"While wealth management is the right choice to position an advisory practice for the future, exactly how to deliver these services is less clear."

A Fork in the Road

By John Bowen

All financial advisors, whether they are independent broker-dealer (IBD) representatives, RIAs, or stockbrokers with wirehouses, tend to do business in one of three ways. They are either investment generalists, product specialists, or wealth managers.

Investment generalists offer a broad range of investment products without specializing in a single type of product. These advisors try to provide all things to all people. But although they offer many products, they do not make consulting an important part of their business. Industry research indicates this is by far the most popular business model, with nearly two-thirds of all advisors, or 65.5 percent, operating this way.

About 22 percent of advisors are product specialists. These advisors focus exclusively on a product niche that might feature separately managed accounts, stocks, or fixed-income alternatives, for example. Like investment generalists, product specialists are product-driven and do not make consulting a large part of their business.

And then there is the third, better way. Wealth managers employ a comprehensive approach and stress holistic methods to derive integrated solutions for their clients. This highly consultative method is gaining increasing favor with advisors, especially those with higher incomes.

Research by CEG Worldwide indicates a general trend toward wealth management as the successful business model of the future. When we surveyed IBD reps, RIAs, and stockbrokers, large majorities of all three types of advisors said they believe that wealth management will come to dominate in coming years.

As always, the elite advisors are ahead of the curve on this; as advisor income increases, so does the belief that wealth management will be the dominant business model. Among advisors with annual net incomes of $100,000 or more, just over 90 percent believe wealth management will dominate, while 81.3 percent of those advisors earning less than $100,000 per year hold this belief.

While wealth management is the right choice to position an advisory practice for the future, exactly how to deliver these services is less clear. There are three distinct models advisors can choose from to deliver integrated wealth management services—asset gathering, asset managing, and dual orientation.

Asset gatherers. Asset gatherers are investment consultants whose main focus is bringing in new assets. These advisors focus on business development and client relationship management while outsourcing many components of their business, including asset management. The most successful asset gatherers are often called rainmakers. CEG research found that about half of wealth managers, or 48.2 percent, choose the asset gatherer model.

Asset managers. Asset managers are investment managers whose main focus is on investment analysis and management. These advisors outsource business development and client relationship management. While research tells us that about one-third of advisors, or 34.7 percent, are asset managers, very few elite advisors are successful as asset managers. Our research shows that just 14.3 percent of surveyed advisors describing themselves as money management specialists earn over $150,000 annually.

Dual orientation. Dual orientation firms employ both business models. These advisors make substantial investments in human capital to accomplish both asset gathering and asset management. Few advisors, just 17.1 percent, attempt this dual approach.

Of these three models, we've found that asset gatherers consistently have the highest net income. Why is this the case? Because by outsourcing the asset management functions, they have the time they need to focus on their affluent clients and to build the high-quality relationships that are crucial to these clients. As a result, the affluent marketplace consistently rewards asset gatherers.

In addition, these advisors have more streamlined businesses. Because they outsource many of the responsibilities and cost structure of investment management to asset managers (such as broker-dealers, money managers, or turnkey asset management programs), their business is much simpler and more straightforward. Successful asset gatherers generally enjoy high profit margins—70 percent is not unusual.

If you decide to move to implement a wealth management solution as an asset gatherer, there are three major options for you to consider:

1. Hire a CIO. By hiring your own chief investment officer (CIO), you bring substantially all asset management functions in-house. To fully implement this solution, however, you need to hire someone with the credentials and experience necessary not only to serve an affluent clientele but also to reinforce the overall positioning of your advisory firm. While few firms employ the CIO option, a small but significant number of advisors are contracting with high-level CIOs as free agents to serve their firms.

2. Use a combined solution. In this option, a firm employs an asset manager to assist with overall asset allocation while outsourcing many money management decisions. This individual typically has some prior investment management experience at a money management firm (possibly as a CFA) and is interested in working in a more entrepreneurial setting.

3. Work with a turnkey asset management program (TAMP). Your third option is to work with one of the many TAMPs in the marketplace (see table below for a description of the biggest service providers in the United States). A TAMP will provide an asset gatherer, a soup-to-nuts investment solution for client profiling, asset allocation recommendations, mutual fund selection, separate accounts platform, performance reporting, back-office support, and marketing assistance.

In other words, all your non-core tasks are farmed out (but remain under your supervision), while building client relationships becomes the primary focus of your time and energy. Ideally you want the TAMP to assume all investment management responsibilities other than asset aggregation and client service.

While you should think about each solution, it is best to start with a TAMP if you have little experience in asset management. Many successful advisors have started with a TAMP and then evaluated whether it made sense to bring a portion or all of its investment management functions in-house.

After passing the $100 million in assets under management threshold, advisors often choose to use a combined solution. However, a significant number of advisors continue to use TAMPs even after passing this threshold because of the cost-effective support they receive that enables them to focus on their affluent clients.

Your clients need you now more than ever. By avoiding the temptation to try to provide all things to all people and instead focusing on one business model that provides the trusted advisor relationship that clients are looking for, you'll take good care of those clients and have a profitable, enjoyable business as well.

Reprinted from: FINANCIAL PLANNING