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.