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July 01, 2010 at 08:00 PM
There is an old adage that says “when you stop growing, you start dying.” Caught in a low-growth cycle, many advisors are looking for ways to stimulate growth in their business. They are pushing a lot of different buttons and pulling a lot of different levers to try to raise the top line.
Some are pursuing mergers and acquisitions. Others are exploring new lines of business. Many are adding capacity, meaning new advisors and staff. Still others are exploring the opening of another office in a different location.
The hidden risk in trying to expand beyond one’s core is that unmanaged growth can be as dangerous to an enterprise as no growth at all. More businesses go bankrupt in their growth phase than in any other phase. Why?
In fast-growing manufacturing and distribution companies, when a balance sheet swells with the acquisition of fixed assets and inventory, funding for that business may become a challenge. In service businesses such as law and accounting firms, accounts receivable and work-in-process also increase, straining cash flow as the firm waits to collect on their efforts.
For advisory firms, fast growth can trigger material cash outflows well before the inflows are realized. Cash may be consumed in the form of down payments for acquisitions, additions of new people, leasehold improvements, and the purchase of computers and peripherals for new staff. Accelerated marketing efforts can also soak up cash as advisors embark on advertising, public relations, and seminar initiatives to drive new clients to their practices.
Watching the bank account go up and down is an easier and more intuitive task for the typical advisor, so managing the financial aspects of growth may not create too many surprises (though in my experience, it still frequently happens). Like hypertension in humans, however, there is a silent killer that sneaks up on managers of advisory firms. During periods of rapid growth, firm leaders suffer from the strain on their span of control.
In other words, not only is there a physical limit to the number of clients any one person can manage, there is also a physical limit to the number of direct reports one can manage. As advisory firms grow, the principals become farther removed from the minutiae and must trust others to do things right. Unfortunately, structuring the business properly to capitalize on growth is often an afterthought, and may not occur until the practice has a near-death experience.
Harnessing Resources
A primary reason for organizational strain is that efforts to drive revenue are often pursued randomly and opportunistically. Eager to make an immediate impact, owners of advisory firms often react to perceived opportunities instead of carefully sifting ideas through a strategic filter.
Strategy is not just about marketing. Strategy should also inform your investment in technology, people, processes, positioning and the client service experience.
Recently, the leaders of an RIA firm revealed to one of our relationship managers that they were thinking about expanding their offerings to include insurance. They properly realized that adding a product sales capability would dilute their positioning as a fee-only advisor, but rationalized that insurance solutions almost always arise with their clients. Up until this point they had outsourced the insurance sale to a trusted broker. But what was frustrating them was that while they did all the analysis on behalf of their clients, the broker was making a substantial sum off the sale of the insurance products. They wondered whether they should enter into a joint venture with this broker in order to derive more income from this source, or possibly even add the capability to their own firm.
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