Three years ago, while Annette Simon and Veena Kutler were operating a two-principal office in Bethesda, Md., they were doused by a wave of positive publicity. Simon was named one of Washingtonian Magazine's "Top of Their Game" financial planners and was interviewed by, among others, National Public Radio, Reuters and the Baltimore Sun. Kutler had been quoted in Business Week, Kiplinger's and the New York Post.

But for some reason, the publicity wasn't translating into new business as quickly as the team had hoped. "Here we were with this amazing service," says Simon, "but sometimes we were losing out on clients who were afraid of working with a tiny little company."

Having worked as a vice president and portfolio manager at T. Rowe Price, Kutler had seen the advantages of size and scale firsthand. "Some clients feel more comfortable knowing that their portfolio manager is one of 20 or 30," she says. "Even though they may have interaction with only one, there is a comfort element working with a larger firm. We realized that if we wanted to target the higher-net-worth marketplace, there should be more of us."

Simon and Kutler's story offers a glimpse of an enormous and difficult trend. Most practitioners are working in one- or two-person shops and are fiercely independent, but they're bumping hard against the limitations that come with being small. The planning world is looking at increasing technology opportunities (and costs), skyrocketing and expensive compliance demands, plus a late-stage career yearning for efficiency and the freedom to finally get rid of the paperwork and focus on whatever the company founders enjoy doing--whether it be investment work or face-to-face interactions with clients.

And as a growing number of advisory firms seek more upscale clients, a new dynamic is creating a whole new level of urgency. Wealthier individuals who work with legacy law and accounting firms expect the same sense of scale and permanence from the company that handles their money.

The result? Everywhere you look in the planning marketplace, advisors are beginning to ask a complex question: How can I increase the scale and efficiency of my practice without the hassles of managing a lot of people, and without losing my cherished independence? In response, they are beginning to evolve a variety of creative solutions to the dilemma of independence versus scale.

Take a relatively simple example: Harv Ames practices in rural Peterborough, N.H. He works in a market that might not be large enough to support the kind of ensemble practice that industry consultant Mark Tibergien has advocated as the model for scale and efficiency. So when clients began asking how they would be served if something were to happen to him, Ames began talking with Warren Mackensen, a sole practitioner (who also runs the Protracker software company) in nearby Hampton.

"We now have a business continuity arrangement between our firms," says Ames. "Should one of us become disabled or die before we've identified a successor, the other will step in and provide continuity of service to our clients. The agreement also gives our employees first option to purchase the firm from the estate."

Since then, the two firms' principals and employees have addressed the scale issue in other ways. They have begun sharing documents, practice management and client service ideas. "Our companies are looking more similar every year," says Ames. The arrangement works like a partnership in terms of management scale, not having to reinvent procedural wheels and business continuity--but the principals maintain their independence.

Other advisors are reaching the same place from a different direction. "The collaborations of independent firms are happening as an outcome of study groups," says Mike Haubrich, who practices in Racine, Wis. He found a virtual partner in fellow study-group member Paula Hogan, who practices in Milwaukee. The two firms now share an HR consultant and are creating a joint internship program.

John Ritter and Jeff Daniher, of Ritter Daniher Financial Advisory in Cincinnati, went from sharing procedures to creating a kind of quasi-partnership arrangement with Rob Grossheim, a solo practitioner with Family Wealth Advisory Group across town. "We discovered that even though neither side was interested in merging, we had a common vision and a common approach to systems," Ritter says. The initial result was collaborating on the staff action steps that would be programmed into Junxure-i, the CRM software that both firms use. Later, the principals compared and normalized their compliance manuals and began sharing compliance information and procedures.

Then the two companies created common investment guidelines. "One of the biggest questions advisors face is: What is your economic view of how much should be in large cap versus small cap versus international," says Ritter. "We sat down and figured out where we stood based on our feedback and theirs. Now, if a mutual fund suddenly does a hard close on us, I email Rob and say, What are you guys using in this space?'"

More recently, the two firms took their intimacy to a new level and started sharing a staffer. "Originally, we were both looking to hire somebody, but we really didn't have enough work for a full-time employee," Ritter says. "So we decided to hire jointly." This led to some unexpected challenges. The firms discovered that while the SEC has no problem with an employee offering financial advice through two separate firms, their errors and omissions carrier was very uncomfortable with it. "Since he was already licensed with the other firm as an IAR [Investment Advisor Representative], he was not allowed to be licensed with us," Ritter explains. "So instead of jointly hiring him, we decided that our firm would lease his services two or three days a week from FWA, and we had to make sure he wasn't doing anything directly with our clients."

REMOTE MERGERS

Often, the progression from fellow study-group member to virtual partner is gradual and accidental, analogous to a romance that begins with a close friendship. Simon and Kutler began their quest to become a larger presence in a less random way. Their first step was to look at their local market for a potential merger partner--and discovered, as most advisors do, that there were no obvious choices in the immediate area. This, in fact, has become the single biggest obstacle holding back what would otherwise be an obvious consolidation trend: The chances that any advisor will find a local partner who practices the way he or she does, with similar systems and back offices, is not high.

But instead of giving up, Simon and Kutler took a second look at their office systems and procedures, and came to a surprising discovery. "With all the advances in technology and the way some firms are hiring virtual employees in remote locations, we realized that we might be able to make a remote merger work," says Simon. "If we can find a way to share economies of scale and systems and procedures do we really need the other partners in the same office?"

This simple revelation opened up a huge number of merger possibilities. Simon and Kutler decided to expand their search from greater Bethesda to a somewhat larger region, defined as anywhere between the Atlantic and Pacific Oceans. "We started by going through a list of advisors we had met at various conferences," says Simon. "We asked ourselves, Who have we met that we might like to ally ourselves with?'"

They found four promising firms. Following the traditional dating model, Simon and Kutler sent out letters proposing that the four companies explore the possibility of an alliance (dating), which might lead to a four-company consortium (engagement), which might lead to a partnership (marriage) down the road.

One of the firms in the proposed group--Boston-based Smith Rapacz, LLC--seemed especially promising. Lisette Smith and Tanya Rapacz, its two principals, had worked together with upper-echelon clients at one of the older planning firms in town before venturing out on their own. They weren't excited about the idea of an alliance, but they did recognize the same challenges that Simon and Kutler had articulated in the letter. "One of the things Tanya and I were constantly thinking about was: As we add people, are we going to add complexity?" says Smith. "Are we going to spend more time managing people than we're saving by having them in the office? Like a lot of others, I guess, we wanted to get bigger and better, but we didn't want to disrupt the good things we already had."

For the next year, principals at the four companies gathered information about one another and explored what each of them envisioned in the alliance. They learned that true compatibility was more elusive than they had anticipated. "The two other companies we were talking to weren't as much like us as we thought," says Rapacz. "One was already the dominant planning firm in its market. The other merged with a local firm while we were still talking."

The alliance idea seemed to be dead in the water. "We didn't pursue it for a while, but we stayed in touch," says Simon. "Then, at the 2005 NAPFA Conference in Boston, we started talking again, this time just with Lisette and Tanya. Of all the people we talked to, they were the ones most like us. The more we talked about it," she adds, "the more we realized that we were talking about more than an alliance."

The two firms had a lot in common. Both were run by women who shared equal ownership; both had some $50 million under management, passively invested; both had moved into that awkward "re-startup" stage where any significant growth would require significant investment in staff and technology. "All of a sudden, we were talking about a merger instead of an alliance," Smith says. "When you discover that your philosophies, services and client bases are similar, the discussion takes on a life of its own."

The first lesson they learned is that when you're looking for a partner, the superficial similarities can be misleading. It's easy to get discouraged when you spend time talking with a potential partner and discover that he or she is really not a good fit. Now that they had identified a good merger candidate, Simon, Kutler, Rapacz and Smith decided to look deeper.

This led to the second lesson: Exploring a merger is very time-consuming. "They came up to Boston a few times and we had fairly comprehensive agendas," says Rapacz. "We talked about everything, looking for potential deal killers."

One was software. "As it turns out, we had very compatible systems," Simon says. "Veena and I use Junxure-i, and Tanya and Lisette were about to purchase it. Adding two more people to our Junxure-i license and linking it all with a server would be a no-brainer."

Both firms used NaviPlan as their financial planning engine, and although they used different custodians (Simon and Kutler work with TD Ameritrade while Smith and Rapacz clear through Fidelity), the idea of diversifying their business among multiple back offices appealed to everybody.

Another potential stumbling block was contracts. "We each had our own attorney, and the contracts were very different," Rapacz explains. "We had to find an attorney who would agree to take the best of both firm's documents and consolidate them into something consistent for all of us," Rapacz explains.

Other differences they found might actually serve to enhance compatibility. "Tanya and I are both planners," says Smith. "We do the planning and investment management work together, and we will do individual work on clients separately." In Bethesda, Simon and Kutler have their own specialties: planning for Simon, investments for Kutler. This suggested the possibility of off-loading different functions to different offices. "I think it would make sense to have the trading and asset management department housed in one location," Kutler says, "and the case-writing department in the other. That way, the staff can be more focused and the planners can be free to do what they do best."

BRANCHING OUT

The overriding lesson here is that advisors who don't find compatible advisors in their communities can, in this new age of virtual terminals, shared remote servers and online communication, create partnerships while drawing from a nationwide pool of potential candidates. That insight alone might have the effect of greatly speeding up the perhaps-inevitable consolidation of practices in the planning marketplace.

At the same time, these emerging communication capabilities are opening up other nontraditional ways to achieve scale, as well. One is a hub-and-spoke arrangement, where individual solo practices merge with a larger firm that happens to reside in a different location. In one recent arrangement, Eric Bruck merged his Beverly Hills client base into Universal Advisory Services, based in Albuquerque, N.M., and now operates the southern California branch of the company. "They already had clients in this area," says Bruck, "but they were serviced from Albuquerque. Now I can give them a more personal touch, as opposed to their doing it remotely."

San Francisco-based Mosaic Financial Partners is exploring similar arrangements with advisors around the Bay Area. Company founder Norm Boone envisions the possibility of having satellite offices operated by advisors who are currently running their own firms and looking for a way to get help and efficiency without inventing it on their own.

The carrot, as Bruck has already discovered, is the ability to leapfrog altogether the painful "re-startup" phase, and get immediate access to the advantages of scale--home-office case-writers; an asset management department that handles the downloads, trades and performance statements; a compliance officer to handle the SEC paperwork. "Now that I have a case-writing department," Boone says, "I can prepare plans in a quarter of the time it used to take. And I feel like I have at least as much control over the process and the outcome."

Universal and Mosaic plan to leave a great deal of the decision making and planning work at the branch level, which allows the individual planner to retain a certain amount of client service autonomy. But if merging into minority ownership of a larger firm feels like giving up too much independence, there are other solutions. Recently, the planning ecology has begun to develop independent, freestanding back offices into which advisors can simply plug their practices, giving them instant economies of scale.

On the East Coast, an example would be Ensemble Financial Services in Henrietta (Rochester), N.Y. On the West Coast, the most highly evolved ready-made scale organization is FocusPoint Solutions, based in Portland, Ore. Advisors basically contract out their back-office chores to a division of one of the area's largest planning firms--which will handle the things that get in the way of face-to-face client work: trading, downloading and reconciliation, Internet-based performance reporting, as well as compliance support that can be adapted to the individual firm's needs.

FocusPoint also offers customized business consulting, a service that was added when the company founders began to realize that good planners were not always astute managers of their businesses. "We wanted to help people who weren't running a particularly good business to become good businesspeople," says FocusPoint founder Brent Hicks. "While we were helping them become more systematized, we also wanted to be more focused on how they could run their businesses as a business."

One thing that FocusPoint will not do is planning--which gets back to the independence issue. "Every advisor has his or her own way of handling the planning service, so that's where we stop," Hicks continues. "We don't have any relationship with the clients, and we don't ever want to be in the position of telling the advisors we work with how to provide client service."

This "hands off the clients" philosophy, in fact, may become the new mantra that is common to all nontraditional ways to add scale to a practice. The study groups, and the increasingly intimate sharing of documents and policies, stay away from these issues altogether. Branch offices like Bruck's or those envisioned by Mosaic aim to preserve the creativity and client relationship skills that the local advisor brings to the table. "I'm here to do what my nature tells me to do, which is serve the client," says Bruck. "But now, when a technical question comes up, or if a client needs cash, I can hand those things off. And clients have confidence that there is a 30-person firm behind me."

VIRTUAL CONSOLIDATION

That confidence, of course, was the original impetus that, years later, led to a virtual merger between the two firms in Boston and Bethesda. As you read this, Simon, Kutler, Smith and Rapacz are the proud owners of a company that is being rebranded as the Garnet Group (after the gemstone that is associated, according to legend, with prosperity, consistency and perseverance). The firm is registered with the SEC and shares a single Form ADV.

A comprehensive merger is still a year or two away, and Simon says the four principals are in no hurry. Functionally, the two offices each still have their own profit-and-loss statements, and although all four are equal owners of the company, revenues and compensation will continue to be determined by the performance of each office. "We still want to be fairly autonomous at that level," says Kutler, "but there's a lot we can share immediately. We'll share compliance work and designate a CCO; we'll send out the same reports; we both use Morningstar Workstation--and we have worked out a single fee structure with consistent breakpoints and minimums."

As the profession continues to explore nontraditional ways of adding scale and its efficiencies, Simon and Kutler are already back on track with their marketing outreach to upscale clients. When one or the other is quoted in the press, or when upscale prospects knock on the door of what appears to be a two-planner office in Bethesda and inquire about the firm's resources, they're told that this is the local branch of a four-principal financial services company that has a presence in the D.C. area and Boston.

"Eventually," Simon says, "we'll have a shared database. We'll introduce our clients to Tanya and Lisette and they'll introduce theirs to us." Consolidated accounting and revenue sharing will follow, soon after different departments are staffed up at one or the other location. At that point, the company will offer proof, once and for all, that the coming consolidation in the planning profession really can be accomplished virtually, and that advisors looking for potential partners need not confine their search to onecity.

And the four women hope that this is just the beginning. "We don't see any reason why we can't market ourselves as a regional firm," says Simon. "With the merger, we're a northeast region company. Maybe we'll go national."

Bob Veres edits and publishes the "Inside Information" newsletter service for financial planners: http://www.bobveres.com.

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