In the late 1980s, I had a conversation with Larry Carroll, a financial planner in Charlotte, North Carolina, whom I regard as one of the sharpest business people in this profession. I asked him what he thought constituted “critical mass” for a financial advisory practice: How big does a practice have to be, I wondered, to achieve maximum operating efficiency? “When you can afford a full-time business manager,” Carroll replied drolly.

I’ve often thought of this exchange when I’m musing about defining the optimal size for a financial planning practice. I’ve struggled with a conclusion, though, because I continue to observe that as advisory practices grow, they hit a series of walls. It happens at certain levels of revenue and it happens at certain levels of staff. Popular wisdom for a long time was to think that when a firm had one senior advisor (the owner) and two associates, plus some administrative staff, and when they were doing about $1 million in annual revenue, that this would be regarded as a “decent-sized” practice. Now, I have concluded that the new definition of critical mass is an advisory firm that does $5 million of annual revenue generated by at least three teams, each led by a senior advisor, supported by at least two associates. But there are two major stumbling blocks to getting there. The first concerns a concept called “span of control,” which is the point at which managers can’t touch their growing staff in a meaningful way and staff no longer feel they are getting direction or attention from their leader. The second involves how to deal with speed of growth and the evolving sense of purpose in a practice.

We’ve already written quite a bit on the financial management aspects of this issue, so this month we will take a more detailed look at the organizational issues that can raise these stumbling blocks on the path to growth.

Having worked in and around the planning profession for almost 30 years, and having looked at thousands of practices, either through our studies or our direct consulting, I have noted that advisory firms hit walls when they get to five people, then eight, then 13, then 21 …. Almost in the manner of the famous Fibonacci sequence (where every element is the sum of the previous two elements), you can project when a firm will hit the wall again. At first it seemed largely anecdotal, but advisors nod their heads when they hear me describe this pattern. There is also solid research to support this hypothesis.

Organizational design specialists attribute this phenomenon to span of control. There are management science studies suggesting that one manager can effectively manage no more than five to seven direct reporting relationships. The implication for advisory firms is that they will need to develop managers along with staff to ensure there is a consistent means of overseeing different aspects of the practice as it grows beyond the ability of owners to manage it.

Unfortunately, this puts most advisors in the position of stepping on the accelerator and the brake at the same time. Each time you add a person, you feel the need to bring in more revenue to pay for this added overhead. When you sell more, you put more pressure on your organization to keep up, thereby beginning the ugly cycle. Does it ever end? Yes, but not without some pain. The cycle begins to ebb at a point much higher than most advisors used to think, partly because of the rising costs of labor, compliance, E&O insurance, and associated expenses.

I now think of critical mass as the point at which a practice achieves optimal efficiency as measured by its overhead expense ratio (all overhead expenses divided by revenue); optimal effectiveness as measured by the productivity of its staff; and optimal profitability. Typically, as a firm’s revenues grow its profit margin shrinks, and then, ideally, the margin starts to grow again. This happens because advisory firms add fixed costs in the form of added staff to support their growing size.

There should come a point in staff productivity when the practice is at optimal capacity, as measured by the ability to grow profitably with each new hire and without a hiccup in the operating margin. Put another way, there is a critical mass point where the organization becomes systematic enough so that the addition of one more person is instantly productive rather than a drag on the bottom line.

Envision a large philharmonic orchestra and compare it to the garage band you played in when you were 17. Adding another clarinet player in the orchestra is a smooth process–everyone is an experienced professional, there is a conductor, everyone knows their role, and has their music in front of them. In my garage band, when Jimmy went to college, the band fell apart because the new drummer never learned our songs. We never gave him any printed music, either, but if he was good he would have learned–or maybe not.

The organizational challenge manifests itself in the financial results in a very dramatic manner. I had a breakthrough in my thinking about this as a result of some interesting analysis done by my colleagues at Moss Adams, Bethany Carlson and Philip Palaveev, for the recent financial performance and operating study they conducted for the Financial Planning Association. As you can see in the “Economies of Scale” chart below, firms do not dip below 35% overhead and become fully efficient until they reach $5 million in revenue.

We have observed that real operating leverage is not achieved until advisors build out capacity in their practices through the addition of professional and administrative staff. Most advisors will agree that they waste time doing things they shouldn’t do. Leverage allows you to delegate work to others so that you can focus on your unique abilities and use skills that have the greatest impact on your business.

Julie Littlechild of Advisor Impact in Canada did an interesting study of this issue. She found that there is a certain amount of time that the typical advisor dedicates to each type of client–top priority, average, or low priority–every year. For a top-priority client, she found that a senior advisor averages three face-to-face meetings, eight proactive phone calls, and an additional 11 hours reacting to inquiries and requests: The total time an advisor spends with a top-priority client is around 20 hours a year. Assuming that you only have 1,800 hours in an average work year, this would tell you that the most relationships you can manage would be 90 (1,800 divided by 20 hours). This also assumes that all you do is client service, which we know is not the case.

In further studies, Littlechild found that the average advisor spends 39% of her time on client service, with the remainder spent on “stuff” like business development, practice management, continuing education, and so on. This seriously constrains the amount of quality time an advisor can devote to client service, and consequently, constrains the ability of the firm to grow.

A Four-Step Process for Growth

Assuming these conditions are even vaguely similar in your business, this research would tell you that without adding capacity, you do not have the ability to grow. Moreover, you can’t afford to grow if you are not producing enough profit to support your infrastructure. What to do?

The first step is to envision what your organization will look like when you implement your five-year strategy. If your strategy calls for dramatic growth, then you will have to consider who will drive that growth, and how you will service the higher volume of client relationships and operations. There are three possible models:

The team approach. The most successful practices organize their professional staffs by forming teams that consist of a senior advisor, a servicing professional, and, often, a client service specialist, which is a support position. The best teams have three servicing professionals per senior advisor, and the best firms have at least two teams. Each client is assigned a specific team. The client relationship manager will manage between 50 and 80 relationships and the servicing professionals will service 100 clients.

The departmental approach. There are many wealth management firms that departmentalize their practices, creating a financial planning department, an investment management department, and so forth. The firms typically have two or more senior partners who are fully devoted to business development and who then hand off the clients to the departments depending on the client’s needs.

The firm-within-a-firm approach. The third option is for a practice to grow by adding principals who represent mini-firms within the larger firm with varying service styles and their own support infrastructures. While often very inefficient, such a pattern is common as it allows a firm to grow easily and rapidly through mergers.

Even if dramatic growth is not in your plans, you should try to envision what servicing an additional 40 clients will imply. Who will be their relationship manager? Do you have capacity to do everything for them? Who can help you service them, and how? This is the second step in learning how to accommodate growth. Write down every stage of your client relationship process and list the staff member who performs each stage now, then list the staff member who will perform it in the future and how much time you expect to average on each stage. The “Inefficiency Expert” table above is an example, though the actual list should be much more detailed.

Our example firm is not well leveraged, and thus inefficient. It shows that the advisor cannot work with more than 60 existing clients (60 x 38 = 2,280 hours). Moreover, the advisor will still need to take care of many other business tasks. So then he must figure out which tasks to delegate. Rebalancing, trading, and statement reviews are obvious candidates.

Filling in tables such as the one above for your various client processes will give you an idea of the staff capacity you have now and the capacity you will need to grow to optimal size. In the above example, if I delegate all three of the functions we mentioned, I would free up 22 hours per client. If I have 60 clients now, I will have an extra 1,320 hours that I can use to add approximately 30 new clients (1,320 ? 43 hours needed for prospecting, sales, and initial meetings = 30).

Third, perform a similar exercise for the operations side of the business to yield an estimate of your back-office capacity. Be sure to cover: compliance; internal accounting; recordkeeping; technology and support; office administration; human resources; and contracts and vendors.

Fourth, determine the number of managers you’ll need. You will need one manager for every functional area of your practice that has more than three employees. For example, the moment your administrative staff reaches four people, you need to determine who will be responsible for managing them. Most of the time, the firms we have worked with have someone who is eager to grow into a more responsible role.

Next, remember that your span of control will run out once you go from five to seven employees. The moment you have more than seven employees, add another manager who can take over some of the reporting relationships.

Finally, remember that employees need attention and leadership, not just orders. Leadership skills are something you learn over time, and it is your job as a leader of your firm to grow new leaders. You should carefully grow the skills of the people under you, so that when the time comes, they can step into a role of higher responsibility.

This exercise can help you realize that there is a stage in your evolution when your practice achieves critical mass. While you are growing, you may question whether this is a good idea because of the pressure growth places on your expenses, profitability, and ability to manage effectively. At a certain point, you will achieve a breakthrough in which leverage actually allows you to drop more to the bottom line without personally having to work as hard, or spending as high a percentage of revenue.

Mark Tibergien is a nationally recognized specialist in practice management for financial services firms, and partner-in-charge of the Securities & Insurance Niche for Moss Adams LLP, the 10th largest CPA firm in the U.S. You can reach him at