The growth of financial advisory firms reveals distinct phases of firm development. We’ve observed that each stage has unique characteristics, challenges, and opportunities that must be addressed in order for firms to progress from one stage to the next. Firms change profoundly as they move through the evolutionary cycle. Over time this change affects the organizational structure, creating specialization and new positions.
We define the five stages of firm evolution as follows:
Early Solo: These firms have one owner/professional and are in their first 10 years of development. The focus of these practitioners is on growing their businesses. In many cases they are making staffing decisions for the first time. The typical early solo practitioner invested $144,707 in compensation for herself and her staff in 2006. This investment in human capital yielded the average early solo a return on labor (pre-tax profits divided by total compensation-related expenses, which includes base salaries, incentive pay, payroll taxes, and all benefits) of 73%, translating into pre-tax income per owner of $119,428. Income per owner increased nearly 20% from 2005 to 2006. Fifty percent of solos looking to add staff indicated they anticipate bringing in a partner and evolving into an ensemble structure.
Mature Solo: Mature solos have been in business for more than 10 years. A typical firm most often comprises an owner/advisor, one administrative assistant, and a client service administrator. The challenge for mature solos is to create an organizational structure that fully allows them to leverage their professional time. Some mature solo practices may yet recruit a second professional and evolve into ensembles, whereas others may choose to work on their own for the rest of their careers. These firms generated median revenue of about $403,979, a return on labor of 55%, and median income per owner of $223,283. Top-quartile mature solos in terms of income per owner have twice the number of total staff as all others.