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.
What Your Peers Are Reading
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.