads, and make the firm vulnerable to an entity or individual not accountable to the advisory firm. Additionally, the cost of procurement is very high, especially when valued over the lifetime of a client relationship. Further, by depending on another company to generate most of an advisor's new business, the firm lives in the shadow of someone else's brand, losing the opportunity to build its own identity. That may be worthwhile when an advisor is just getting his footing, but becomes a big negative when attempting to grow more independently or, ultimately, trying to sell the firm.
The same can be said of solicitation agreements wherein the advisor pays an independent contractor to steer business to them in return for contingent payment. As one source of business, both approaches work—but neither should be relied upon as the biggest pipeline of new opportunities.
New rules are pending from FINRA, and later from the SEC, that will govern solicitation agreements, especially for ERISA-type business. But for now the rules governing payment to an outside solicitor are clear. Less clear are the long-term economic consequences for advisory firms that attempt to grow via this route.
The Deal in Context
Unfortunately, very little data exists on payment structures to solicitors generating new business. While some are paid just for the leads, most receive payment based on the actual business produced. The payout ranges are all over the park, whether in the form of a basis point charge from the custodian for providing the lead, or a percentage payment to the solicitor. It's helpful to put the payout schemes into context within an advisory firm's economic reality.
The financial statement for an advisor's business should look something like this:
