Across the industry, interest in forming multiadvisor firms has grown. According to Cerulli Associates, 55 percent of advisors now operate within a team. The trend is even more pronounced for large firms: of advisors operating within a practice managing $500 million or more in AUM, 93 percent are part of a team. But while the term “ensemble” has become en vogue to define this new business model, it doesn’t always apply—different models exist within the industry, and there are several defining features of an ensemble practice that must exist before a business can truly be considered an ensemble.
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The Relationship Continuum
Instead of a singular definition, consider framing multiadvisor teams across a continuum from informal partnerships to ensembles based on their characteristics.
On the left side of the continuum, a loosely knit informal partnership operates as a collection of silos who all have full autonomy. In many cases, these firms share expenses and sometimes staff and other resources. They often operate under one business name and website. Structurally, they are designed to reward individual advisors for generating revenue.
On the right side of the continuum, an ensemble has much higher integration and intertwined ownership. These firms are run like a business and are designed to encourage owners to invest in and build the overall business.
Most multiadvisor firms don’t sit squarely on one side of the continuum or the other. Rather, firms may fall anywhere along the continuum depending on how they measure up against each of the five features of an ensemble practice.
1) Vision, Strategies, and Methodologies
Within an informal partnership, advisors have greater latitude to run their businesses as they prefer, whereas formalized ensembles work collaboratively toward a shared vision. With ensembles, advisors set and follow strategies together as a team. This creates a trade-off between individual autonomy (informal partnerships) and the ability to realize synergies and generate economies of scale (ensembles). Neither approach is right or wrong, but rather a matter of the team’s preference.
Uniformity of investment and financial planning approaches is another key aspect. Ensembles have greater consistency across methodologies. In other words, advisors execute on the firm’s methodologies rather than their own personal approaches. This allows certain functions, such as financial planning and investments, to be more easily centralized and executed by specialists. And clients have a consistent experience regardless of which advisor they work with at the firm.
It’s common for multiadvisor firms to share staff and expenses, whether they’re informal partnerships or ensembles. As firms grow, their pooled economics make it possible to employ specialized roles, such as a marketing director or CIO. The largest of ensembles can even centralize roles and build departments. A large ensemble might build a client service team or financial planning team that supports all of the firm’s advisors. This centralization and specialization of roles allows firms to be more efficient and deliver a deeper and broader service offering.
Along with human capital, core processes compose the backbone of a firm’s infrastructure. With informal partnerships, advisors tend to operate with their own methods, so processes are personalized for each individual advisor. This offers advisors a high degree of latitude to operate based on individual preferences. The trade-off is that exception processing can weigh down efficiency. In comparison, the high degree of integration within ensembles requires advisors to give up a certain amount of autonomy to adopt the firm’s processes, which in turn makes it easier for a firm to scale up.
3) Compensation and Profit
With informal partnerships, revenue typically flows directly to individuals based on their personal level of revenue generation. It’s common to split overhead expenses such as rent and the cost of shared staff, prorated for individual usage. In this model, the owner’s compensation is based on the revenue generated.
For ensembles, revenue flows through a corporate entity and runs through a standard profit-and-loss format. This structure rewards owners separately for three distinct roles:
- Leading a business
- Providing financial advice to clients
- Taking entrepreneurial risk
In this model, owners receive fixed compensation for leadership roles. For example, an owner could receive a fixed salary for operating as CEO or CIO. Additional fixed or variable compensation is paid to owners for their role as financial advisor. Compensation is then paid to nonowner advisors and staff, and all overhead expenses are paid. The remainder—operating profit—can then be reinvested in the business or distributed to owners based on their equity ownership (or other agreed-upon formula). This structure incentivizes owners to grow the profitability of the overall firm.
4) Ownership and Value
For firms where advisors are loosely integrated, the value of each individual advisor is typically the value of his or her client relationships. When an advisor decides to sell, he or she sells the cash flow generated by a specific set of clients.
Ensembles with equity ownership create a formal agreement defining the terms for adding or exiting a partner. With this approach, the value is based on the percentage of equity held in the firm. This structure can be especially beneficial for creating an ownership track for younger advisors or even key employees. Future owners can fund equity acquisitions by contributing their profit distributions. This is a key foundation for building a multigenerational legacy firm.
A critical element of a multiadvisor firm is the leadership structure and culture. Informal partnerships tend to have ambiguous leadership roles since each advisor operates with a higher degree of individual latitude. This can be challenging if leadership approaches differ across a firm, and it sends mixed messages to employees.
With integrated ensembles, leadership roles become more defined. A leadership team might divide responsibilities for overseeing operations, marketing, and financial management across three different owners, which allows firms to divide and conquer across internal vertical responsibilities. But don’t consider leadership as solely a functional role. Leaders in the organization develop the firm’s vision and strategies, motivate and inspire employees, influence the culture, and light the path during periods of change. A cohesive leadership team is imperative in an ensemble.
Choose Your Path
There are many benefits of working in a multiadvisor team, including the following:
- Multiple advisors can allow a firm to broaden and deepen service offerings.
- A team brings diversity of approaches and strengths.
- Teams can achieve greater economies of scale.
- A powerful team can create a sense of accountability for success by challenging one another.
- A team with multiple generations of advisors creates a foundation for an enduring legacy.
If you are considering moving toward a more team-based structure or changing the one you have in place, know that with a multiadvisor firm, no one approach is right or wrong. It’s a matter of building the firm that’s best suited to your long-term objectives. The key is to take a deliberate approach and ensure that everyone at the table is aligned for the path forward.
After reading about the features of an ensemble practice, would you define your firm’s structure as a multiadvisor firm or as an ensemble? If you have a relatively informal partnership today, how likely are you to transition to more of an ensemble approach in the future? Why?