February 21, 2012

Advisory Boards Bring the "Wisdom of Crowds" into Your Practice

Could a diverse group of 5,000 people that know nothing about the advisory industry make better business decisions than a single 30- year industry veteran?  Setting aside the coordination needed to collect and interpret 5,000 opinions, the short answer is "yes."

Now back to the world of actionable advice!

You can improve the quality of your decisions by putting together an advisory board for your RIA firm. In his book Wisdom of Crowds, James Surowiecki shows how a collection of diverse individuals can make better decisions than any one individual (even when the "crowd" is made of of non-experts).  Here's a video clip that explains his ideas.

Your advisory firm can improve decision by forming (and using) an advisory board. Here are some thoughts on how to do each.

Forming your Advisory Board

  • Confirm your motivations behind forming you advisory board.  For start-ups or newer RIAs, you may seek advisory board members that: add credibility to your new firm or investment process or serve as subject matter experts in a particular part of your service offering.  For established RIAs, you may be more interested in gaining insights from people that have experience in building and managing advisory practices.
  • In most cases, advisory boards that are between three and five people work best.
  • Be sure to select advisory board members that will add diversity to your decision making.  Don't pick clones!  No additional "wisdom" will come from a group of people that see the world or approach problems in the same way.
  • When approaching each candidate, be clear about what role you would like them to play and the circumstances where you would likely utilize them.
Using your Advisory Board
  • Frequency of your interactions with each advisory board member will likely vary depending on their role and the issues that come up for your firm.
  • Communications with your board may take the form of a simple phone call to discuss a particular matter.  Alternatively, as larger issues issues or key decisions come up, schedule a conference call with your full board to solicit their thoughts.
  • When soliciting their opinions, be sure to limit your role to laying out the issue.  Leave ample time for them to react/respond.
  • Consider establishing a regular communication program that is targeted towards your advisory board, for example a quarterly business update.  This way you can ensure that each advisory board member feels "connected" with your firm.  And when you reach out to them for counsel, they will have a clearer sense of context.
  • There are two schools of thought on compensating advisory board members.  For RIAs, the use of cash or equity compensation for advisory board members is certainly feasible, but it opens up a number of compliance issues that may not be worth the trouble for you or your board members.  Personally, I find that effective boards can be made up of successful industry professionals that are motivated by the non-economic aspects of helping an entrepreneur build a business.
I am a firm believer that decisions making is improved when multiple viewpoints are incorporated.  When done right, your RIA's advisory board can become an incredibly valuable resource to your firm.


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