The Benefits And Structures Of Ensemble Practices

A Practice Management Expert Unpacks Ensembles, Including Organizational Structures, How To Form Them And How They Can Help With Succession
Kenton Shirk, VP, Practice Management, Commonwealth Financial Network
Kenton Shirk, VP, Practice Management, Commonwealth Financial Network

The volume of M&A barely slowed last year even as the Federal Reserve topped its Federal Funds Rate at 5.25% and other industries experienced a pullback. Advisor recruiting also continues at a robust pace, driven by factors such as the need for succession planning and economies of scale.

M&A and recruiting frequently lead to different types of business structures regarding employment, ownership, financial flows and more, often tailored to the needs of individual advisors or teams of professionals. The ensemble is one such structure, in which a team of advisors operates through a combination of both cooperation and autonomy, frequently varying in the details.

We spoke to Kenton Shirk, VP, Practice Management at Commonwealth Financial Network, to understand the options available to advisors in ensembles, the best way to form an ensemble practice and how ensembles can help in succession planning.

WSR: What is the best organizational structure to assemble for an ensemble?

Shirk: There are many ways to structure a successful ensemble. Some multi-advisor firms share a brand, operate in the same space and share expenses such as reception. Like a coop, this model gives each advisor maximum autonomy, allowing them to operate as they desire, but each practice functions more like a solo practice than an integrated firm.

Most commonly, ensembles are highly integrated in terms of how they operate and brand themselves, but siloed in terms of ownership. This is ideal for owners who want the benefits of operating as a team with shared resources while ensuring each advisor owns their book of business.

Ensembles are ideal for owners who want the benefits of shared resources while ensuring each advisor owns their book of business.

In equity-based ownership structures models, all clients are considered the firm’s clients and the partners own equity in the overall entity. A formalized financial model and legally binding governance attached to a legal entity will be required. This model aligns everyone to the success of the firm and creates a model that can persist in perpetuity.

Enterprise firms that have grown to over $750 million in assets operate at a significant level of scale and complexity and often need to incorporate a mix of additional organizational factors such as business lines, branch locations and affiliation options.

WSR: Are ensembles better built through M&A, recruiting, tuck-ins or another method? What makes that method superior?

Shirk: All of these are great growth drivers – the key is to be intentional. Firms often stitch together a mix of deals that result in an overly complicated business model becoming difficult to scale. Instead, identify the inorganic drivers that you want to prioritize, fine-tune your value proposition and then design a profitable business model. Most importantly, be confident saying “no” when an opportunity isn’t aligned with your strategy.

The upside of an acquisition is you take full control over the acquired assets and you assume the full value of the seller’s practice in exchange for cash or debt financing. The downside is that it’s a seller’s market so it may take a long time to find and win a deal.

For a merger, there needs to be significant alignment regarding vision, compensation, ownership structure and leadership roles. The synergies of merging firms can amplify a firm’s value and impact, but it can also significantly detract from productivity if the merging partners aren’t a good fit.

Finally, recruiting established advisors, or tuck-ins, can be successful when it’s the right match for both parties. These discussions look and feel more like a merger so it’s important to be clear on the strategic and financial value of adding a tuck-in to your firm to ensure it’s worth the time, effort and risk.

WSR: Is joining an ensemble a good alternative for an advisor in need of succession planning? What types of advisors would this work for, and who should consider a different option?

Shirk: Partnering with an ensemble is an excellent alternative for advisors who need a succession plan, especially since ensembles tend to have the advantage of shared resources giving them the ability to comfortably finance an acquisition. They also may have multi-generational teams, giving them the necessary bench to deliver a great experience to your clients long in the future.

A partnership with an ensemble could be as simple as forming a continuity agreement with an ensemble in the short-term, continuing to work independently and eventually selling your practice to that firm.

Partnering with or selling to an ensemble could offer a more flexible and longer-term exit.

I talk to many advisors who aren’t quite ready to retire. Formally partnering with or selling to an ensemble could offer a more flexible and longer-term exit. The key is to make sure both buyer and seller are aligned in terms of firm direction, methodologies, roles, responsibilities and timelines.

Even if succession is far in the future, joining an ensemble now ensures a smooth transition for your clients so it feels less abrupt than selling your practice to another firm. You might also leverage the shared resources of the ensemble to grow your value faster than you could otherwise achieve on your own.

Michael Madden, Contributing Editor and Research Analyst at Wealth Solutions Report, can be reached at mmadden@wealthsolutionsreport.com.

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