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Kitces: The skills client-facing advisors need most

From the advisor’s perspective, emerging fintech solutions present an opportunity to operate more efficiently and reduce overhead by automating various back- and middle-office functions. But from the perspective of the individuals performing those jobs, and whose livelihoods may be impacted as these tech-driven solutions mature, the question becomes whether they should aspire to more front-office, client-facing roles.

For back-office employees who want to pursue this path, the next logical question is around when to make the switch and launch their own practice as an independent advisor. While there are no cut and dry answers to these weighty questions, there are a number of tactics and hard-won lessons to apply that can help inform a considered, personalized answer.

Anecdotally, I’ve been hearing these kinds of questions a lot. And I think in part it’s because so much of the financial services industry is getting squeezed by fee compression, potentially causing downsizing at some asset managers and brokerage firms, in addition to the automation wave sweeping through our industry.

Naturally these forces make people performing internal, operations-oriented jobs take a greater interest in front-office advisor roles, which tend to have better compensation and appear less prone to being automated away.

Another potential attractive quality about the advisory path is that when it’s your firm and your clients, you tend to have more control over your career and future. That’s not to say the outcome is guaranteed, but there’s a famous saying that when the value chain in any industry gets compressed by competition, whoever is closest to the client usually wins.

That’s why we’re seeing very little compression in advisory fees — even though platform, product and asset manager fees are all getting squeezed. The advisor is closest to the client.

So how do you know when it’s time to go independent and launch your firm, and what steps should you take to prepare? In my experience I’ve found there are essentially three primary drivers that determine when someone is ready to launch: experience, competency and financial stability.

Like the old adage goes, there’s no substitute for experience. I’ve found it takes on average seven years before independent advisors achieve real success. This isn’t just a pay your dues mentality. Rather it’s recognition that there’s a lot to learn, absorb and be prepared for if you’re going to launch and successfully run a firm.

And aside from those aforementioned three primary drivers, there’s a kind of subset of three skill sets that you must have in place before launching a firm: operations, relationship management and business development.

The operations piece is the most straightforward. There are plenty of ops-oriented jobs in the industry, and if you spend any time anywhere near financial services, you’ll pick up a lot of this. Ideally though, you’re in a role where you get to fill and file insurance and annuity applications, perform account openings, transfer paperwork and execute trades for clients — such that you really learn the operational guts of the advisory industry.

Indeed it’s a lot easier to deal with the stress of launching your own firm when you’re not also learning the difference between an ACAT and a non-ACAT transfer, or why that distinction matters — let alone the expectations you need to set for clients about how long such transfers are going to take.

So for those who have a direct, hands-on role in an operations capacity, sticking with this for a year or two may be sufficient to at least learn the core tasks. It’s not a role you’ll necessarily want to hold indefinitely, but getting at least a year or two in is invaluable.

I did it for the first 18 months of my career, and it was hugely impactful. For those who may be more indirectly attached to the industry and learning more through osmosis, maybe it’ll be three to five years to absorb the key knowledge and experience.

The second skill set needed is relationship management experience, specifically with clients. Proactively managing a relationship means learning how to define and communicate the scope of your agreement with clients about what you will and won’t do, so that you can deliver on what you promise. If you aren’t managing client expectations, it makes it very problematic to keep clients. You learn to do these things effectively by managing clients for a period of time.

Likewise, it’s not only setting expectations of the relationship, but also helping clients understand what kinds of results are reasonable to expect. “No, we’re not going to give you 15% returns every year. We’re not going to make you rich in the next five years. We can’t guarantee you won’t ever experience portfolio declines. What we can do is help ensure that you have a reasonably diversified portfolio and a strong chance of participating in the growth of the markets in coming years, and can help you stay the course along the way.”

Managing the relationship is also about setting the rules of engagement. Does the client know what’s appropriate to email you about, versus what should be a phone call or a meeting? E.g., “When you call me, I will call you back in three hours/24 hours/three business days.” If you don’t set those expectations, then you may not be able to live up to clients’ demands.

Part of managing the relationship well is also knowing how to deliver advice in a way that actually sticks. A lot goes into learning how to deliver advice in such a way that clients sign on and stay the course. That latter part is crucial because if your clients aren’t implementing your advice, they won’t improve their situation. If their situation doesn’t improve, they won’t see value in the advice relationship and they won’t keep your firm.

This is an area where I think advisors usually need about three to five years in a client-facing role. That might be two or three years where you’re in a second chair, mostly listening and watching and maybe not saying much, and then another two to three where you’re in more of a lead role with at least some clients.

The key truth to grasp is this is hard stuff to learn. It’s doubly hard when you’re out on your own and your business depends on you learning as you go. Getting this experience before going independent really matters.

The third crucial skill set is business development experience — i.e., sales experience. Sales has become a bad word in some parts of our industry, but whether you’re trying to sell a product for a commission or you’re selling your own advice for a fee, no client will engage you until you can convince them that you’re worth paying and are delivering something of value.

You consequently have to sell yourself and your value. It doesn’t matter how great your advice is if you can’t convince anybody to pay you for it. And so getting some level of business development experience is crucial.

Some advisory firms have their own sales training programs. You can also put yourself through a program on your own. You can train under an advisor who’s particularly good at business development. To each their own. The important thing is to learn.

And if you’re scared to learn business development and sales, trust me, it’s not going to go well when you’re out there on your own. Get the experience now, before going out with your business on the line.

The one caveat I would note is that a growing number of firms these days have non-compete or non-solicit agreements. These effectively mean the early clients you might get when you’re learning business development may not be transferrable to your independent practice. Sometimes it’s feasible, which is great; you keep the relationships in which you’ve invested heavily. But a non-compete doesn’t have to be a deal-killer. If you’re going to build your own client base over the next 10 or 20 years and service those individuals for the next 30 years, you can learn business development for a year or two and then start fresh when it’s time to launch.

The second domain that helps successfully launch your firm is competency. If you’re going to give advice to clients, know that the advice you give is actually correct and you don’t get sued or hurt your clients out of plain ignorance — even if you had the best intentions.

What does this mean in practice? At a minimum it means getting CFP certification and ideally, at least one post-CFP designation to deepen your knowledge and begin to differentiate yourself. Getting your CFP marks requires two or three years of experience anyway, so you’ll often do this while you’re pursuing the experience we previously touched on. Just getting a Series 65 or your Series 7 and 66 in a brokerage firm is not enough. Sure, it’s enough to be minimally licensed to hang out your shingle as an advisor, but that doesn’t mean it’s what you need to get someone to pay you for advice.

Certifications like the CFP marks are so important because they build confidence and credibility. You have to be confident enough to actually sell the value of your advice, and if you’re not confident, you will hesitate in front of prospective clients when they ask questions like, “What do you do and why should I pay you that fee?”

And because CFP certification is increasingly known by consumers as the designation for planning — thanks in no small part to the CFP Board’s own public awareness campaign — getting certified makes you more credible in the eyes of the consumer. This is especially important if you’re going out on your own, when you may not have the big-name brands on your business card.

So if you haven’t started investing in your education as a planning professional, start now.

The third and final area that I’d highlight for what it takes to be successful — and one I frankly think is not talked about nearly enough in our community — is to have your own house in order beforehand. Even in the best of circumstances, it usually takes about three years for advisors to see their old wage levels return. It simply takes time for clients to know, like and trust you, and decide to work with you.

The good news is that beyond that point — the next 27 years after the first three — the business just grows. Advisors who’ve been doing this for 20 or 30 years often make several hundred thousand dollars a year of income from the cumulative impact of growing a high-quality client base. This is an incredibly rewarding and lucrative career in the long run, but that only matters if you make it to the long run. That doesn’t happen if you run out of money in the short run.

For some advisors, having their house in order means building up as much as three years’ worth of household expenses, or at least two years’ worth, since by the time there’s at least some income coming in. For other advisors it means trimming down your old household expenses: downsizing your car, even downsizing your house, keeping your personal overhead low enough to survive and pay your expenses while you’re out there building your business. I also know of some dual-income households that cut back to live on one spouse’s take-home while the other spouse launches their advisory firm.

The reality is it doesn’t actually cost that much to launch an advisory firm. It’s not like building a factory or even fitting out a restaurant. The actual startup costs are often no more than $10,000 or $20,000 — not negligible, but not a giant bank loan sum.

Don’t think of this in terms of startup costs to succeed. It’s about being financially stable enough to invest in your long-term future.

To recap: You’ll need CFP certification; seven years of experience, including some operations, relationship management and business development experience; and up to three years of personal expenses to bridge the gap. That gives you the best odds for success in an incredibly rewarding career.

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