From the October 2017 issue of Investment Advisor • Subscribe!

Runaway CEOs: The Billion-Dollar Question

To grow their firms beyond $1 billion, owner-advisors need to stay focused

In my Aug. 10 ThinkAdvisor.com blog, “The Terrible Twos: The Key Decision Point for Advisory Business Growth,” I wrote about owners of independent advisory businesses who want to grow beyond $2 million in annual revenues. At that point in a business-growth curve, there is one key decision to be made, and it's a personal one for the business owner: Do I want to become the chief executive officer?

You’re probably asking yourself whether this is a trick question, but I can assure you that it isn't. Being a CEO is a very different job than being a financial advisor — even an owner-advisor. In my experience, many firm-owners-turned-CEOs quickly find that they don't like their new job.

(Related: The Four People Advisors Need on Their Team Before Trouble Starts)

With that said, if your personal goals include growing your business to $1 billion in client AUM, your options are limited. Yes, you can bring in someone from the outside or elevate one of your partners. But in my experience, it's very difficult for the owner to completely stay out of day-to-day management decisions. The resulting confusion can seriously damage your business.

If you decide that you’re going to assume the CEO role yourself, you’re still going to find some bumps in the road. Not only are you going to have to stop working directly with clients, you’re going to have to change your attitude toward your business and your role in it — and it's going to be a very different role. That means that you’re going to have to do some changing, too.

As I wrote in the above-mentioned blog, when you become CEO of a growing advisory business you have to say goodbye to working with clients, being a financial advisor, being a revenue producer and having a flexible lifestyle, and you’re going to have to say “hello” to a much more demanding full-time job.

CEOs don't actually do anything. Instead, they make decisions about what other people are going to do, or try to do, make sure those people have what they need to do it, and then help them evaluate the results. For many advisors — most of whom tend to be “doers” — this role can be very frustrating.

What's more, when you’re managing a bigger business and trying to grow it even larger, you’ll need to be accessible almost 24/7; which can put a crimp in that flexible lifestyle that many owners of smaller businesses are used to having.

If you’ve decided that the CEO role is for you or that it's worth it to grow a $1 billion business, then here are a few suggestions on how to make your new job a success:

Make the mental transition to your new job. To help my clients understand how their role in the business is going to change, I take them through a simple exercise. I ask them to draw two stick figures on a piece of paper, one right next to the other. Then I ask them to write “asset” above one figure and “leader” above the other. The assets in your business are the advisors, who bring in the revenues. The leader is the person who makes the decisions about who does what and when. Then I tell them: “To get to $1 billion, you have to have both. You can be one or the other, but you can't be both.”

Don't run away. I know, sounds like I’m kidding. Sadly, I’m not. In my experience, most CEOs in the advisory industry are runaway CEOs: They don't know what they are doing in their new jobs, so they run away from it. Some go back to working with clients, others play golf or find other reasons to be out of the office most of the time, or they are so overwhelmed that they don't do anything at all — they won't manage the business, look at the financials, focus on training or talk to their team members.

I know that CEOs are running away when they push their staff away and make decisions quickly, without any input. They are trying to convince themselves that their decisions are good ones, but are afraid to ask for feedback because someone might disagree. They run away so they don't have to take responsibility, and they blame other people when the outcomes are bad.

Obviously, this is a recipe for disaster — or, if your team is extraordinarily good and loyal, for mediocrity. Either way, it's not going to get you and your business to that $1 billion mark. So, cut yourself a break, accept that you’re in a new job and that it will take a while to figure it out, and ask for all the help you can get.

Understand that your new job has a new focus. Even though you were running the business before, the job was much easier. For one thing, it was smaller. For another, your focus most likely was on client service and generating referrals.

Now the business is bigger, and you want to make it bigger still. That's going to take you in new directions, with new goals and new challenges. Embrace the challenge and grow into your new job.

Accept that what got you here isn't going to take you there. If it could, you wouldn't have to make any changes at all. But trust me — it isn't. You’re going to have to do things differently in the future than you have in the past. It also means that you’re going to have to treat your first six months or so in your new job as a “learning experience.”

Make your business the priority. This is probably the toughest part of transitioning to the CEO role, and frankly, it's why the job is not for everyone. Most independent advisory businesses were started to provide a flexible, controllable, comfortable and profitable work environment for the founders. Nothing wrong with that. But to grow an advisory business to the $1 billion mark, what's good for the business itself has to become part of the equation.

For instance, a greater portion of the cash flow may need to be reinvested, or the business may need to be run more efficiently, which can mean taking a hard look at the profitability of some clients, the productivity of some employees or the wisdom of some expenditures.

One of the problems with many advisory businesses is that they generate so much cash flow that owners get into the habit of simply throwing money at problems. When the goal is substantial growth, it's the CEO's job to solve problems with his or her brain rather than with the pocketbook and to focus the resources of the business on reaching that goal, which may entail some changes.

Often these changes result in greater efficiencies, which are usually popular with everyone. But sometimes they require decisions that aren't so well received. Some employees are very popular but not very productive. Some perks are popular, but rather expensive. Some expenditures are traditional, but fairly extravagant. It falls on the CEO to direct the firm's resources toward reaching its goals, and sometimes money needs to be redirected to help out. It's the CEO's job to make these tough calls and to get everyone in the business behind them.

Build your own team. Making hard decisions at the top is a hard job and not always a popular one. To maintain your equilibrium, it's important to keep your goals and priorities clearly in mind. To help business owners do that, I recommend they build their own team of advisors, comprising a lawyer, an accountant, a compliance firm, a business consultant and a financial advisor, and to get their advice frequently. Knowing that you’re on the right track can be very comforting when making unpopular decisions.

Get a social life. For many firm owners, one of the hardest parts of being CEO is that making decisions that are best for the business doesn't always make you friends. Yes, it's better if your employees like you, but that doesn't really make you friends. I find that it's very helpful for owner CEOs to have a healthy social life outside the office. That keeps the already complex dynamic of making hard decisions from being further complicated by personal feelings.

To grow beyond a small business, independent advisory firms need someone who is highly responsible and capable of directing that growth. They are called CEOs. It's not an easy job, but to reach the $1 billion mark, it's an essential job.

--- Read Pump the Brakes: Why You Should Wait to Build a Billion-Dollar Firm on ThinkAdvisor. 

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