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Dealing With Success: Breaking Up Is Dumb to Do

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Having worked with independent advisory firms for over 15 years now, we have begun to identify patterns that appear as the firms get larger. We’ve been happy to see a number of our clients grow from quite small firms into businesses with $1 billion or more under management. Yet as gratifying as this kind of success is, we’ve also found that it presents significant challenges. In fact, in the last couple of years — despite our best efforts — we’ve had a few of these large firms “break up,” with some partners splitting off to form their own businesses.

Sometimes these breakups are the result of differing goals and visions. More often, they stem from a more unfortunate (and, in our view, preventable) problem: The business simply outgrows the founding owners.

This phenomenon has been well-documented over the past 20 years or so in startup tech companies. When they reach significant levels of size and success, their shareholders will often feel the need to move beyond the entrepreneurs who started the companies in favor of experienced, professional business management. (Microsoft and Apple are notable exceptions to this trend, although Apple did dump Steve Jobs, only to bring him back later.)

Of course, tech firms are rarely (if ever) split up. Instead, the CEO is simply replaced. But with independent advisory firms (which even at eight-figure annual revenues are still considered “small businesses”), when the owners split up, they usually take a substantial portion of the business with them, creating a major financial setback for everyone concerned and usually limiting the success of both parties for the foreseeable future.

If there is a silver lining to this trend, it’s that (at least in our experience) it is largely the fault of the founding owners. Why’s that good news? Because it means that the founding owners can take steps to prevent them, and we’ve seen more than a few do just that.

We find the root of the breakup problem is that, just as in tech companies, the skills required to start an advisory business are very different from those needed to run a $1 billion-plus firm. Founding owners are generally great rainmakers, extremely self-reliant and motivated to work long hours with little or no help. As their businesses grow, they (usually reluctantly) add clerical staff to leverage themselves, and eventually additional advisors. We have written extensively over the years about the need for owners of growing firms to become managers as well as advisors.

Unfortunately, (or happily, depending on the advisor) becoming a good manager is just the beginning of the skills that owner-advisors need to add to their résumés as their firms grow. By the time an advisory business reaches $1 billion in AUM, it’s a very different business from the one the owner started 20 years ago. Typically, they have 30 or more advisors, junior advisors and assorted staffers, and supervisors to oversee them. The firm also typically has myriad “departments”: financial planning, asset management, client service, technology, compliance, back office, marketing, accounting, human resources, etc.

Running a business of this complexity requires a far different skill set from what was needed to launch the business. Here are some of the biggest mistakes we see founding advisors make as their businesses attain considerable success (and which often lead to firm breakups), and what they can do to keep them from becoming deal breakers.

1. Trying to do too much. When an advisory business is small, the owner-advisor has to wear many hats: rainmaker, advisor, financial planner, portfolio manager, marketer, compliance officer, recruiter, trainer, strategist, etc. When a business gets larger, most of these “hats” become full-time jobs. Of course, many owners can’t unload some of those jobs fast enough, but most have a few that they are reluctant to give up. This is one of the trade-offs of having a larger firm: Key areas require full-time management. Letting go of them is one of the hardest things for a founding owner to do.

What’s more, most larger firms also need someone in a new position: the CEO, running it all and plotting the new direction of the firm. Some founders take to the CEO role, while others prefer to choose one of their former jobs such as spokesperson, rainmaker, senior advisor or portfolio manager, and promote one of their partners to CEO or hire one. Either way, the founder has to choose.

2. Not making decisions fast enough. This mistake is related to the first mistake. A CEO’s job is to make decisions about the firm: who does what, where to focus resources, what’s the strategy for moving forward, etc. A CEO who still has operational and client responsibilities on his or her plate often will find it difficult to make these decisions in a timely manner, which will result in inefficiency, lost opportunity, confusion and possibly low morale. On the other hand, an executive who is freed up can make more timely decisions and also monitor those decisions to make necessary adjustments.

3. Not transitioning from running the business to managing the managers. Firm founders who choose the CEO role often have a hard time letting go. We believe that’s because they are usually “hands on” people, but to run a large firm, they have to learn to be “hands off” people. The key to being a good CEO is hiring good people and leaving them alone to do their jobs. Sure, you want to keep abreast of how they are doing — but mostly from a perspective of finding out what else they need to do better jobs, not how to do their jobs.

4. Failing to ask questions and to listen to the answers. When a firm grows, the partners typically take on different roles heading up the various areas of the firm. Because they are involved with their areas on a daily basis and the owner is not, nine times out of 10 they’ll know more about what’s going on in their area. Every CEO needs to understand this, and to listen to what those partners are saying. To stay relevant, and to be part of the conversation, founders of large firms need to keep abreast of what’s going on; the most efficient way to do that is to listen to the folks on the front lines. Many of the great CEOs we’ve worked with ask a lot of questions and listen more than they talk.

5. Failing to trust their partners. We used to work with one firm in which the founder had been out of operations so long he had no clue what was going on, yet he insisted on making virtually all the decisions in the firm, offering uninformed opinions and second-guessing what his partners did. As you might imagine, the firm floundered, and the partners got fed up and split off to found their own (very successful) firm. Nothing will demotivate a management team faster than CEOs who think they know it all. Once they’ve put good people in the right jobs, good CEOs will let them do those jobs — and that includes trusting that they will make the right decisions. When they don’t make the right decisions (nobody’s perfect), the CEO needs to back them up and help them get things on the right track, not second-guess them.

6. Doing things the way they’ve always done them. When a firm has been very successful, it’s natural for the founder to become attached to the strategies that got the business to this point. What he or she needs to understand is that the new firm is different from the one they started with, and what worked for the old firm likely won’t work in the new one. We tell our clients that growing a business is a continuous learning curve: As the business gets bigger, we have to find new strategies to deal with the new realities.

7. Undermining the authority of other partners. Some firm founders express their unwillingness to give up control by going around their partners or managers to get information from their employees, and even championing those employees over the objections of their managers. Hopefully, you can see why this is bad idea. There’s nothing like feeling they have the boss’s ear to make an employee difficult, if not unmanageable. Firm founders and CEOs need to understand that when they delegate responsibility, they must also delegate authority. Without both, managers will become ineffective and the firm will suffer. This gets back to the trust issue: If you don’t have faith in your managers, get new ones you can trust. Otherwise, you’re running the firm yourself, and you’re back to mistake No. 1: Doing too much.

Overall, we find that owner-advisors who can avoid making these mistakes as their firms grow have far more successful firms. Equally important, they have happier partners, which greatly reduces the risk that some partners will leave, taking some of the business — and a significant portion of a firm’s future profits — with them.

Being a CEO of a larger firm is not a part-time job. In all these years working with truly awesome CEOs, I’ve noticed that the great ones have one thing in common. They fight! They are out in front taking little credit and a lot of blame for the success of their entire team; fighting for (not against) their partners, their team and their clients to protect the company and its profits.

If you want to be a great CEO, learn to fight for the people you’ve hired.