The path of becoming a financial advisor is viewed as a very entrepreneurial one, starting from scratch and building a client base who pay you for services, growing over time into a business that can generate substantial income for the advisor/owner/founder. The growing trend of independent advisors, whether in RIA or broker-dealer form, just further emphasizes the entrepreneurial spirit of the financial advisor community, and their desire to build businesses of value… or at least, a practice that can generate substantial ongoing income throughout their working years.
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at the key distinction between building a business versus a practice. Because while the terms are often used interchangeably, the reality is that they’re actually very different roles.
Building a successful practice means getting clients who will pay you for your services, and leveraging your personal productivity to serve them effectively. By contrast, building a successful financial advisory business is about hiring other advisors who will be paid for their advice, and building the infrastructure necessary to support them, and ensure that clients are served well. In other words, it’s the difference between delivering financial advice yourself, versus building a business to deliver financial advice.
And the difference matters, because the reality is that a practice can generate substantial income for successful advisors, but will only ever have very limited enterprise value. On the other hand, a bona fide advisory business can become an extraordinarily large financial asset, but comes at a cost of what could be years or decades of lower income as dollars (and a lot of sweat equity) are reinvested back into the business to continue to grow it. One benchmarking study recently found that it takes growing an advisory firm to more than $1B of AUM, just to get the partner/owners back to the same take-home pay that the most successful solo advisors can generate.
Ultimately, the choice is the advisor’s about which to build – a business vs a practice – but it’s crucial to recognize the difference, to ensure that you’re building what you really want!