When you work with a large number of advisory firms over a long enough period of time, you start to see patterns. One of the most important patterns we’ve found is what we call the firm growth barriers.
While most owner-advisors believe that their firms are “unique,” from a business perspective more than nine out of ten firms will grow along a very predicable revenue curve. They’ll encounter the same challenges, requiring the same solutions, at the same points in their growth curves.
We believe that a baseline level of understanding of this industry growth curve provides owner-advisors with a “life jacket,” that enables them to keep their heads above water—thinking clearly—when their businesses predictably hit these barriers.
The first thing that firm owners need to know is that, rather than the result of any mismanagement on their part, these barriers are caused by the growth of their firm. All firms encounter these barriers: the more successful owners anticipate them and deal with them effectively.
Growth barriers occur when a firm’s expenses increase faster than firm growth. We find that, under ordinary circumstances, a firm’s expenses will grow between 3% and 5% a year. But when a firm is approaching a growth barrier, its expenses will increase 12% to 20% or more, annually. As you would expect, this has a major impact not only on a firm’s profitability, but also on the take-home pay of its owner(s), as well as their owner’s psyche.
Although these cost increases in growing firms are inevitable, because they are predictable, firm owners can both prepare for them and take steps to dampen their impact on a firm’s finances.
Here are the six points at which most firms run into these expense barriers:
The Barrier: Adding Staff
This is the stage where most smaller but growing firms finally outpace their original structure of an advisor or two, and a couple of support staffers. Until now, this low-overhead structure has managed to keep up with the clients’ needs, but the steady growth of the client base has begun to max out both advisor and staff. The owner’s response has been to add more staff and possibly a support advisor, driving up overhead. But at the same time, this new staff needs to be trained and managed, jobs that usually fall to the firm owner and/or a senior staffer. Either way, in the wake of this “unexpected” increase in workload, client service typically falls, and in the case of the firm owner, rainmaking usually declines—dampening firm growth.
The Solution: This usually comes from anticipating these staffing needs and adding employees before client services begin to decline, which allows time to spread out hiring and training.
The Barrier: Reaching $750,000 in Annual Revenues
To reach this level of growth, and provide quality client services, advisory firms have added substantial support staffs, and support and a lead advisor(s). In most firms, this staffing has been added in response to specific operational overload issues: back office, onboarding new clients, overworked owner-advisor, etc. This piecemeal approach to hiring typically creates a management “nightmare,” in which new employees are insufficiently trained, and the growing number of staffers lack focus and direction in their jobs and responsibilities.
The Solution: Create a formal organization strategy for the firm, combined with formal, firm-wide training.
The Barrier: Reaching $1.2 Million in Annual Revenues
At this point, most firms have solved their management/organizational issues (to a greater or lesser degree), but are now confronted with growing employee turnover rates, which greatly increase their costs of human capital.
The solution: Better hiring practices, combined with clear career paths for most jobs, and a formal succession plan/path to partnership for support advisors.
The Barrier: Reaching $3.3 Million in Annual Revenues Here’s where most firms outgrow the typical owner-advisor “rainmaking” approach. To get to this point, usually firms have gone beyond traditional financial planning and asset management—adding a broader range of services for more affluent clients.
The Soultion: To increase growth in step with this higher overhead, firms need to go beyond client referrals, to a professionally designed and implemented marketing plan.
The Barrier: Reaching $8.5 Million in Annual Revenues
Firms this size typically begin to face the challenges of large (rather than small) businesses: business strategy, layers of management, financial management, and coordinating operations.
The Solution: To control costs and maximize growth opportunities, these firms need to add professional management in the form of a CEO, a chief financial officer and a chief operating officer.
The Barrier: Reaching $15 Million in Annual Revenues At this level, with many advisors and other professionals providing a broad range of client services, firms run a very real risk of losing control over the delivery of client services, and diluting their marketing message. This typically translates into low referral rates, and high client turnover—driving up marketing and new client acquisition costs.
The solution: Refocus on firm messaging and consistency of client experience, across all departments and client contacts.
Although advisory firms face very real—and substantial challenges—at each of these revenue/cost barriers, the good news for owner-advisors is that they are predictable and manageable: particularly when they are anticipated, and prepared for. And, that firm owners understand that these barriers are a natural part of the growth of an advisory firm—not the result of a management failure on their part.