The last three years were about surviving the here and now. But what about the long-term health of your advisory firm? Now that the economy and markets have started to recover, every advisor should consider how their current decisions will impact the future of their business. What does it take to build a business that will last?
To embark on a positive course, begin with the destination in mind. Ask yourself these important questions: How old will I be in 10 years? What do I want my business to look like at that point? What will be my role, if any? What will our clients look like? What will our employees look like? Who will be leading the business? Who will own the business? What do I want out of the business?
Defining an enduring firm
An enduring advisory firm has five key qualities:
- Consistent profitability
- Transferable value
- Loyal clients
- Career growth for employees
- Multigenerational client appeal
The metrics for these characteristics are unique to each business model, but these basic guideposts should steer all firm owners.
For example, an advisory firm that consistently generates a gross profit margin in the 60% range and an operating profit margin in the 25% range would be in the upper quartile of advisory firms globally. Gross margins are impacted by pricing, productivity, service mix and client mix. Operating margins are impacted by revenue volume and cost control. The top performing firms actively manage these six profitability levers to produce better results than the average advisory business. Meanwhile, the average firm achieves mediocrity by letting profits be determined by fate.
Advisory firms that can demonstrate how such profitability could be sustained if the business were sold will also command a higher multiple, but they will justify a higher value based on cash flow alone [Value = Cash Flow ÷ (Risk – Growth)]. Clearly, leaders of advisory firms should use valuation principles to actively manage their businesses. Create a decision-making filter based on increasing cash flow, minimizing risk and uncertainty and positioning for growth. If you build a business to last, you will always have a valuable business to sell.
Advisory firms that value their clients and their employees equally also tend to endure. Ask the same questions for each constituency: What causes them to come to your firm and what causes them to stay? Loyalty is different from fealty; people become passionate about supporting the firm when they truly believe in what they are doing. One of my favorite quotes from Ayn Rand’s classic novel “Atlas Shrugged” states, “It is not your obedience we seek, but your commitment.” Advisors who do things only because they are required rather than because they are right for clients or employees build an unstable foundation for their business.
Client loyalty can be measured in the number of referrals they bring to your firm, the types of issues they rely on you to help them with and the amount of assets they trust you to manage. What clients say about you when talking to their friends, relatives and centers of influence is very revealing. Having a process in place to validate loyal behavior and measure the quality of your service experience can be a dynamic management tool.
The same is true for measuring employee loyalty. While individuals each have a unique relationship with their employer, the big question is whether they would recommend friends to seek employment at your firm and whether they would recommend relatives to use the firm for the management of their wealth. Being an advocate for the firm depends on whether employees are fulfilled in their job, proud of what the firm does and how it does it and satisfied that the rewards are competitive with the market and include the opportunity for career growth.
The enduring advisory firm must also be properly positioned for future growth. Unfortunately, many advisors who have been force-fed data from consultants, researchers and trade publications have come to believe that the world will end when the last baby boomer dies. Today’s advisors, broker-dealers and custodians have heavily invested in solutions for boomers and have geared their messaging and delivery toward this constituency. Within the not-too-distant future, most boomers will have shifted from the accumulation phase to the withdrawal phase. When an advisor’s practice is overweighted with retirees, they must work harder to replace lost assets each year.