In Practice January 20, 2007

Schwab Institutional Releases Two Reports to Help Independent Advisers

In conjunction with Moss Adams LLP, a provider of management consulting services to advisory firms, Schwab Institutional has released two reports to aide independent investment advisers with organization and business development, the leading barriers to firm growth.
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Although independent investment advisory firms are growing at triple the rate of other financial firms, they are confronted by many barriers to growth, Schwab said. Last fall, Schwab’s RIA Benchmarking: Growth Trends Study, found that although such firms did have high growth rates, nearly two-thirds of them reported that they had at least one significant barrier to growth, most of which centered on inefficient organizational structure or lack of clarity around business development.

“It’s a great time to be an independent adviser – but many firms are looking for guidance on how to manage their rapid growth, overcome barriers to growth, and maintain a superior level of client service,” said Deborah Doyle McWhinney, president of Schwab Institutional, which offers custodial, operational and trading support for independent fee-based investment advisers, in a company press release.

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Building an Effective Organizational Structure

The first white paper, “Building an Effective Organizational Structure,” discusses how advisers can select the best operational structure for their firm. According to the report, there are three main organizational structures: solo groups, which have little or no structure; emerging ensemble groups, in which individual and department specialization are viable options and structures begin to emerge; and mature ensemble groups, which can have diverse structures, including departments and service teams.

Schwab said that the white paper found that those advisers who make organizational structure a priority have better performance, including more satisfied clients, better business growth, and increased profitability. The best organizational structures are flexible so that they can adapt as a firm grows, so an adviser can focus less on day to day issues and spend more time addressing the long term goals of the business. They should allow for clear definition of roles and responsibilities for each person.

According to the report, there are five considerations for determining which of the structures is most appropriate for an adviser’s company:

  • stage of development;
  • strategic plan;
  • strategy or strategic differentiation;
  • employee development and retention needs; and
  • changes in organizational characteristics.
Achieving Growth with the Right Business Development Structure

The second paper, “Achieving Growth with the Right Business Development Structure,” discusses common business development models and offering advice on how advisers can select one for and implement it at their firm. It is necessary to align a business development structure with a firm’s strategic goals, culture, values, and ideal client profile, Schwab said.

The report discusses the pros and cons of three business development structures:

  • Principal-Centric – Firm principals are responsible for business development, which is the traditional approach used by most firms.
  • Dedicated Model – Specialists inside the firm are charged with business development, giving clear accountability for client acquisition.
  • Fully Shared Model – With business development responsibilities shared across the entire firm, this model encourages collaboration between principals and professionals, and reduces risk by spreading efforts across a number of individuals.

According to Schwab, the principal centered model is used by more than 80% of firms with less than $100 million in assets under management, but only 40% of those with over $250 million under management. The other 60% of those with over $250 million under management rely on either a fully shared or dedicated model.

The latest two reports are part of an ongoing series called the Schwab Market Knowledge Tools (MKT) reports, a group of industry research reports, white papers and how-to guides to enlighten investment advisers on the trends and competitive challenges facing the industry.

IMHO January 20, 2007

IMHO: Exit Strategy

This past week, we passed the “anniversary″ of the commencement of bombing strikes in Operation Desert Storm (1991). Now, I was too old—and my kids too young—to have been directly impacted by that action. But I’ll always remember that night.
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I was living in North Carolina at the time, and had been invited by a co-worker to my first NCAA basketball game at the “Dean Dome’ at the University of North Carolina. Tickets had been hard to come by, and Chapel Hill was a nearly three-hour drive from where I lived (and on a “school’ night, to boot)—but I was excited at the prospect. My friend and I got there early—grabbed some refreshments, found our seats, and sat down to watch the warm-ups. We were only about 10 minutes to tip-off when they made the announcement about Desert Storm—and the resulting decision to cancel the game.
Now, unless it is a playoff game, or a remarkably close contest, people have a tendency to exit such events early to “beat the rush.’ In this case—and I don’t know how many people can actually fit in the Dean Dome—nobody saw the cancellation coming, so everybody tried to hit the exits at the same time. My buddy and I actually thought we were in a distant enough parking lot that we could beat some of it, but spent the next hour basically one car length from the parking place we started in—and another hour just getting to the exit of the parking lot.
For years, we’ve been worried about the Boomers heading into retirement. We’ve worried what would happen on that day when they would quit working (and cause our economy to come to a halt), worried that they would pull out all of their retirement savings from the stock market and invest it in bonds, and, most of all perhaps, worried that they would simply get to retirement without enough money to live through retirement. We’ve also rightly worried about what would happen when they all tried to “exit’ the working arena for the “home’ of retirement at the same time.
Different Paths
A new study by Vanguard affirms what most of us know, at least anecdotally–people’s approach to retirement is about as variable as, well, people. The report highlights six different paths (see “Workers Plan To “Downshift’ Into Retirement’) but, of course, it’s more complicated than that. The bottom line is this: Working full time until you reach age 65 and then “retiring’ appears to be the exception, not the rule. Apparently, people begin gradually cutting back in their fifties (by their late fifties, the rate of full-time workers falls to 62%)—and even by the time you get to the second half of the sixties, 17% are still working.
The good news could be that people are working, and saving, longer—and perhaps deferring tapping into their retirement savings beyond the date(s) that many retirement projections now assume. The bad news, of course, is that workers could be cutting back on work (and compensation) earlier than those same projections contemplate—and not always at the choice of the worker. Note that, among those who returned to work in the Vanguard sampling, more than half did so to meet basic expenses, and a quarter needed to pay for health insurance.
We’ve tended to think of retirement as a cessation of compensated employment and, perhaps simplistically, crafted certain financial assumptions around the notion that that occurs at a specific point in time. IMHO, the Vanguard study reminds us that the individual decisions around employment generally, and retirement specifically, are just that—individual decisions.
Accordingly, I’d like to propose an alternative definition for retirement in the workplace—an “exit’ strategy, if you will—“to fall back or retreat in an orderly fashion, and according to plan.’
It’s an exit strategy in which advisers can clearly play an integral role.

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