SEI Recommends Advisers Incorporate Advisory Model

The latest report from SEI Advisor Network finds that most advisers are implementing an enterprising advisory model—but only because they feel as if they should.

According to the study, “The Purposeful Advisory Firm: Maximize your firm by design, not by default,” a majority of the 400 U.S. financial advisers, business owners and managing partners surveyed own an enterprise firm solely because press articles and presentations favor the model. Instead of considering a lifestyle model, where an emphasis is laid on maximizing cash flows and remaining involved in a client’s retirement plan, these advisers are risking company goals and consumer needs.

“The tradeoffs are clear between enterprise and lifestyle – higher revenue with lower valuation or lower short-term revenue with higher valuation,” said John Anderson, managing director and head of practice management solutions for the SEI Advisor Network. “In making this decision, an adviser should be able to direct its firm’s financial future to match their goals and clients’ needs – there is no right or wrong choice.”

The SEI report recommends advisers evaluate what model type they currently embody, whether enterprising or lifestyle, as well as future objectives and goals. In doing so, advisers can maximize model value and prospective growth within a client’s retirement plan. If an adviser fails to choose an advisory model, value potential or cash flow may be diminished, according to the study.

While SEI believes a lifestyle approach may bring profitable and fulfilling futures for certain firms, they warn those advisers who utilize a lifestyle model (74% of survey respondents) to focus on long-term valuation, especially if they believe their firm will live beyond their careers. Additionally, the SEI report urged these advisers to mark succession as a top concern. For those who incorporate an enterprising approach, SEI research said these advisers can expect better value for owners upon transfer and sale.

“Advisor owners have to choose a path or their firms will become limited lifestyle defaults; representing the worst of both worlds: they won’t have much to sell, and the owners won’t have as much revenue as they hope,” said Bob Veres, co-author of the study. “There is nothing wrong with optimizing a lifestyle practice, and these firms will continue to be the backbone of the profession. If advisers choose to follow the road more traveled of an enterprise firm, then they must be intentional in their decision and consider their own unique goals and skillset.”

To recognize which model best fits their company needs, SEI provides four components critical to advisory businesses: people, value proposition/brand, investment philosophy, and technology.

NEXT: Firm phases to consider

The study connects four integral phases in company progression: Startup, Emerging, Mature Lifestyle and Mature Enterprise. Before reaching either maturity stage, companies will go through both Startup and Emerging phases until a sustainable business is formed, the report says.

For advisers concerned over profitability levels with both models, survey results show the two firms can generate a generous amount of profit. “Twenty-five percent of mature enterprise firms experience profitability levels in the 31% to 50% range and 37% experience profit margins of more than 50%,” and “53% of mature lifestyle firms have profitability of more than 31%,” SEI reports. Additionally, “59% of enterprise firms hold revenue greater than one million dollars, compared to 55% of lifestyle firms,” according to the report.

More information on the report can be found here.