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Practice Made (More) Perfect: Transforming a Financial Advisory Practice Into a Business (Bloomberg Financial) ReviewPractice Made (More) Perfect is both an impassioned account of leadership in the advisory industry and an innovative "owners-manual" for transforming a professional services practice. The book succeeds brilliantly on both fronts. The authors' premise is that the independent advisory industry is maturing, and advisory firms are becoming bigger and more complex enterprises. At the same time, most industry leaders lack formal training or experience in managing growing businesses with many moving parts.
The revised edition of this book first came to my attention while I was attending Pershing's INSITE 2011 Conference. I'm seeking a business development specialist role within the independent RIA channel, and I applaud these two practice management thought leaders for updating the original 2005 text to navigate the challenges of a slower growth environment.
Having been in and around the advisory business for many years, Mark and Rebecca have found that the most successful advisory firms have several common characteristics:
*Clear idea of their strategy and positioning
*Human capital plan aligned with their vision
*A compensation plan that reinforces owners' vision for the business
*Active management of profitability
*Built-in leverage and capacity.
The authors provide a straightforward and actionable approach to even the most abstract of these concepts. In the interest of brevity, the following is a summary of what I feel are the most notable concepts contained within this book.
Strategic Planning
For most financial advisors, strategic planning is such an overwhelming process that it's frequently ignored. It's not always obvious to me what makes a particular firm unique in the marketplace by studying their Web site, regulatory filings or the many "top" advisor or wealth manager lists. The authors suggest that strategy is not just about marketing; rather, it is how you inform your investment in technology, people, processes, positioning, and the client service experience. Without this framework, it is difficult to define your optimal client, the organizational structure best suited to satisfy clients' needs, your pricing strategy, and your approach to compensation. A central theme throughout the book is that the operations function is growing in strategic value, yet the biggest weakness in advisory firms is the lack of leadership and a career track in operations.
Human Captial
One of the major issues advisors are wrestling to resolve is the challenge of hiring and keeping the right talent. The single biggest reason for turnover in a financial advisory practice is poor selection of candidates. The authors suggest the widening experience gap between owners and staff is because, "owners of advisory firms have not invested time, money, or trust in the development of those who work for them and, in many cases, live in fear that their employees might outshine them." While this passage may cause many advisors to bristle, it does merit serious consideration when you consider the high cost of employee turnover. Although not necessarily the book's target demographic, Gen Y advisors will benefit by closely studying the section on how to make a partner.
Compensation Planning
The authors provide a formal process for structuring pay that positions compensation as an investment in which to get a return rather than a cost to be controlled. The sample compensation philosophy statement on page 136 provides a powerful decision-making tool for structuring the key components of compensation. The book provides a clear explanation of the difference between a bonus and an incentive. The authors believe the later is more effective at eliciting a desired behavior. I found this section extremely helpful in interpreting the compensation and staffing data published by InvestmentNews/Moss Adams, Quantuvis and FA Insight. At the end of the day, the authors emphasize that money is never a substitute for active management.
Financial Management
The book's discussion of financial management techniques is based on the assumption that industry profit margins will remain under pressure as advisors navigate through the challenges of pricing, productivity, service mix, client mix, and rising costs. Accounting and financial management are fundamental to running any enterprise, yet most practitioners have not been trained to use their financial data to effectively manage their businesses. The chapters on financial management techniques are accessible to the layman and serve as a thoughtful, structured, analytical guide to use financial data to effectively manage a firm.
Built-in Leverage and Capacity
The authors believe the advisory business is eminently scalable, but building leverage and capacity requires a quantum leap in how advisors structure and manage their practices. Critical mass is one of those elusive management concepts that the book does an excellent job demystifying. Simply put, it now appears that $5 million in annual revenue is the new level of critical mass where a firm is achieving optimal efficiency in its cost structure, optimal profitability based on its client service model, and optimal effectiveness in the number of clients it can serve well.
In many cases, a Founders' ownership stake represents years of heartache and sacrifice. It is also an asset that must ultimately generate a sufficient return on investment. In this context, one of the book's main themes is particularly compelling: Advisors who build a business to last have created a business to sell. Armed with the lessons in Practice Made (More) Perfect, advisors will go a long way toward taking their firm to the next level.
Michael Sabatino, CFP®
New York City
November 2011
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