There is an old adage that says "when you stop growing, you start dying." Caught in a low-growth cycle, many advisors are looking for ways to stimulate growth in their business. They are pushing a lot of different buttons and pulling a lot of different levers to try to raise the top line.
Some are pursuing mergers and acquisitions. Others are exploring new lines of business. Many are adding capacity, meaning new advisors and staff. Still others are exploring the opening of another office in a different location.
The hidden risk in trying to expand beyond one's core is that unmanaged growth can be as dangerous to an enterprise as no growth at all. More businesses go bankrupt in their growth phase than in any other phase. Why?
In fast-growing manufacturing and distribution companies, when a balance sheet swells with the acquisition of fixed assets and inventory, funding for that business may become a challenge. In service businesses such as law and accounting firms, accounts receivable and work-in-process also increase, straining cash flow as the firm waits to collect on their efforts.
For advisory firms, fast growth can trigger material cash outflows well before the inflows are realized. Cash may be consumed in the form of down payments for acquisitions, additions of new people, leasehold improvements, and the purchase of computers and peripherals for new staff. Accelerated marketing efforts can also soak up cash as advisors embark on advertising, public relations, and seminar initiatives to drive new clients to their practices.
Watching the bank account go up and down is an easier and more intuitive task for the typical advisor, so managing the financial aspects of growth may not create too many surprises (though in my experience, it still frequently happens). Like hypertension in humans, however, there is a silent killer that sneaks up on managers of advisory firms. During periods of rapid growth, firm leaders suffer from the strain on their span of control.
In other words, not only is there a physical limit to the number of clients any one person can manage, there is also a physical limit to the number of direct reports one can manage. As advisory firms grow, the principals become farther removed from the minutiae and must trust others to do things right. Unfortunately, structuring the business properly to capitalize on growth is often an afterthought, and may not occur until the practice has a near-death experience.
A primary reason for organizational strain is that efforts to drive revenue are often pursued randomly and opportunistically. Eager to make an immediate impact, owners of advisory firms often react to perceived opportunities instead of carefully sifting ideas through a strategic filter.
Strategy is not just about marketing. Strategy should also inform your investment in technology, people, processes, positioning and the client service experience.
Recently, the leaders of an RIA firm revealed to one of our relationship managers that they were thinking about expanding their offerings to include insurance. They properly realized that adding a product sales capability would dilute their positioning as a fee-only advisor, but rationalized that insurance solutions almost always arise with their clients. Up until this point they had outsourced the insurance sale to a trusted broker. But what was frustrating them was that while they did all the analysis on behalf of their clients, the broker was making a substantial sum off the sale of the insurance products. They wondered whether they should enter into a joint venture with this broker in order to derive more income from this source, or possibly even add the capability to their own firm.
Putting their choices through a strategic filter in this case generated more critical questions. In particular, how would they measure the success of their initiative? What kinds of capabilities would they need to invest in to ensure they could deliver this service as consistently and as well as they currently deliver financial planning and investment management? Further, the insurance business requires a different level of compliance oversight and licensing, adding a layer of complexity to the business. There is also the question of whether their fiduciary standing would be more difficult to manage if they were paid by the product instead of by the client. These complications are not insurmountable, but they are real issues that represent the strategic thought process one should undertake before grabbing additional revenue.
If this firm decides to enter a strategic alliance, somebody inside the firm would have to be accountable for the outcome, including having a deep knowledge of insurance (cost, benefits, applications, and negatives) and the optimal circumstances where it should be applied. I have seen far too many instances where advisors adopted strategic relationships and then abdicated responsibility for the outcome to the strategic partner.
Also of concern is the quality control process. What will happen when more of the firm's advisors access this source of income and do their own deals with the insurance provider? The more advisors the firm adds who might also dabble in the insurance realm, the greater the potential for loss of control over the quality of the firm's advice and solutions. Not having a clear control or quality control point, even in a well thought-out alliance, adds risk.
It is tempting to view a strategic alliance as a low-cost, leverageable approach to doing business. However, most strategic alliances are short-lived: either they work well and one partner absorbs the other, or they work badly and fail. The biggest reasons alliances work badly center on the lack of an approved set of procedures, limited communication around the issues and opportunities, and the failure of one side (or both) to make somebody accountable for the results of the relationship.
In the end, while this particular advisory firm opted not to pursue the insurance route, some RIAs do dabble in insurance on an as-needed basis, and others do this more systematically. Income from this source is highly unpredictable from one year to the next and tends to be more opportunistic. But when it's good, it is very, very good. As a result, firms who do this successfully build their economic model around the advisory business and look at the insurance sales as gravy.
The upside of this possible initiative is more income. The downside includes more risk and a slight compromise to the firm's brand as fiduciary advisor, and added compliance oversight. The demand on resources is great as a firm must formalize implementation of the insurance sales process and hold people accountable for the revenue to be generated from it. The firm's advisors must fully understand the solution and use it wisely.
The addition of a new service or product line is one of many growth options. Some advisors have acquired tax preparation practices, or merged capabilities into their firm that are better aligned with their positioning and goals. These might include business consulting, estate planning, or the creation of investment partnerships.
But each decision ultimately comes down to a resource question. First ask yourself, "Which business are we in?" Then decide if you can do what you need to do to make a new strategy successful. Just adding more responsibility to your current staff or creating a brochure that promotes your new activities will not help you to attain profitable growth. In fact, these efforts can be a distraction at best and a business killer at worst.
In the smooth seas leading up to the market cataclysm, advisors were fooled into thinking that a 20% annual growth rate was normal and that added revenue came organically so there was very little need to add substantial resources to service the additional revenue.
Now that advisors are facing headwinds, a new tack must be taken. Carefully consider how you will marshal your resources in a way that creates an impact and does not threaten the continuity of your enterprise.