Speed, Velocity, and Momentum

The Best Measure of RIA Success

Practice Management

Formula One racing continues its invasion of the crowded U.S. sports market next weekend with the first running of the Las Vegas Grand Prix.  Ten teams will race 50 laps around a 6.2-kilometer track.  The city of Las Vegas spent huge money and made tremendous concessions to host Formula One.  While it won’t rebrand Sin City as the Monaco of the United States, the odds are good that Vegas will successfully monetize one of the biggest events in motor racing, as it does most things.

Formula One racing is a good analogue for money management.  Speed is important, but not as important as velocity.  Momentum is hard work, but also the best measure of success.

Speed Is Exciting

F1 cars can top 220 miles per hour and would be much faster if Formula One rules didn’t limit engine displacement and design, chassis weight, and aerodynamics.  Usually, the cars fielded for an F1 season are very similar in terms of straight-line speed, and even this only matters in races with particularly long straightaways.

In asset management, alpha can feel like speed.  When positions are right, or the investing style suits the economic cycle, or your asset class becomes popular, or mergers cause a few major holdings to get taken out at premiums, it can cause a melt-up in AUM where just onboarding clients becomes a major task.  You stop negotiating fees for new clients, choose which channel to focus on for new business, hit capacity, do a soft close and then a hard close, and enjoy your write-up in the financial press.

In wealth management, speed is the unexpected client win, the well-timed change in asset allocation, the local competitor fading from view, the longtime client of modest means who sells their business for nine figures, the new referral source who turns out to be just as prolific as they promised.  And, of course, market tailwinds: when financial markets are favorable, everything feels right.

Speed is great, but velocity is better.

Velocity Is Important

Velocity involves not just movement, but direction.  Speed is a measure of activity; velocity is a measure of progress.

Beyond the scale of the spectacle itself, F1 racing is exciting because it yields so few surprises.  Passing is rare, and wrecks somewhat more common than passing.  I don’t know much about the Las Vegas circuit, but the course at Monaco, which I’ve driven (in a Volvo station wagon and at the speed limit), is exceptionally narrow.  F1 is not a drag race.  Straight-line speed is important but not as much as control of the car.  Velocity wins races.  And velocity comes down to the skill of the drivers, mechanics, and designers of the car.

In the RIA space, velocity equates to process-driven performance.  It might be disciplined, replicable, teachable investment strategies.  An asset manager might generate positive or negative alpha for a few quarters, but performance within a given style varies less between managers than many people think.  Consistent risk-adjusted returns within a given asset class serve the needs of long-term clients.

For wealth managers, the key to velocity is a commitment to organic growth.  Velocity is achieved by attracting, onboarding, and servicing clients such that AUM growth is the product of normal operations, not markets.

Momentum Is Success

F1 cars are fast, but they are also light, weighing less than 1,800 pounds.  They have speed and velocity, but not momentum.  Momentum in F1 racing is not built with cars; it’s built with organizations.

F1 teams work to build lasting dynasties, but the competitive nature of the field works against them.  The Red Bull team has dominated the past two seasons, ending a streak of eight consecutive titles for Mercedes.  Ferrari is the winningest team in F1 history, but their last championship season was fifteen years ago.  In Formula One, speed is table stakes, velocity is important, and momentum is difficult to build and nearly impossible to maintain.

In money management, momentum can be thought of as institutionalized success, and it’s just as hard to generate.  Think of an established sector asset manager.  How much does their AUM in 2023 have anything to do with their competitive position ten years ago?  We have seen many high-fliers brought low by poor returns, ownership disputes, and staff defections.  Happily, we’ve also witnessed a few recoveries.

It’s an unfortunate irony of the RIA space.  Despite the power of recurring revenue, client relationships end as easily as they begin.  Long-term success, which I’m equating to momentum, is a consistent process of institutionalizing the elements that give a firm velocity.  Team development, succession planning, organic growth, and other key practice management dynamics build momentum.

Market performance gives you speed.  Employee performance gives you velocity.  Practice management gives you momentum.  If you want to be successful, focus on building momentum.