Managing growth is a challenge for any business. When a wealth management practice takes on more clients, it also tends to hire staff and expand into more office space. The balancing game is to ensure that the new business brings in enough profits to justify the higher costs.

If the firm tries to hold costs down and asks the current staff to manage more assets and clients, it risks compromising all the small, important details of client service, from how much time planners spend listening to clients to how relaxed a receptionist sounds on the telephone. Employees can only do so much, and wealth management clients expect and need time and attention. Unless it manages change with grace, a practice risks disappointing or losing established clients when it takes on new business too quickly.

 

TAKING A STEP BACK

My firm, American Economic Planning Group, based in Warren, N.J., faced the fast-growth conundrum two years ago. We had grown to over $600 million in assets under management in our 25-year history. Between 2006 and 2008, our assets grew by over 20% just as the stock market and economy went into turmoil, and our clients needed more from us than ever before.

In 2008, we had a total staff of 30, including 10 financial planners as well as six full-time staff people devoted to overseeing our investments. We also had experts in pensions, group healthcare benefits, life and long-term-care insurance. To handle our growth, we needed to rethink our business model.

We approached the problem as we would a financial planning challenge for a client. First, we carefully explored the relevant facts. Then we became more specific about our goals and created a game plan that we could accomplish (while still running the business) in the time we had.

We needed to ask ourselves the fundamental question: What are our clients really paying us for? Our annual surveys told us that transparency, liquidity, low costs and tax efficiency were most important to them. We then asked: What are our core strengths?

We decided that our core strengths were investment ideas and research, strategic asset allocation and comprehensive financial planning. However, we were performing a number of back-office functions where we added little value: portfolio rebalancing, trade execution, tax harvesting, client performance reporting and portfolio accounting. We also wanted to improve our own practice management reporting and client billing.

We knew we wanted to outsource these back-office functions. But we needed to find the right company.

 

THE RFP PROCESS

Through our industry contacts, we identified a dozen firms that offered solutions to our needs. They varied by size, business model, technology and flexibility. To evaluate this diverse group, we developed a detailed request for proposal (RFP) as the next step in the discovery process.

We sent out the RFP in January 2009, requesting a response within a month. The subsequent responses filled several binders, and it quickly became clear that we were dealing with apples and oranges as well as bananas and assorted grapes. We knew the firms varied, but not that they varied in every imaginable way possible. We gave ourselves about a month to digest the information and put together a detailed spreadsheet to compare the responses.

As March Madness approached, we selected our Final Four from among the various contenders. The next step was face-to-face meetings with senior representatives from the four firms, asking about their capabilities, costs, processes, development plans and credit worthiness. We also held a number of conference calls to follow up on specific points.

As the project evolved, we became more aware of the fact that we were about to make a critical business decision. We weren't just choosing software. We were choosing a strategic partner. We would be "attached at the hip" with another firm that would have a major impact on how we could grow and meet our clients' needs.

 

THE ENVELOPE PLEASE

Our final choice was easy. We chose Adhesion Wealth Advisor Solutions, based in Charlotte, N.C., because it offered the most flexibility at the right price. Flexibility is very important because our investment management team designs its own proprietary investment models to meet our clients' objectives in a cost-efficient manner.

The other RFP finalists offered prix- fixe menus of investment alternatives prepared by their own investment research staff. Since we have our own investment management team, we were not interested in outsourcing that core capability. Working with Adhesion ultimately would allow us to cut the underlying investment expense ratios from approximately 1% to 35 to 55 basis points, while maintaining our own fees and services.

Another important consideration was that Adhesion focuses on RIAs. The other finalists seek to serve the entire financial services industry. We felt that Adhesion's management team understood our business and would be a real partner in our future growth.

 

MAKING CHANGES

In the summer of 2009, as we began working with Adhesion, we shifted our investment strategy. Previously, we used a buy-and-hold strategy with software to rebalance client portfolios periodically. But the software took a week or more to complete a rebalancing, and we concluded that strategy did not allow us to react to market events as quickly as we would like.

Instead, we adopted a core and satellite investment structure to make more use of exchange-traded funds (ETFs). The core equities, for the most part, consist of ETFs that track a global benchmark. The satellite, or as we call them, "opportunistic investments," are based on our own research.

Since we outsourced back-office tasks to Adhesion, our investment team has been able to spend more time on investment research. The opportunistic investments have included focused areas of the equity market, corporate and junk bonds as well as a commodity ETF. We balance each client's risk assets held in the core and satellite with a conservative bond ladder. The allocation is based on our financial planning as well as a client risk tolerance survey.

We were able to build and customize these detailed models using Adhesion's software. Each position in the portfolio has its own "tolerance band" where we specify a percentage range where the investment can trade up or down before being subject to rebalancing. We monitor our models at three levels: individual investments, asset class and risk.

As for cash, we set specific levels for each client account. There is a floor and a ceiling for cash which, if breached, triggers Adhesion to rebalance investments either to generate cash or drain cash. For a retiree drawing monthly from an account, we will set aside a greater amount of cash and will maintain a certain amount of cash to support those draws. Conversely, if a younger client is making regular contributions, we set much lower cash targets as investments are dollar cost averaged into the market over time.

We are also able to accommodate clients who want to hold on to stock or bond positions they brought to the firm and keep them in the same account as our model. These legacy holdings are carved out of the models and identified in the investment policy statement.

Adhesion also gave us the ability to use all the major custodians. This lets us provide clients with one statement, including more than one custodian.

 

THE NEXT PHASE

In the end, we completely reinvented our practice. Our investment staff spends most of its time on developing ideas and research. Our financial planners can provide clients with daily online reporting, monthly performance reports and annual tax packages. Our management team has seen the detailed practice management reports that Adhesion plans to release later this year. The reports will be based on our billing records and our data on assets under management. Most important, our clients enjoy the transparency, liquidity, low costs and tax efficiencies that they requested.

We have no problem picking up the phone to contact any of Adhesion's senior management team, and over time, the partnership continues to grow. We continue to refine our investment strategy and client reporting with Adhesion's input. Our business development staff and Adhesion's marketing team frequently exchange ideas and opportunities.

Having outsourced several back-office functions, we have entered another growth phase. Because we can take on more assets with minimal cost, we are actively recruiting planners and business alliances.

We are also offering our investment models to other RIAs, CPAs and community banks. Some RIAs may want to focus on business development and client services while outsourcing investment management, custodial operations and reporting. We now offer those services for 50 basis points.

We also offer client performance reporting, portfolio accounting and practice management at a fee per account. A third-party firm can use the client-reporting structure we have created with Adhesion and not have to worry about maintaining remote servers to back up in-house data. Just as we outsourced some of our roles to Adhesion, other firms are now outsourcing to American Economic Planning Group.

 

Peter A. Needham, CFP,is a financial planner and executive vice president of American Economic Planning Group, a wealth management firm in Warren, N.J.