The progress that accompanies growth often doesn’t come smoothly for financial advisory firms. In fact, as we at Vanguard watch our clients become more and more successful, we see a fairly predictable, and dare I say “natural,” progression of challenges they routinely must face.

How firms respond to these challenges makes a huge difference. As advisors use ever-greater numbers and varieties of ETFs and watch their books of business expand, the very nature of their trading changes. Transactions that were simple to perform on a small scale become more complicated—and potentially much more costly if not managed correctly—when scaled up to significantly higher levels.

In this blog, I’ll lay out some of the challenges that come with getting bigger, and I’ll provide specific strategies advisors can adopt to get around those challenges.

Scaling to size

Many advisors start off using ETFs on a small scale—either because they’re new to ETFs or because they’re just beginning to build a book of business. At first, the order sizes formost ETFs these advisors use will be fairly small. The large majority of ETFs will have enough onscreen liquidity (also known as secondary liquidity, since it represents the shares that are available and readily visible on the secondary market) to accommodate smaller order sizes.

In addition, advisors tend to favor the more popular ETFs, which, by virtue of their heavy trading volume, will almost always have ample onscreen liquidity to facilitate smaller transactions.

At this stage, all is well for the advisor, and it’s easy to see the benefits of using ETFs in his or her client accounts.

But what happens when the orders start to get bigger?Say, on the scale of 10,000 or 20,000 shares bigger, or more?

This is where my team, which is often brought in by advisors to talk about the trading basics and rules of the road, offers its thoughts to advisors on engaging block desks for trading. We strongly believe it best to involve the desk early and often in your investment process (before you absolutely need it). If you have an order that is eligible to route to your block desk—typically, at least 10,000 to 20,000 shares—pick up the phone and call.

Helpful in-house resource

For the uninitiated advisor, engaging a firm’s block desk can feel like an overwhelming, confusing, and perhaps even intimidating experience. But it’s more helpful to think of it as anew opportunity—one that promises to open up many options an advisor may not have known even existed.

Even if it’s only to bounce an idea of yours off of them, block desk staff can serve as an amazingly helpful resource. The block desk traders have dealt with most ETFs and can help you understand the cost of liquidity for each ETF. This can provide you with a realistic view of the cost to implement an idea for a client. This know-how becomes more and more critical as investment orders continue to increase in size. A poorly executed trade can result in sizable additional costs. If large enough, the trade can also have a substantial and undesired influence on the market. This tends to occur with a lower volume product coupled with a poor trading strategy,such as using market orders. The reality is, almost all ETFs have sufficient liquidity when the order is managed properly.

Believe it or not, it’s actually a good thing when advisory firms have concerns such as these on their radars. It means the practice is thriving and winning more business. Among the solutions is to build a scalable process to manage the now larger book of business.

This usually takes the form of using a set of model portfolios that allow an advisor to continue taking on business.

Trading up

The final part of the small-to-big evolution arrives when the business becomes more institutional in nature. By that I mean there will be large teams in the wirehouse banks or more specialized staffing in RIA firms—in both cases, those individuals will be assigned the specific task of managing trades.

For example, these specialists may have to put a full-fledged plan in place to ensure an orderly rebalance trade—simply because the orders they work with are so large.

While a 5% model change might be a simple trade on a$50 million book of business, it could get more complicated and require some thought on a $500 million book of business, and it may require a detailed strategy on a $5 billion book of business. As the trades get bigger, what once took a few minutes could take a full day or more to execute, depending on the asset class to be traded.

For many advisors reading this, the thought of a book of business totaling billions of dollars, and the more advanced trading methods needed to sustain it, might seem daunting. Just keep in mind that there are optimal strategies you can follow to help your practice thrive and grow, no matter what its current size.

Finally, there’s one more resource I invite you to call upon if you invest in Vanguard ETFs, no matter where you are in your firm’s evolution. I welcome you to give the ETF Capital Markets Team at Vanguard a call. We can discuss in detail your individual situation and give you an idea of what your peers are doing in similar circumstances. Get in touch with us through your Vanguard sales executive at 800-997-2798.

Blog by: Brandon Clark, Senior Manager of Vanguard Equity Investment Group.

© 2014 The Vanguard Group, Inc. All rights reserved. Used with permission.