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Thinking Team Structure

During the early stages of their practice, most financial advisors work as sole practitioners. However, the ability of such practices to grow is limited by the advisor’s skill set and capacity as an individual. Many sole practitioners soon find themselves unable to keep up with evolving financial markets and their associated uncertainties, or with the changing client preference towards a one-stop shop for their financial needs, including investment management, tax planning, estate management, etc. Creating a team structure helps solve those problems and grow the practice.

Because sole practitioners typically handle clients with smaller asset bases, the number of clients they can handle is relatively high. This practice acts as a double-edged sword for the sole practitioners as the need to service multiple clients with limited resources can be a significant hurdle to growth. While a majority of sole practitioners do have some form of a support team in terms of administrative support, the primary tasks of business development and providing financial services still rests on the shoulders of the sole practitioner. Typically, as the assets under management of the sole practitioner increase, the practitioner starts to look towards a team structure to support further growth.

A recent whitepaper by Pricemetrix (Teams in Retail Wealth Management) shows the growing trend towards working in teams. Pricemetrix notes more than 55% of financial advisors now prefer to work in some form of team. The study also highlights that the likely reason for the growing popularity of teams may be greater efficiency, productivity, and revenues. Since teams are typically able to meet a larger number of financial needs based on a larger client base, the return on assets for teams also tends to be higher than sole practitioners:

“The average team manages $260m and generates $1.7m in revenue across 280 relationships, compared to the average sole practitioner who manages $110m, generating $830k across 140 household relationships.”

Teams in Retail Wealth Management
The Pricemetrix study suggests that sole practitioners who are at or are approaching $150 to $200 million in assets under management could benefit from forming a team structure or taking on a partner.

Because teams are an aggregation of financial professionals who can provide a bouquet of services to their clients, they are in a better position to shoulder the responsibility of meeting the growing and diverse demands of clients. In recent years, higher net worth individuals have shown a preference for a one-stop shop for financial services from their financial advisors. The wealth management services they expect normally include, but are not limited to, investment planning, accounting, insurance, retirement planning, and even estate management services. “Ensemble” teams are able to service such higher net worth clients because they can leverage the larger skill sets available through the team.

Teams are also able to achieve higher operational efficiencies. By delegation and clear delineation of responsibilities to team members and holding each accountable for such responsibilities, practices are able to achieve higher efficiencies of operation. Teams allow financial advisors to focus on revenue generating activities and their areas of expertise while delegating non-revenue generating activities to support team members. The success of a financial advisor team is based on trust among the team members within this structure.

When the roles and responsibilities of each team member are clearly defined within the team structure, financial advisor teams tend to be more proactive in dealing with clients by networking to grow the business, as well as being more flexible in dealing with business changes.

Because of these benefits, teams are typically able to achieve higher revenue and asset growth than sole practitioners, and on a larger asset base.

Generally, sole practitioners can form a vertical or horizontal team structure, and that decision is determined by their willingness to delegate responsibility and control. The vertical team structure vests control primarily in the financial advisor who then creates a team of associate advisors who provide support to the financial advisor in his or her operations. The horizontal team structure involves the financial advisor taking on partners who share responsibilities of the day to day operations and have an equity stake in the practice. Partners can provide other specialized services, such as tax planning, insurance, etc.

Regardless of the type of team a sole practitioner chooses to create, the transition to a team structure can be fraught with its own set of challenges. To be able to achieve the necessary economies of scale resulting in higher return on assets, teams need to manage operational efficiency issues and have clearly defined roles and responsibilities within the team. Having well-written contracts that spell out the roles and responsibilities of each of the members of the team help ensure that relationships are well maintained.

If you are a sole practitioner who is approaching $150 to $200 million in assets under management, and you are willing to not only take on team members, but also delegate responsibility and control to those team members, creating a team is one way to effectively grow your business.

An accurate and up-to-date valuation is critical when it comes to growing your business by adding team members. 3xEquity can assist you with a certified valuation, learn more by clicking here.

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