The Inverse Grid: Is Your Firm Providing Enough Value?

When considering the products and services a firm provides in exchange for the revenue they keep, is it really a good value?

Overall, advisors care deeply about their clients and view all decisions through the lens of how best to serve them. But that’s not to say that they don’t care about payout. And rightfully so. Wealth management is, after all, a business.

Typically, advisors will evaluate their payout as a synthesized, bottom-line number, i.e., “How much of the revenue I generate is going into my pocket each month?” But now more than ever, advisors are hyper-focused on whether the firm revenue split is fair.

Considering that question first from the advisor’s perspective, most can articulate exactly the services they are providing to warrant the fee they charge clients: financial planning, investment management, safe custody of assets, overall financial advice, etc. But the firm side of the equation can be harder to quantify. What exactly is the firm doing to warrant, in some cases, keeping more than half of every dollar earned? Is the cost worth it?

In full disclosure, this article will not be able to answer that question definitively. The answer will be different for all advisors, but by better understanding the “inverse grid” – the products and services a firm provides in exchange for the revenue they keep – an advisor can make a more informed decision about whether their current firm or platform is the best possible home for their practice.

Wirehouse advisors, for example, will typically describe their payouts as ranging from 40-50%. Logic follows that the firms themselves keep between 50-60% of the revenue an advisor generates. And it’s not just the wirehouses: Virtually every firm or platform comes with a set of costs, and advisors should constantly evaluate whether they provide ample value to justify that expense.

So, what are some areas in which a firm might provide value to advisors? Here are six that are most common:

1.    Investment platform – Access to a myriad of investment managers and solutions is not a given; it requires deep relationships and a due diligence framework to ensure all investment products are properly vetted. Most traditional firms curate an investment platform for advisors. Said another way, they shrink the total possible universe of products and solutions to a more limited, pre-approved menu and allow advisors to shop that menu freely. It’s a commonsense approach that works for most advisors (anecdotally, few advisors at traditional firms complain about their investment platforms).

2.    Tech stack – Advisors take for granted that when they show up to work each morning, they have an advisor desktop to log in to. That desktop is replete with various integrated pieces of software, from planning tools to rebalancing programs to performance reporting systems.

3.    Brand – This is where we get into some of the softer line items. Brand is difficult to quantify, but there’s no question it has value, and a firm is entitled to charge for the privilege of leveraging its brand. The wirehouses, for example, boast some of the most sophisticated and well-regarded brands on the street, and that’s worth a great deal to some clients and advisors. It’s also notable that there are instances in which a firm brand name does more harm than good (in the case of negative headline risk, for example).

4.    Subject matter expertise and ancillary services – While many advisors are CFPs or have team members with advanced qualifications, there are more sophisticated and specialized client needs that advisors are asked to solve. A firm’s advanced planning department or roster of estate planning attorneys, philanthropic giving advisors, and trust experts can operate as an extension of an advisor’s team.

5.    Compliance oversight – This is every advisor’s favorite punching bag. However, it’s a critical and necessary component of a successful wealth management business. Compliance is not intended just to police bad behaviors, but also to provide guard rails as well as advisor and client protection when needed. Plus, a firm’s “deep pockets” can give clients comfort that in the event of a regulatory issue, they are taken care of. Almost all traditional firms handle compliance as part of their bundle of services, and even many independent firms offer solutions to advisors which solve for compliance.

6. Scaffolding and support – Plenty of advisors will share that the day-to-day support they receive is well worth the cost. And no doubt, there’s value in knowing that if something breaks, it will be fixed. But not all support is created equal. How quickly and efficiently are requests handled? Is there an escalation point within the firm that an advisor can turn to when needed? For those transitioning, is there a team with boots on the ground to help move client assets and set up the team?

So, understanding the basic components of what advisors “pay for,” the question remains: Are these products and services worth the revenue your firm charges? The answer depends on two key factors:

1.    How well does your firm deliver on each?

Having the above resources and capabilities is often not enough; they must be delivered with excellence. For example, virtually every firm and platform have a tech stack, but does it function well? Is it sophisticated enough to keep up with client demands? Do they continue to innovate?

2.    How reliant are you and your clients on each?

For instance, your firm may have the greatest alternatives investments platform in the world, but if you don’t do any alternatives investments business, that’s not likely to influence your opinion of whether the firm is providing ample value. Or consider the big brand name: Does it even matter to your clients? Are you allocating to investments that could not be accessed elsewhere? Do you leverage any special technology? These are all important considerations.

Understanding the inverse grid makes it easier to evaluate whether your current firm or platform is providing enough value relative to the firm’s keep. Two advisors at the same firm might well arrive at different answers to the question of whether the firm is worth the cost. Ultimately, it all depends on each advisor’s unique needs.

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