Advisors looking to take their practices to the next level and to endure into the future must add procedures and processes beyond what was needed when they were much smaller firms. Pershing Advisor Solutions’ Mark Tibergien discusses how advisors can evolve into practices with lasting value.

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Eric Grey: Hello, I'm Eric Grey, and I lead the RIA distribution effort at Capital Group. I'm here today with Mark Tibergien, CEO of Pershing [Advisor Solutions]. We're here to discuss his new book, The Enduring Advisory Firm, and the implications it has both to advisors and advice firms of the future. Welcome, Mark.

Mark Tibergien: Thank you. Good to be here.

Eric Grey:  In your book you say the best advisor firms have five traits: clear positioning, structural alignment, people planning, management to profitability and the last is systematic client feedback. How do you see these traits improving firms?

Mark Tibergien: As you look at the evolution of the advisory business, they go through four stages: wonder, blunder, thunder and plunder. And in the first stage they're not thinking at all strategically about what they're doing. Anything that breathes is good as a client. But as they evolve to this point of wanting to be true enduring advisor firms, the question is whether or not they're clear about their vision — meaning who do they want to serve and why? Who their optimal client is. If they're clear on that element, then they're clear on what kind of structure they need to have for their business.

We like to get advisory firms thinking about the decisions they make around pricing and productivity and client mix and service mix and cost control and volume that all impacts the way they do business.

We've seen a number of examples of firms that are very clear and conscious on what kind of strategy they have. And it usually revolves around two elements: either having a focus on a niche market, meaning a community that they can define, or being known for technical specialty.

Eric Grey: Mark, some of the things that may restrain growth in some of these firms as they move through the phases are the myths that they come in with. And you identify some of these in your book: that fees are falling, that young employees lack a work ethic, that robos are digital will make it hard for them to compete in the future and that the industry will benefit from a generational transfer of wealth. From your perspective, what's the reality and how should they be thinking about those viewpoints?

Mark Tibergien: Let's just take an example when we look at fees. The reality for the past decade is the median fee that advisors charge has remained constant at 77 basis points. And in fact, last year in a study that we did, we found that 65% of those firms that adjusted their fees actually raised their fees by five to 10 basis points. So, one clear difference is that those who are able to demonstrate value are able to command a premium for what they're doing, and those who don't demonstrate value are, in fact, experiencing fee compression.

The second point with respect to the generational challenge, the first question I have is, who are their parents? How did you create a generation of people that you have no confidence in?

There's a difference, though, in that this generation believes in movement over motion. And when you think about the way in which we drive behavior, the question is whether or not we're creating an environment in which these motivated people will flourish.

The third point with respect to this great wealth transfer, when people talk about whatever the number happens to be today, 35 trillion or so forth, there's a big difference happening now in that much of that wealth is going to be fragmented, and, in fact, what we're finding is a great number of wealthy people are transferring it to not individuals but to foundations and trusts and other purpose-driven decisions that they're making — like how can they leave a legacy and make an impact and not necessarily give that wealth to the children?

Eric Grey: You also identify some things that really make the top firms stand out. And in your book, you identify them as human capital management, which relates to the conversation we had about the next generation, technology implementations, how well are they incorporating a new ability to create efficiency and effectiveness and profitability pricing, which is always a conversation in this industry. How would you think about successful firms as they engage those topics positioning themselves to be successful in that going forward?

Mark Tibergien: When I look at the future of this business, I think that the greatest inhibitor to growth is lack of capacity. And we can solve for capacity problems through technology. We can solve for it through better workflow. But in the end, this is a people business, and the fact that so many firms don't have a conscious human capital strategy is impeding their ability to grow in an enduring business.

So one of the opportunities that I think many advisory firms have is to become recognized as the employer of choice in their market. Imagine if they were as relevant to new people coming into the business, where people were working at other firms, as they were to the clients that they wanted to attract. And when you believe that this will lift the cap on your ability to drive growth, it can be quite phenomenal.

I think that ultimately individuals have a desire to seek wisdom as well as knowledge and to seek human touch as well as efficiency. And so, in my view, the technology that is built around the robo platform is more of an enabler, and I believe that many successful advisory firms will adopt many of the same principles that allow them to be easier to work with and allow clients to access information on a more dynamic basis. So I view it more as an enhancement than a threat.

Eric Grey: So Mark, one of the things that you've shared with us is Pershing's focus on those firms that become professionally managed that transcend being a lifestyle firm to being a real forward-looking, growth-oriented entity professionally managed with aspirations for complex situations and engaging clients profitability there. How do you think about that broadly, and how do you encounter it in the firms that you work with?

Mark Tibergien: This is a profession that's pretty much a cottage industry. It was founded by individual practitioners who had the desire to build a book of business and not a desire to manage other people.

When you think about the future of this business, particularly the RIA side of the business, the question becomes whether or not anybody's going to step into the breach and build something that's more enduring that isn't just tied to the life cycle of the individual. And it's quite clear now that we see both financial consolidators and strategic consolidators coming into the business who are trying to build something that is more sustainable.

So what this ultimately means is that advisory firms have to think about, what does critical mass look like in their business? And I define critical mass as a point where you can achieve your targeted level of profitability and you have redundancy at every key position. So when you get to that point, now you can start thinking about your practice as a business and think about how appealing that might be to new people coming into the business or ultimately even to prospective acquirers of your firm.