Patterns emerge when you’ve observed enough advisory firms.
The most common patterns involve problems that arise and the way firm owners try to solve them. And the most common — and destructive — problem by far is the growth cycle.
As independent advisory businesses grow, their owner(s) naturally expect to take home more money. More often than not, this doesn’t happen.
In fact, they usually start taking home less. In nine times out of 10, they respond by doubling down on their efforts to grow their firms even larger. (Actually, I’ve never come across a one out of 10 case in which they didn’t try to grow larger, but it’s possible that some don’t.)
What’s more, virtually all owners that I’ve seen then take the same steps to get more growth.
First, they hire a marketing firm to create a plan to attract more clients. Then, they hire people so their business will be ready to handle the flood of new clients.
You can see where this is going. For one thing, marketing firms aren’t cheap, so now the owner is taking home even less money.
At best, marketing is a long-term solution — not a get-rich-quick scheme. Now the firm has more employees, but few, if any, new clients, which really doesn’t help the bottom line either.
Even worse (yes, it gets worse), because the owner failed to identify the real problem with the business, they’ve only made that worse, too.
Remember, the original problem at most firms is that they are growing — which means adding more clients and bringing in more revenues — but their profitability isn’t.
That means, as any good business analyst will tell you, they actually weren’t making money on the new business they brought in. So, by bringing in even more business, and increasing overhead, they actually are exacerbating the problem.
As most independent advisory firms grow, the costs of delivering their client service tends to go up rather than down. That means their “efficiency” goes down and they tend to make less on each new client, to the point where some firms really are losing money on new clients.
This brings us to what I’ve found to be the hardest part of working with independent advisory firm owners: getting them to focus on profitably providing client services. (I’ve come to suspect that this is because most owner advisors are making so much more money than they ever expected to make that it’s hard to get them to take overhead seriously.)
Remember this: To keep a growing business healthy, you must keep overhead down, which means controlling costs.
To get firm owners to focus on costs, I’ve come up with two techniques:
1. Find a “third choice.”
Here’s how what I ask advisors: “If you couldn’t spend more money on marketing and hiring, what would you do to make your business more profitable?”
At first, I usually have to provide a bit of discipline. As in: “No, you can’t do marketing.”
And, “No, you can’t hire any more people. In fact, you can’t throw any money at the problem at all. You have to come up with choice No. 3.”
But, sooner or later, the light bulb goes on, and they start thinking of ways to make their business operate more efficiently. It’s usually a miraculous transformation.
All of a sudden, they’re coming up with all kinds of good ideas for reducing costs and increasing productivity. It truly can become business innovation at its best.
2. Focus on the profitability of your business.
I’m not sure why this is, but we humans tend to perform better when we “keep score.”
Most advisory business owners tend to focus on revenues. But that’s the wrong yardstick. Again, more revenues are only beneficial if you make money on them. If not, they just represent more work — and lower cost efficiency.
To make sure that your business is healthy and growing, keep an eye on your profitability and profit margin. If those two numbers are going up, you’re on the right track.
If not, force yourself to look at choice No. 3: increasing profits without adding clients or employees.