From the July 2017 issue of Investment Advisor • Subscribe!

Not So Fast, Tortoise

Here are the steps that every owner of a firm should take before unleashing a new growth plan

Sometimes you have to step back to go forward. Sometimes you have to step back to go forward.

I’ve been working with the owners of independent advisory businesses for more years than I care to think about. Yet I’m still continually surprised that most firm owners resist building a solid foundation for their businesses before implementing new strategies to grow their firms.

I’m surprised because this is essentially the same conversation that financial planners and other financial advisors have with their clients — who are usually all too eager to implement a new investment strategy before creating a sound financial plan to base it on.

As you may have guessed, this column is about creating a sound business foundation. But, before your eyes glaze over, let me quickly say that I’m not talking about a traditional foundation for an independent advisory business that includes creating finance, technology, sales, back office, client service, advisory, financial planning and portfolio management departments, as well as a strategic plan, vision, mission and a timetable, etc. Instead, I’m talking about a different foundation — what we might call a foundation for the foundation. Believe me, this is a tougher notion to sell to owner-advisors.

Slingshot Approach

Just as with advisory clients, firm owners are excited when they start working with a business consultant. They’ve done some soul searching, decided they need help to reach their goals, made a big (and not inexpensive) decision to get that help and are just raring to hit the ground running. Then I come along, suggesting that they have to take a few steps backward before they can move forward.

The reaction is almost never pretty — even when I give them my “slingshot analogy” about having to pull back before you can let go and shoot forward (go figure). In fact, I’d have to say that most of the time, they freak out.

Years ago, when I was newer to the consulting business, I would sometimes cave in and go along with their demands that I help them “just start growing.” But experience — often painful — has taught me that skipping the pre-foundation step not only makes my job much harder, it greatly lengthens the time it takes to grow an advisory business to target levels; plus, it greatly reduces the chances for achieving that level of success. Consequently, I’d estimate that 95% of my work with advisory firms is about convincing them to build a solid pre-foundation, and then helping them build it.

A large part of the push-back that I get when asking a firm owner to step back and build a pre-foundation is what seems to be the widespread belief that growth is the solution to a business's current problems, as in: “If we were just bigger, with more revenue, then we could easily solve all these problems.”

What owners with this mentality (and its almost all of them) don't realize is that growth comes with a large set of new problems, ranging from work overload at every level to systems overload, hiring, training and adding new levels of management.

Many businesses that had already solved their old problems still struggle with these new ones. Businesses that are planning on solving both their old problems and their new ones are setting themselves up for failure, particularly because some of these old problems can create substantial operating risks. Here are four steps for setting your firm up for success:

1. Recognize where your firm is today. I realize that this seems so basic that it sounds trivial. But in my experience, being self-aware of one's business isn't any easier than being self-aware in your broader life — and how's that coming along?

Owners usually have a lot of ego tied up in their firms, which often makes it hard to look at their businesses objectively. I can't tell you how many firm owners I’ve come across who want their firms to be different in some way — bigger, more profitable, happier, easier, etc. — but are absolutely unwilling to do anything differently from what they are currently doing.

This step is about adopting the right mentality. Yes, I know that you’ll be anxious to get started building your new firm, but try to remember that in most cases your “new” firm will be built on the foundation of your old firm. So, it's probably not a bad idea to take a hard, honest look at what you currently have.

Do you have the right people? Are they in the right jobs? Do they have enough of the right training? The right equipment? Do you have the right clients? Do you provide the right client services for those clients? Do you have the right strategic partners or other outside support?

Once you’ve answered these questions as honestly as you can, you may have to decide to do something about some of these issues. You can always choose to fix existing problems later, but in my experience, with a few rare exceptions, it's almost always better to fix them now so you and your firm can move on.

2. Manage risk. When you’re building an advisory firm, your inclination is to take almost any client who can fog a mirror. But if you want to position your business for substantial growth, you should take a more strategic approach — which includes managing your risk. For most independent advisory firms, their biggest risk is a lack of diversification in their client base.

Yes, I know that's it's usually more operationally efficient to focus on clients who have some similarities in both their financial lives and their financial needs. What I’m talking about is diversifying by client size.

I’m often surprised to find that many advisory firms — even larger firms — are generating a significant portion of their revenues (20% or even higher) from as few as two or three clients. Perhaps you can see the problem here; the loss of one of these clients can create a hit to revenues greater than many market drops. Because wealthy clients are often friends, losing one can snowball into disaster.

Now, I’m obviously not saying that you shouldn't have wealthy clients, but if you have one or a few clients who represent a substantial portion of your firm's revenue, you have a risk problem. And the way to solve it is to increase your diversification: either by getting some more wealthy clients or by adding a lot more not-so-wealthy clients.

3. Get back to delivering what clients truly want. This is perhaps the hardest thing for most owner-advisors to understand these days, and I don't think it's really their fault. Advisors today are deluged with advertisements, reports, studies and speakers, all talking about what financial professionals “need” to succeed: new technology, marketing approaches, services, financial products, ways to communicate, etc.

The best data I’ve seen tells me that at least 80% of the value advisory clients get is the advice that comes out of their advisors’ mouths — not from online portals, the Vault, eMoney, reports, tweets or blogs. In my experience, however, as advisory firms get bigger, they tend to cut back on the advice and client face/phone time in favor of adding all that other stuff, which they apparently believe they need to add to keep up with the competition. But what they are actually doing is adding costs while reducing client service.

In my view, this is exactly the opposite of what advisors should be doing, especially in this age of downward pressure on pricing. The key to competing — and winning — is to increase advisor/client contact and not to decrease it. Clients don't want stuff. They want advice that will help change and enhance their lives.

4. Focus on your client base to grow. In this fast-changing digital age, many advisors seem to have forgotten that their clients still represent their greatest growth opportunities. Today, most firms do not manage all their clients’ financial assets. In fact, most firms don't even know their clients’ total financial assets.

Before you implement a detailed growth strategy or a fancy marketing plan, take a year and work on discovering the gems in your existing client base. This doesn't have to be complicated. Simply ask clients a few deep questions about additional assets, outside assets, future assets, etc. I’ve found that the reason advisors don't manage more of their clients’ assets is that they never ask about them.

It's far easier to fix a business first and then to grow it rather than vice-versa. The main idea behind building a pre-foundation for your firm is to eliminate as many potential risks as possible and take advantage of existing opportunities. Once you’ve done that, you’re ready to release the slingshot and propel your firm into the future.

--- Read The Key to Success Is Often What You Don’t Know on ThinkAdvisor.

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