Beyond the Owner: Advisory Firm Paths to Success

Without a clearly understood service process, junior professional positions will struggle to match the expectations of the client or replicate what “Bob” can do. That frustration is usually visible among both the professionals and the clients they service – there is a sense of downgrading if they don’t work with Bob. This becomes a severe capacity limitation (Bob is the scarce resource) and tends to promote a culture of “wanting to be Bob.” Needless to say, when the professionals finally acquire the skills and expertise to be like Bob, they tend to look for a position inside or outside of the firm that gives them the control and power “Bob” had – i.e. they either fracture the firm by building their own little silo or leave to start one of their own.

3. Identify markets and sources of new business that support the institutional value proposition, and find business development processes that are consistent with the strategy. Not every market will support an institutionalized approach. In fact, I would propose that the best markets for an institutionalized firm are at the two extremes of the wealth spectrum – the mass market and the very high-net-worth. The reason is that they have service expectations that are consistent with the idea of a firm-level service. The small, mass market accounts generally are treated as institutional clients in all of their financial needs. They are accustomed to bank and brokerage firms who service them through 1-800 numbers and websites, and they generally do not expect a personal relationship with an advisor. Any personal attention is highly appreciated, but there is less resistance to multiple people being involved. In the other extreme, high-net-worth individuals are accustomed to institutionalized service – their CPA firm, their bank, their trust company have all likely surrounded them with teams of people rather than one key contact. That said, many other markets can be addressed by an institutionalized strategy, as long as it is well-differentiated.

Many firms have a hard time switching from a personalized business development mode to a more institutionalized mode. After all, usually the firm has been built on the strength of the personal network of the founders and it is difficult or counterproductive to replicate that institutionally. For example if the firm has grown through Bob’s network and connections, but wants to now become a large investment manager, it will be very inconsistent to continue relying on Bob or sending Bob-juniors to every country club in town. It might be better to seek sources of new business that lend themselves to an institutional approach. Examples of such sources include CPA firms, banks, direct marketing to consumers, broker-dealers or other networks of advisors, custodial or broker-dealer platforms, etc. Identifying such opportunities is not easy or inexpensive, but relying on personal networks promotes the rent-the-owner model even if we increase the number of people involved.

4. Behave like a large firm. The first step to becoming a large firm is believing that you are one. This means that your firm will have to transform its culture from relying on personal relationships and opportunistic communications to being driven by procedure and structure. This sounds scary to most advisors and they see pending bureaucracy and politics in that transformation. However, nothing is further from the truth – personality and entrepreneurship can exist even in the largest firms, as long as they are directed toward the institutional goal. What has to go, however, is the haphazard approach to service, data gathering and documentation, following of process, the way that decisions are made and the general approach to the business.

It is very common to see advisory firms using their size as an excuse for operational difficulties or mistakes, poor hiring decisions or lack of progress on important initiatives. If a firm wants to grow it really has to shed that mentality and aspire to behave and act like the larger image it wants to grow into.

Essentially this means a shift of focus from relationships to results. Most of the management decisions in smaller firms are driven by relationships – “He is a great guy!” or “He is not very good at that, but he is very loyal.” The reality in a larger firm is that there has to be a focus on results – there really is no way to accommodate the larger number of people in a relationship based management. The statements should turn to “He is great guy, but his performance was below his potential this year,” or “He is not good at this, therefore we need to hire somebody else who can do that job.” Again, this may sound rather cold and impersonal, but in fact it is the only fair way of treating a larger group of employees, so it is either a results-driven approach or a small firm forever.

5. Become CEO and executives, and establish a decision-making infrastructure. Many advisors are uncomfortable with the responsibility of acting like CEOs. In particular, they struggle with managing people and accepting responsibility for the decisions made. The stakes, however, only get higher and the responsibilities get bigger. As a firm grows, the size of budget decisions will increase, the complexity of the operations model will increase and managing the people in the firm will become more difficult.

The burden can be crushing and you hear advisors saying “I don’t want to be the bad guy,” or “I don’t want to be between the two of you.” Unfortunately, that’s what a CEO or an executive does – they make tough decisions under stress and with the potential of upsetting people. As my grandma often said, “You can’t make an omelet without breaking some eggs.”

The decision-making process and interaction of the partner group has to change as well. Most small firms are driven by a consensus process. As the partner group grows, consensus may become impossible or impractical. It is important that the partners are prepared for the transition and have the resolve to carry it through.

6. Invest in people and develop a mentality of investing in people. In any service business, financial advice included, the quality of the professionals involved is a critical factor for the success of the firm. Professionals, however, are rarely available widely in the market and the price of talent is high. This puts an enormous premium on firms that are good at developing people. An advisory firm that does nothing else but creates a reliable process for developing professionals is guaranteed to be successful almost regardless of any other factor discussed here.

It is difficult for the owners of most firms however to shift their focus from clients to people. It is a scandalous but probably true statement in most large firms that the development of professionals is more important than client service. I don’t mean that you should neglect clients, but if you have a chance to provide a young professional with a training opportunity, even if that “displeases” an important client, the scales should perhaps tip in favor of the employee (by no means suggesting risking any damage to the client’s financial interests – just their ego). Unfortunately, too many times firms pull out younger professionals from key assignments at the first sign of trouble.

Budgets should also support hiring, perhaps even ahead of demand, once a firm enters into a stage of trying to institutionalize itself. Recruiting and training is definitely scalable as accounting firms can attest, and that’s why they hire entire classes of new employees.

7. Think in terms of expert jobs and set the foundation for departments. In smaller firms, tasks are simpler, but diverse, and most positions are hybrids in nature – i.e. can easily be split into multiple jobs. Larger firms tend to bring more complex tasks and specialized processes, requiring that the firm retools itself with specialists rather than diverse generalists. This is a painful process since the “Swiss army knife” employees are incredibly valuable in the early stages and tend to have a problem specializing later as the firm needs that. The earlier the owners start thinking about specialization and encouraging employees to focus on fewer but deeper skills, the less painful this process will be.

8. Establish a culture of firm ownership of clients. Finally, for all of this to hold together, everyone should share the deep fundamental belief that the clients are clients of the firm – not just legally, but in terms of who the relationship is with and what the role of the professionals is in this relationship. This is where wirehouses go wrong very often in their efforts to institutionalize their business model – they follow many of the steps we discuss above, but they create a culture of personal ownership of the client promoted by the compensation process and the branch management priorities. If a professional believes that this is “my” client, they will actively undermine every other step taken to institutionalize the relationship – whether they do that consciously or not.

There are many successful firms in the industry today that generate great income for their owners and have wonderful staff and clients. The vast majority of them will be dependent on the owners for the length of the their career and will then dive into a risky process of trying to reinvent themselves around a new generation of owners or under institutional ownership (or both). There were many coffee shops in Seattle before Starbucks and there are still plenty left. Only a couple of them, however, became a nation-wide chain with amazing growth and return to its shareholders. There are many accounting firms in the country, but there are only a few that have the prominence and presence of KMPG, PWC or E&Y. Similarly, there will be only a few firms that cross that bridge between an institutional strategy and a rent-the-owner strategy. For each firm, however, the more of these eight issues it can address, the higher its value will be and the more sustainable its growth and success.