I recently overheard an advisor bemoaning the difficulty of taking his firm to the next level. "How can I create a career path for my staff when I only have 10 people in my firm?" the advisor asked. "Especially when I'm already doing everything from making rain to managing the biggest client relationships."
He went on to say that hiring raw talent and developing it was the least appealing of all his options for growing capacity. He also expressed frustration that he had been trying to recruit experienced advisors to his firm for years, only to be rebuffed or to discover that they weren't a good match.
Such firms are like awkward adolescents: Their clothes don't fit and their skin is breaking out, making it harder to get a date. Without a vision for what they wish to become or the ability to pay as much as larger organizations, firms struggle to bring in top talent. With many conflicting demands on owners' time, building a framework falls to the wayside. Often these firms have no human capital strategy, making the recruiting process even more challenging. How do you inspire excitement in your practice and decide who would fit in without a clearly articulated vision beyond the desire to get to $1 billion of AUM? Unfortunately, this is the reality for many in the advisory business today.
This plaintive cry for help is commonly heard from advisors whose practices are both too big and too small: too big to be managed by the current team, and too small to compete for experienced talent. Ironically, while many "tweener" firms desperately need to be managed professionally, the owner often has a death grip on every activity, thereby inhibiting maturation of the business. It's painful to observe these owners. They can't get out of their own way and, in many cases, they are not demonstrating the patience and long view that they recommend for their clients.
Now imagine taking a long view. What if the advisor quoted above had not only kept an eye on possible tuck-in mergers, breakaway brokers and mature advisors from other firms, but also had brought on and developed promising individuals with degrees in financial planning or finance and a year or two of experience at other firms? Would his firm be farther ahead?
It is easy to be critical from the comfortable perch of a larger organization, but as a former small business owner and manager a couple of times over, I know that among my biggest mistakes was trying too hard to bring in big hitters instead of investing in the development of those who already believed in the vision and culture of the organization.
Successful veteran advisors have proven that they can generate new business and make money. When they began their practices they were loaded with energy, but short on wisdom. Now, having been in the business for 15 years or more, they have less energy, but tons of wisdom. Wouldn't it be exciting if they could begin the process of transferring what they've learned to others, teaching them how to harvest referrals from existing clients, develop centers of influence and clarify a strategy for cultivating the next generation of clients?
As the management guru Peter Drucker once said, "Plans are only good intentions unless they immediately degenerate into hard work." Leaders of advisory firms have an opportunity to build critical mass in their business through a reduced dependency on the owner. As with the processes of attracting clients, delivering advice or managing money, mentoring staff requires a disciplined approach.
After reading dozens of studies and talking with thousands of advisors, it's clear to me that the best performing advisory businesses—as measured in sustained growth, strong profitability and a place where others want to work—have several important things going on:
- Clear positioning: They know who their optimal client is and have built a client experience around it.
- A structure that supports their strategy: They have designed their business and their processes to help them serve their optimal clients effectively and efficiently.
- Managing to profitability: They pay attention to all the key levers of profit management, not just cost control.
- A human capital plan: They have aligned hiring and talent development with their vision and structure.
This last point is critical for those "tweener" firms that want to shed their skin and become stronger for the next phase of their business.
First, outline the types of clients you wish to attract to your firm. Understand the people and roles required to achieve your specific goals. Then construct a career path, training objectives, a performance evaluation process and an implementation plan to help draw talent to your firm and develop these individuals into high-performing contributors.
Once you have a reasonably clear idea of how the business needs to be built out to achieve your vision, hiring becomes more obvious. Evaluate current staff to decide if certain employees are ready for new responsibilities, and help them to refine their focus. Then determine what skill set and experience level you need to bring on. Remember to hire somewhat ahead of the need; it generally takes 18 to 24 months for individuals to get to full productivity within an advisory firm, so it's important to keep a long view on your human capital investment.
With a laser focus on managing to profitability, determine the break-even point for hiring people; this informs you of how many new clients, generating how much in annual revenue, are needed to cover that cost. Rarely does a business get instant payback on a new hire, so manage your expectations and plan for the future.
Keep profitability in mind as well as culture; it is important to create a reward structure that reinforces the right behavior. If your goal is to get to a 25% operating margin and attract 50 new clients, yet to do so in a team environment, then the compensation plan will need to balance base salary, short-term incentives and long-term incentives. If your goal is to drive new sales, then the compensation plan for certain individuals likely will be heavily variable and short-term oriented. There is no one "right" answer, but the plan cannot be created without the end in mind. This is critical when competing for talent who may be offered signing bonuses elsewhere. The cost of the signing bonus must be incorporated into the margin over a reasonable period of time, and the impact of the bonus needs to be evaluated in terms of how the individual recruit will behave with a chunk of money in his pocket before he even gets started.
As an advisory practice progresses through its life cycle, owners eventually reach that crossroad where they have to decide if the business is going to revolve around them as a rainmaker, or around their vision as a business leader. Either decision is OK, but it's best to make a commitment one way or the other. Power through the growing pains and an awkward duckling may well transform into a healthy, graceful, mature firm that can soar.