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Managed Accounts and Practices vs Businesses

By 7 May 2015November 8th, 2022No Comments

There are some increasingly clear lines being drawn in the rapidly growing world of managed accounts. One of them relates to whether wealth managers are practices or businesses. “What ?” you may ask, or “Why does it matter ?”. Let me try and explain:

 First of all distinction between a practice and a business. For this article, lets call a ‘practice’ as a group of people (perhaps in partnership), who invariably are in work of servicing their clients, perhaps joining together to help each other out and form a larger footprint than they would themselves. Practices often are named after their principals and may be ‘partnerships’ of some form.  Lets call a ‘business’ as something that is usually incorporated, usually creates a ‘product’ and is often about creating an operating model that can grow, scale, and possibly ultimately be sold as an operating entity irrespective of the owners of the business.
Some key differences here:
  • Practices are often charcterised by their principals and often have ‘succession’ issues as often a lot of the value is lost when the principals leave (who would go to Smith and Partners if Mr Smith may no longer be there ?). Because of this, they often trade at values or multiples of profit / revenue that are lower than businesses.
  • Businesses are often characterized by brand and their product, which can be passed on from owner to owner. Businesses are often less ‘personal’ but fulfil an important utility value to their customers. Because of such, they trade at larger values in terms of multiples of profit and revenue. They have broken often the link between owner and management.
 What has this to do with Managed Accounts ? Well in some cases quite a lot, especially in terms of valuations of the firms that are providing or using such. The key point is that the firms that are using other firms managed account offers are more like ‘practices’ and those creating and operating their own managed account offers are more like ‘businesses’. Clearly (and often) there are hybrids also, which in many cases have, or are considering, splitting such operations between portfolio manufacturing operations (ie a business) and dealing with clients (ie a practice).
We have noticed this with some of our clients recently who are reporting that as they transition from  being a ‘practice’ to having a ‘business’ with a managed account portfolio ‘product’ that can be promoted by both themselves and sometimes others, that they are being viewed with higher valuations.
So if you are involved with the creating or selling of managed account portfolio offers, perhaps ask yourself whether you are in a practice or a business, and ask yourself is what you are doing currently the best way to maximize the value of your skills and assets, and if appropriate how to turn your capabilities into a ‘business’ that may have considerably more value than just the servicing of clients.
At Financial Simplicity, we would like to think that we very much recognize the differences between ‘practice’ and ‘business’, and continue to help firms make the transition to create value for their owners.
In summary:
– Practice – often promoters of other providers’ managed account offers, or service clients on a 1 to 1 basis

– Business – often operators of a managed account offer that can be promoted via client attraction and servicing           channels, or other firms (often practices)

Just think how valuable a business would be if it could manufacture a managed account portfolio product that was tailored to each investing client ? That’s practice level service with business level value, that’s Financial Simplicity !

Thankyou to my friends Creel Price and Matt Church for some of the background around practices and businesses.

Stuart Holdsworth

Author Stuart Holdsworth

Stuart has over 30 years of experience in the use of technology for the strategic competitive advantage of businesses in the financial markets and investment industry.

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