The Interdependent RIA: The Next Stage of Advisory Evolution – Barron’s

What separates the industrys most successful advisory firms from all the others? A key teaching from The 7 Habits of Highly Effective People by Stephen Covey comes to mind.

Covey observes that we begin life dependent on our families and communities for food, shelter, protection, and everything else until we are able to take care of ourselves. But once we have our independence, we often get stuck. We, quite naturally, fight to keep our independence when it is threatened. Yet, counterintuitively, those of us who achieve our fullest potential in life do soby evolvingbeyond independence. We learn to embrace interdependence to become something greater.

Many independent registered investment advisors, large and smalland some hybrid firmshave also evolved into a state of interdependence, one in which they recognize that they can be their best only by proactively embracing their place in a broader ecosystem. But not all independent advisory firms can or are willing to make this evolution, hence the fiercely independent advisory firm, a term that has become a celebrated clich in our industry. Fiercely independent firms reactively engage with the broader ecosystem only as necessary and only as a means to address obvious gaps in their core capabilities.

Before I go any further, let me acknowledge that even the most interdependent firms will, and should, preserve many of the traits of their independence. Independent advisory firms do and should report solely to their clients and themselves and not to third-party shareholders that control how the firm is operated on a daily basis. Independence in this fundamental sense is a good thingas long as it does not preclude interdependence.

So, with that point made, lets see how interdependent firms differ from their fiercely independent peers.

Clients. Interdependent firms understand that they rely on their clients just as much as their clients rely on them. They are willing and eager to adapt and innovate to serve their clients changing needs and will humbly take great measures to satisfy and retain those clients. They will, for instance, readily move out of their comfort zone by adding, or contracting for, less traditional tax, bill-pay, or cash-management services clients may need or request.

Fiercely independent firms, by contrast,believe that they always know best and that it is their clients who need to adapt to the firms service model and capabilitieswhich have sometimes become stagnant, unbeknownst to firm leaders. Obvious examples are firms that are unwilling even to consider adding new services or evolving their investment approach to incorporate broader asset classes, investment vehicles, or investment themes like sustainable investing. Clients who cannot conform are seen as not getting it and are easily discardedoften on the false assumption that they are a lost cause.

Employees. Interdependent firms see each employee as a unique and important contributor to the team, know workers have choices about where and how to pursue their career and understand that their firm is only as good as their team members make it. They provide employees with attractive compensation and benefits, along with clear career paths, training and education, transparency about firm plans and results, and ample opportunities to share their perspectives and ideas.

In the mindset of a fiercely independent firm, just about everyone is replaceable and employees should consider themselves lucky to work for them. These firms also tend to view a select group of employees as essential and all others as non-essential and their leaders may get carried away using pronouns such as my and mine as opposed to our and ours.

Communities. In his TED talk, How to build a business that lasts 100 years, Martin Reeves of BCG noted that enduring companies see themselves as embedded within a larger community. They know they must work in harmony with that community to ensure their own survival. This construct lends itself well to advisory firms. A firms communities are a source not only of clients, employees, and business partners but also of culture, support, and even purpose.

Fiercely independent firms struggle with the notion that they may needtheir communities. And, unlike their interdependent peers, do not see their communities as stakeholders. This belief system may have loosely worked in the past, but in the age of instantaneous information flows and employees and clients focused not only on profit but also on people and planet, these firms inevitably will confront the same pressures as todays public companies already face in this regard.

Peers. Interdependent firms do not see their peers myopically as competitors but rather as potential allies. They join study groups, attend industry conferences and proactively seek out reciprocal relationships. They are inspired by their peers successes and understand that most colleague failures are harmful to the entire industry. Interdependent firms also have a special perspective on industry consolidation. They pursue mergers not to be larger but to be better. They see strategic transactions as an efficient means to add new ideas, capabilities, and team members, as well as other synergies that extend beyond mere size, ego and dollars. They believe that mergers will lead to long-term sustainability, a status that organic activity alone may not activate because it is typically too insular.

Fiercely independent firms that do not share or communicate well with others become inward-looking and staleusually without any awareness of having achieved that state. If they pursue any form of consolidation, they do so primarily to solve a short-term problem, make money, assuage egos, or avoid a forced sale in the future.

Partners. Interdependent firms avoid thinking of custodians, technology providers, and other business partners as mere vendors. They understand that their own success will be enhanced by building a network of strong, symbiotic third-party relationships. Interdependent firms even see regulators as allies. They know that a healthy ecosystem, in which all firms play by the same rules and in which clients feel the greatest confidence and security, is good for everyone.

Fiercely independent firms limit their relationships with third parties and see vendors as working for, not with, them. They tend to see regulators as obstacles who dont understand how business is done.

Gandhi said, Individual liberty and interdependence are both essential for life in society. In a sense, the same is true for independent advisory firms. Their independence is an important differentiator, but the best firms also embrace interdependence as the most powerful differentiator of all.

Michael Nathanson is chair and CEO of The Colony Group. He hosts the Seeking The Extraordinary podcast, which aims to identify, understand, and explore the undiscovered world of the extraordinary. He is a co-author of the book Personal Financial Planning for Executives and Entrepreneurs: The Path to Financial Peace of Mind. He is dedicated to bringing meaning and joy to the lives of The Colony Groups clients and team members by fostering a culture that values lifelong learning, cultivates innovation and offers opportunities to live lives full of passion and purpose.

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The Interdependent RIA: The Next Stage of Advisory Evolution - Barron's