21 Aug 2024
The Scalability Dilemma: How Financial Advisors Can Navigate Customer-Centric Scaling
Michael Kitces, a well-known commentator and stalwart in the finance industry, posits that financial advisors increasingly find themselves at the “capacity crossroads”(1) today. It is an inflexion point where the domain’s long-standing product-driven models are losing ground to relationship-based models. It’s a paradigm shift from focusing on sales transactions to building long-term relationships that drive recurring revenue. However, this transition has one glaring problem: A lack of resources to build long-term relationships.
Kitces argues that the total number of clients an advisor can serve has reduced significantly, with relationship-building taking centerstage — a financial advisor cannot effectively serve more clients without cognitive constraints like fatigue. Moreover, volume can come at the expense of value for existing clients, leading to business setbacks. So, the logical solutions include recruiting new associates or halting growth and expansion. Either way, the growing traction of relationship-based financial advisory necessitates a conscious decision to be made promptly.
Slow scaling Vs staying solo
A comprehensive study(2) ruled that solo financial advisors can grow their revenue by 76% by adding new associates. The rationale is that if you run a solo practice, you can make unilateral decisions and scale as per demand. Under such flexible models, associates can be a value addition. You can segment clients by total financial assets, delegate the low-priority accounts to associates, and check the progress periodically while retaining hands-on involvement with high-priority clients.
Delegation of work will help you streamline your services, create accountability in your business, and become more proactive than reactive in responding to market changes. Based on future demand, you can scale systematically without disrupting existing client relationships. Meanwhile, the associates can be nurtured as part of your legacy plan for the business.
Multi-advisor firms must put the collective before self-interests
As mentioned above, the Commonwealth study revealed that multi-advisor firms generate about the same revenue per advisor, on average, as solo and lead firms. The primary reason for the lack of higher revenue is the silos between different advisors. Furthermore, advisors tend to get complacent due to the absence of personal financial incentives to grow the firm. The inflexion point for such firms would be integrating the operations, incentivising advisors to operate as a unit, and centralising the decision-making process. Such a unified approach corresponds to the Aristotelian saying that the whole is always more significant than the sum of its parts.
The road to an enterprise model is paved with customer-centricity
The increased financial literacy among novice investors, especially in the aftermath of the pandemic, has enhanced the demand for wealth management services. The “capacity crossroads” is indeed a concomitant of that demand economics. As a result, aspirational financial advisors are particularly eager to scale, mainly by acquiring other firms. An Ameriprise study(3) revealed that nearly 50% of solo advisors are “somewhat” or “extremely” likely to acquire another firm in 2023, compared to 36% of multi-advisor teams — a finding that also reflects the lack of cohesiveness and congruity in multi-advisor firms.
Pursuing enterprise models requires a steadfast focus on customers and their ever-evolving needs. Due to the protracted economic downturn in the last couple of years, customers increasingly seek hands-on involvement from advisors. That spells opportunities for advisors to leverage consumer faith, pivot to enterprise models, and deliver quantifiable value. The average gross revenue per advisor in large-scale enterprises is considerably higher than that of smaller firms. The apparent reason is an enterprise-level unified vision to do right by the customer through thick and thin.
