Investor Karl interviews Mark Tibergien -- guru, author, chief -- who tells why solo practices are far from extinct

If a solo practitioner provides a good enough value proposition, all of those red flags can be managed. Just like you manage risks in investments.

Josh,

The case that can be made against small RIA firms having a bright future on this planet has been made eloquently by the likes of Joe Duran and Philip Palaveev, for starters. Yes, it’s like running an intellectual gauntlet of red flags to read what they write and the good points the make are many. It all relates to scale, professionalism and brand.

What the branded scale crowd may underestimate, of course, is the way people get motivated professionally and what makes clients feel trusting. Furthermore, it leaves out the fact that as big professional RIAs get better at what they do, there is a parallel evolution of outsourcers who are getting better and better at helping the solo advisor perform like a giant.

I sense this is an area that is ripe for more exploration and thought.

Brooke

Boy, long-form article. The next step, informed by brain research, will be to accept that most investment behavior (“decisions”) by investors – professional and consumers – are made unconsciously and instantly.

Of course, it is the norm to speak and attend mainly about the logical matters, e.g.:

“Clients should ascertain:

- The competency of the advisor and his or her team….etc.”

However, how would an investor ever be able to ascertain these items? Secondly, if the dependent variable is investing behavior – how much do these questions, logical behaviors contribute – as independent variables – to the investing behavior? That is an open question right now. There is increasing research suggesting – not as much as we want to believe!

My response to Karl’s question about the solo practitioner was meant to distinguish advisors from advisory firms. Solo advisors often get their hackles up when people like Mark Hurley and me comment on the difficulty of running a small Practice. It is not about the competency or value of advisors as individuals, but as the viability, depth and strength of their business. The fact that the business dies when the owner does is sufficient commentary on its sustainability as an enterprise. But that doesn’t mean the solo advisor does not deliver value to his clients. That said, I’m in the camp that would like to see stiffer certification and an experience requirement for those who manage assets on discretion and act as fiduciaries. I would also like to see a capital requirement for advisory firms. And I’dlike to see the bodies that confer credentials make certain business management courses a requirement before issuing the certification, and for continuing education purposes. And I’d like to see the SEC and FINRA exercise some discipline around the terms people use to describe themselves: for example, if you hold yourself out to be an advisor, then you should be held to the fiduciary standard. Otherwise, you are a broker, agent, rep or producer. I’d rather see clarity of roles then a blurring of the lines.

If people’s life savings are lost because of bad succession planning by an advisor – what then? Tough luck?

As the bulk of investable, and advisor’s, assets become people’s life savings and pension assets, the political, media social and legal ramifications of investment professional’s behaviors are growing.

There may be no bigger responsibility than for a society to protect the life savings of it’s citizens. How that society-wide responsibility plays out with financial professional’s individual and financial firm’s business and profit goals is an immense challenge.

Bank custody is far and away better in every regard than broker custody.

Small advisory firms are not as small as the ADV might suggest as those that are successful in avoiding the red flags are also those that have engrained use of outsourcers. So in essence, his/her advisory firm is staffed by many expert personnel vs. being a 1 man shop. The best positioned solo businesses have a written contingency plan, processes, a strategic plan for growth and management, manage the outsourcers effectively, and use systems to stay organized and focused on excellent client service. MoneyZen is a great example of this and using resources like the directory of outsourcers, Virtual Solutions for Advisors, and there are many other examples of solo firms using outsourcers as well….

The dilemma for the clients of a solo practice and their wealth is what is called the “Get’s hit by a bus….” problem.

There are potential threats to having one’s wealth dependent on one person – alone.

Custodians do play, then, an important role of providing continuity.

I agree – Custodians do play a very good role in hopefully finding the advisor’s business a new “home”. In addition and just as important, the outsourced money manager, back office reporting firm, virtual assistant, virtual planner and others that are handling the day-to-day operations technical and general servicing work will help greatly. They could easily educate any new advisor as to how the business is being run AND the investment portfolios’ “health” as well as reporting could remain intact during a transition of the client base from one advisor to another. They could stay on and continue the servicing and technical work until the new firm has learned the business and client base and so forth.

In our business development and client retention consulting work we also find that customized custodial services can be a differentiator and add significant value as client needs and requests get more detailed and specialized.

Especially, as the advisor population continues to age, and primarily be in mid-life, safe transitions are becoming a key issue.

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