Getting from A to B

How to evaluate your RIA team structure and build a specialized team

RIA Team Structures

Once you have decided to strategically grow in specialization, new questions come to mind–such as, “How do I expand my practice to deliver these services while achieving scale?” Answering this question involves evaluating your current firm structure.

As a sole practitioner, it is challenging to grow in specialization. Options include recruiting or forming alliances with advisors who already have specialized expertise or developing a long-term roadmap for expertise expansion that includes the development of new hires, such as a junior advisor.

RIAs with multiple advisors need to evaluate if their current team structure is conducive to delivering a wide array of specialized services. There are two primary RIA team structures. While they share some characteristics, you will notice they differ in many important aspects.

ENSEMBLE PRACTICE

All team members use the same DBA
Team members operate as one firm instead of independently of each other
Each advisor or employee has defined roles and responsibilities
Team members are expected to understand the role of other team members and work to complement each other
Client experience is consistent throughout (even for complex planning events)
Practice is easily scalable

GROUP PRACTICE

All team members use the same DBA
Each advisor operates independently
Each advisor or employee is not provided with assigned roles or responsibilities
Some duplication of roles may occur
Each advisor is responsible for their production and maintains their own profit/loss statements
Advisors may benefit from some shared efficiencies (such as administrative support)

As industry thought leader Michael Kitces, CFP®, ChFC®, CLU®, REBC®, CASL®, states, “With some multi-advisor firms, the goal is actually to build a true standalone business, in which all the advisors contribute to the growth and success of the business (i.e., an "ensemble" firm) that is larger than any one of them alone. With this type of partnership, equity and compensation dynamics are different: the primary driver of value and wealth creation is not client revenue (fewer expenses), but net business profits and the (slice of) equity value of the aggregate business. Which means taking uniform salaries based on job descriptions (not revenue-based compensation from clients), plus perhaps a bonus for business development, and deriving most long-term value directly from the equity itself.”6

A recent study of venture capitalist firms attributed overall firm success to specific job descriptions and areas of specialization.7 Adam Smith, who is considered the father of modern economics, identified the division of labor through specialization to be a catalyst for growth back in 1763. He hypothesized that as companies grow and are able to hire more workers, employees are able to specialize, improving efficiency, increasing production, and lowering overall costs, resulting in an economy of scale.

As outlined in the illustration above, an ensemble team’s structure is more conducive to delivering specialized services since there is minimal overlap of resources and responsibilities required to enable specialization at scale.

Steps to Build a Specialized Ensemble Team

You can use these general guidelines as you begin to explore restructuring to a specialized ensemble team

1. Determine the areas of specialization you want to target with your current client base, as well as which areas you might want to target in the future. You may want to consult with a firm regarding revenue and cost-sharing models.

2. Conduct an audit to see which areas of specialization can be handled internally by expanding the expertise of a current employee and which need to be recruited into the firm.

3. Locate the required specialists either through your professional network or educational resources such as The American College of Financial Services, which has more than 180,000 alumni—many with specialized knowledge in seven areas of financial planning expertise.

4. Build your team with minimal specialization overlap; however, it is also important to evaluate demand. If most of your clients will soon be retiring Baby Boomers, you may need two financial advisors with expertise in retirement income planning.

5. Emphasize characteristics in your candidates that are ideal for team chemistry, such as professionalism, excellent communication skills, strong ethics, accountability, and a commitment to ongoing education.

6. Clearly outline the role of each team member, provide a sound management structure, and explicitly define all financial arrangements.

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6 Kitces.com - How Should You Split Equity And Compensation When Multiple Advisors Partner Together? July 13, 2017 7 Gompers, Paul A., Anna Kovner, and Josh Lerner. "Specialization and Success: Evidence from Venture Capital." Journal of Economics & Management Strategy 18, no. 3 (Fall 2009): 817–844.