Formulas for Success: The Dispensable Leader

“The graveyards are full of indispensable men.”–General Charles DeGaulle

At the risk of sounding overly dramatic, we are an industry facing a crisis of leadership. The advisory business has been built around individuals who are unwilling to relinquish control or develop others who could add strength to their organizations.

If something were to happen to you, what would happen to your business? How would your clients feel about continuing to be served by your associates? How would your associates feel about reporting to a new leader? Is it even obvious who the next leader will be? How is everybody in your business behaving currently–as owners or as employees?

As we ponder the big challenges facing independent firms–both broker-dealers and registered investment advisors–it is becoming increasingly clear that most organizations have invested in only one dimension of their enterprise: either business development, or technical expertise, or technology. For the most part, any conversations around succession have to do with an ownership change and not a management change. Yet at some point the business will need to carry on without the founder, with the best leaders in place to manage the firm successfully.

All this raises the question: at what point will you become dispensable? That question begets another one: why would you want to become dispensable?

Building a Business to Last

Any enterprise that is overly dependent on the owner or the CEO is diminished in value. Yes, there are advantages to having a strong leader: the business will have a clear vision; can execute decisions quickly; and can minimize the political intrigue of whose agenda gets served. This is often a great culture during the entrepreneurial phase. But as an advisory firm takes on more clients and more staff–and consequently, more moving parts–but fails to broaden lines of responsibility, it is doomed to a mediocre future.

Why? The primary reason has to do with span of control. Organizational experts frequently say that any one person should have only three to five direct reports–and this assumes that all they are doing is managing. In an advisory firm, when you overlay other responsibilities such as business development, compliance, and managing client relationships, the competition for one’s time and attention is intense and something (if not all things) inevitably suffers.

An organization too tightly controlled by one person does not allow for growth beyond the limitations of the leader. Prospective buyers would look at a business like this and apply a discount to a firm with weak infrastructure, poor operating leverage, and an over-reliance on one person.

Trends that are intensifying the leadership problem include the opening of multiple locations, rapid client growth, inexperienced staff, and a growing compliance burden. Today, roughly one in five large RIA firms have more than one location and most firms have clients in multiple states. ACAT transfer data indicates a large flow of clients and assets out of banks and wirehouses into independent channels–growth that all advisors desire but not all are prepared to manage. As firms add staff to create capacity to grow, they often hire inexperienced people who lack training and strong oversight.

Consequently, advisory firms are experiencing more symptoms of strain, from high error rates, to productivity decline, to turnover of staff, to spikes in acts of malfeasance and misfeasance. Last year Pershing published a white paper, titled Mission Possible II, linking operational efficiency and human capital. According to the study, the average overhead cost as a percentage of revenue is ranging between 39% and 44%, depending on the size of the advisory firm. In order to manage to an appropriate level of profitability, the overhead expense ratio should not exceed 35% of revenue. These creeping costs are cause for concern and reveal a more serious problem in how firms are being managed as they become more complex.

For the large number of advisory firms that operate as solo practices, spending time developing new leaders may be a bewildering proposition. Just because someone does not build a leadership team doesn’t mean he or she is a poor advisor. But considering the codependent relationships that advisors develop with their clients, a failure to plan for the continuity of the enterprise with the same skill and commitment is as close to a breach of fiduciary responsibility as an owner can commit. When an owner’s exit is unplanned, clients are left to founder at a time when they need their advisor the most.