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Opinion Online: The perfect business model for advisers

By Evan Cooper

August 12, 2010 4:19 pm ET

Do you struggle to make your business more profitable? You're not alone.

In whatever channel advisers labor — wirehouse, regional, independent, hybrid, pure RIA — and in whatever way they are compensated, financial advice-givers of all stripes are grappling with ways to improve their business.

So big is the issue that custodians and product companies center much of the value-added efforts on practice management to help meet the challenge, as do consultants and research firms.

A major research project in this area — the biennial Moss Adams/InvestmentNews Financial Performance Study of Advisory Firms, which is our in-depth look at how firms are doing — is coming out in September, and you'll be reading about the report over the coming weeks and have an opportunity to learn about its findings through a webcast and conferences around the country.

Another respected source, Cerulli Associates in Boston, just published its broker-dealer hiring trends issue, taking a look at the problem from the perspective of personnel. Cerulli's key point is that a shortage of financial advisers is looming and that the traditional engines of adviser creation — wirehouses and major brokerage firms — are more interested in poaching existing brokers at other firms than growing their own.

The problem of attracting sufficient advisers to the advice business probably would solve itself if there were a clear-cut, reliably profitable advisory business model advisers could follow. What follows is a sure-fire winning formula, although many of my vocal readers will undoubtedly point out its flaws. Here's the model anyway, in all it's politically incorrect simplicity:

First, you need a branding statement or a distinctive marketing approach that differentiates your firm from the thousands of other peddlers of financial products and services. Since the time for appealing to greed has come and gone, devote your business to providing solutions for retirement security. That becomes your elevator speech, the core of your marketing efforts and the centerpiece of how you run your business.

Next, you need a rainmaker. Most advisers, of course, come from a sales background and are salesmen by nature; an interest in providing unbiased advice is something (hopefully) they acquire over time. In my business model, however, instead of selling themselves as the advice-giver, the rainmaker sells retirement security services — or whatever else is chosen as the business differentiator. The rainmaker does not provide the service, because for this business model to work, sales must be divorced from advice.

Third, you need an advice-provider. This is the person who builds the financial plan, picks the right products, holds the client's hand and is the “expert” who provides the service. The advice-giver should be a CPA, a certified financial planner, a chartered financial analyst or someone who possesses some other evidence of braininess.

Finally, you need someone to run the business. This person schedules appointments, knows the technology, handles the paperwork (or the paperlessness) of the office and makes sure things get done.

Now here comes the politically incorrect part. You have to get the right personality-type to fill each role.

The rainmaker should probably be a charming, gregarious, alpha-type middle-age male. A middle-age woman could work in this role, too, although men seem to have an easier time of schmoozing with prospects and clients and are unafraid to appear to know something they don't.

(If the business approach is to target women, the rainmaker should be a woman).

The advice-giver must be analytic and empathetic. While gray hair can be an advantage, the advice-giver can be as young as about 35, so long as they are smart but not arrogant.

The office administrator/business manager should be a highly organized woman, and preferably older. This job is too important to be left to most men, who tend to be poor administrators and too concerned with hierarchy and dominance to make sure all the nitty-gritty stuff gets done. With the right administrator in place, the business will never have to worry about customer service because all customers would be able to get any question answered at any time.

As for compensation, a simple formula is that the rainmaker gets half the pie and the advice-giver and business manager split the remainder. Over time, the rainmaker, advice-giver and business manager will divide the pie evenly. Since the model is based on delivering a predetermined service and is not dependent on any one person, it is scalable and has enterprise value and could be sold more readily than one ruled by a rainmaker.

OK, readers, I know there are many other models that are successful, but tell me why this one won't work.

From Investment News published on August 12, 2010 4:19 pm ET