There’s no doubt that an advisor already has enough going on, never mind adding 10 more things to think about. But as the year changes and I assess the big trends that have been impacting the advisory business since the turn of the century, I can’t help but contemplate what these trends portend for the average advisory firm today.
One of the challenges of managing a business is the necessity of analyzing the firm and making plans about where to invest your attention. Even though it is an inexact science, we can probably draw some conclusions about where the business of financial advice is heading based on some essential observations.
I’m basing my observations on the following assumptions about the typical advisory firm. Most firms: are small businesses (even at $1 billion of AUM, the revenue level would qualify a firm as small); are owner-operated; have experienced rapid growth in clients and a meaningful increase in headcount; have seen overhead costs in general go up dramatically, particularly compensation-related expenses; have clients expecting–if not demanding–more without allowing for a commensurate increase in charges; and firm owners and staff are getting older.
Moreover, for most firms these trends will continue. So what do you think the future holds for your firm? The following 10 essential considerations have already begun to take root, with the potential to aggravate, and in some cases exhilarate, owners of advisory firms:
No. 1: Managing growth. According to Moss Adams, the average advisory firm has grown its top line by more than 22% annually. For many companies this rapid pace has continued over a sustained period of years. While growth provides the opportunity for staff development, increases in profits, more succession options, and an exciting atmosphere, it brings with it the potential for stress fractures. When an owner’s span of control is stretched, quality, consistency, and effective leadership suffer. Often the firm’s sense of purpose gets derailed as well because there is no time to inculcate new associates with the right way to do business, or for leadership to evaluate what’s working and what’s not. Unmanaged growth can be more dangerous to a business than no growth at all because of the reputational, financial, and compliance risk.
No. 2: Hiring professional management. As an owner, you will know your practice is at a crossroads when you do not have time to both serve clients well and manage the business well. For many firms, the business has become its biggest client and it has many moving parts: strategy, human capital, financial management, operations, sales and marketing, client service, and compliance. If you evaluated your business management by the same standards that your client uses to assess your ability to provide sound financial advice, how would you rate? Your challenge now is to decide whether to give up one in order to focus on the other. Advisory firms with professional management grow at a substantially faster rate than the average firm. With qualified individuals dedicated to a job, the outcome will almost always be better.
No. 3: Deploying technology effectively. Most advisory firms have plenty of tools but are not using technology to the optimal level. The lack of interface and integration, the failure to train properly, and having neither a plan nor a budget for acquiring software and hardware all contribute to the inefficiencies. Having made multiple steps forward, most advisors now need to take at least one step back to assess workflow and to determine how technology can be optimized to improve productivity and client service. There is a high likelihood that the solution will not be a proprietary creation, but better usage of what currently exists.
No. 4: Building value. Advisors realize value in their business through current income and capital gain upon sale. The vast majority of advisors are not contemplating the sale of their business anytime soon, however, so the key is to build a business to last. This means consistent repeatable income, sustained profitability, continuity of management and client service, and a systematic process for generating new growth. Business value in its simplest form is determined by dividing cash flow by risk minus growth (V = CF ?? [R -- G]). To build value, then, one should focus on enhancing cash flow, minimizing risk or uncertainty, and managing growth.