5 Questions to Ask Before Starting a Financial Advisory Practice

Nov 1, 2022 | Blog Posts

Running your own financial advisory practice is a dream career path. It’s understandable why. You have the ability to build a business that operates on your terms, in a way that makes you proud. You can be selective about your client base, services you wish to offer, choice of investment methodologies, approach to customer relationship management, and pathways to grow your business. Independence means that you can spend more time with your family — and build a name for yourself in a respected industry while ultimately helping more people. With an entrepreneurial mindset, there’s no limit to your growth potential. 

Despite these benefits, many advisors are hesitant to make the jump to start their own firms. That’s because entrepreneurship comes with inherent risks. For instance, you will need to manage your own clients, compliance and legal infrastructure. Rather than your employer paying you a regular salary, it’s up to you to establish a sense of predictability and stability. You will be accountable to yourself, your team, and your clients rather than a manager. As you’re starting out, you may not have coworkers with whom you can bounce ideas.

Some people aren’t ready to handle the less-glamorous aspects of entrepreneurship. Others thrive in situations of uncertainty. Entrepreneurship can be scary and unstable — and it isn’t a fit for everyone. So how do you know if starting your own advisory practice is a good fit for your personality and strengths? What are some steps you can take to offset concerns, fears, and weaknesses?

Self-reflection is critical to finding the right step forward for your unique business. Here are some questions to help guide your thinking — to find clarity through uncertainty — about whether or not to start your own practice.

1. What types of clients are you best positioned to work with?

To its core, wealth management is a relationship-building practice. Especially with the availability of robo advisors and automated solutions for investing, clients are seeking meaningful support and education. 

Even before the pandemic, the wealth management industry had been experiencing substantial pressure towards hyper-personalization. According to  research from Deloitte and HSBC, “customers will increasingly expect a highly personalized service determined by their individual requirements, instead of based around a set of savings, borrowing, and investment products, each with their own sales and servicing characteristics.”

As you envision the future of your firm, it’s helpful to understand the exact client that you’re seeking to reach. Who are you positioned to help and empower to become successful?

With this understanding, you’ll establish the footing you need to build an advisory practice that’s positioned to succeed. Ultimately, it’s your clients who pay your salary and fund your livelihood.

2. Are you aligned with the right institutional partners (i.e. custodians and banks)?

McKinsey has written that RIAs are a profitable and growing segment in the U.S. wealth management industry. As a result, there’s a high degree of consolidation taking place.

“With 15 retail-oriented RIAs eclipsing $20 billion in client assets in 2020, up from eight firms in 2016,” writes McKinsey. “The average size for the ten largest RIAs grew 2.4 times during this period.”

This trend means there is more fragmentation at the bottom, which is the cohort that you’ll be a part of if you’re starting a new firm. As a result, it’s easy to feel like a small fish in a big bond — you may be worried about your unique practice’s ability to stand out as a result. 

The solution to the challenge of feeling like a small fish is to partner up with an ecosystem of providers that include custodians, technology, and asset managers. In addition to providing core infrastructure, these institutional partners may also provide referral networks to new clients, built-in communities, and other support systems to actively scale up your practice.

In case it’s helpful, Michael Kitces has put together a helpful resource for choosing the right custodian. This guide from Fiduciary Trust may also be helpful as you navigate your decision.

3. Are you supported among communities and networks of fellow advisors?

One of the toughest parts about being independent is the feeling of operating on an island. As you make decisions, it will be helpful to have a braintrust of individuals with whom you can work to share knowledge and depend upon for recommendations. These professionals, ultimately, can help operate as sounding boards to help you prevent costly mistakes in your business.

If you’re not sure how to expand your network, some places to begin your journey are the CFA Institute and the Financial Planning Association. Be sure to check out local chapters and conferences where you are likely to meet fellow owners of financial advisory practices. Social networking sites like Hopin and Eventbrite may also be helpful for networking.

The key is to build strong, 1:1 relationships with advisors who you respect and admire. Over time, many talented advisors reach a point of being able to take on new investors. With a small network of trusted partnerships, you can easily refer clients to one another — and support each other in growing your practices as a result.

Remember that even as an entrepreneur, you don’t need to go at it alone.

4. Do you have mentorship from practice owners who have been where you are?

When you’re in the weeds of starting and growing a business, it’s challenging to distinguish signals from noise. Especially in your first few years, you should expect to be focusing your attention on highly tactical operations. During these critical moments, it’s valuable to seek access to mentorship — to be able to talk with experienced business owners who were once where you currently are. 

As with other professions, entrepreneurship is a skill and balancing act that you will learn to refine. Over time, you’ll begin to recognize patterns that are unique to your business and maintain a higher level view of your operations. In the meantime, it’s helpful to be able to speak with financial planners who have experienced some of the same struggles that you are going through.

Peer networks and discussion forums will be especially important in this regard. To find your footing, take a look at this roundup of advisor mentorship networks.

5. What is the minimum business infrastructure that you’ll need on day one?

The wealth management industry is heavily regulated, with the need for defined protocols and documentation in place. For this reason, you’ll need a technology and compliance stack ready on day one. You should expect to be working with a combination of consultants and technology systems.

From a technology standpoint, you’ll need tools to help you manage and connect client accounts, easily share financial documents, store investment models, execute rebalancing trades, perform heat checks, etc. CircleBlack can help you get started with the functionality you’ll need

On the consulting side, you should expect to work with an outsourced compliance team to make sure that you’re operating in accordance with rules and regulations. Outsourced administrative and business operations support (i.e. a team to support scheduling, finance, invoicing, and other administrative tasks) may also be helpful.

Final Thoughts

Remember that being a business owner puts a lot of power in your own hands. You can steer your ship as you see fit. Sound decision-making — and strong business fundamentals — are how you establish the right balance between risks and rewards, with the tipping point in your favor.

Starting your own business is an investment in your future especially as you start to think about your own investing methodologies and philosophies. There’s a growing demand among investors for personalized insights and unique expertise.

Your guidance might be the right wisdom that a potential group of clients needs. Don’t sell yourself short in your potential  — but remember that it’s important to be realistic, too. Solid business fundamentals will be key to your stability and success.

If you found this resource valuable, we encourage you to please share it with fellow financial advisors in your network or in any communities in which you belong. 

Learn more about CircleBlack

CircleBlack is an all in one management platform for the wealth management industry. You can think of it as an operational dashboard to better connect financial advisors and their clients around a shared perspective. The outcome is better collaboration and communication for relationship-focused advisors.

To learn how our software can help you build, manage, and grow your wealth management practice, get in touch. 

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal, or tax advice.

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