Financial services firms have operated independently for decades. Looking back, we see this entrepreneurial mindset emerging in the 1980s, when the industry developed two variations on existing business models: registered investment advisors (RIA) and independent contractor broker-dealer (IBD) reps. These new structures featured practitioners who were also owner-operators, instead of working as employees of other firms.

Now, many years later, these models continue to evolve. We see new dynamics emerging as firms transform from practice to business, and from single-owner to multi-owner/multi-employee advisory firms. Interestingly, the success the independent advisory world has experienced now strains the notion of independence. More mouths to feed, more constituencies to please and more competition for strategic direction from multiple points of view tend to complicate and disturb the way firms operate. While ownership may feel independent, principals have lost the ability to make business decisions without the influence of others.

RIAs remain the purest form of independence. They are free of broker-dealer oversight and overrides on their compensation, whereas the IBD model is subject to supervision by the broker-dealers with whom they affiliate and must share an override on revenue production. These different business approaches include different regulatory structures: the Securities and Exchange Commission versus FINRA. The RIA model comprises professional buyers, whereas the IBD model is composed mostly of professional sellers; in the former, advisors get paid directly by the clients and act as fiduciaries or client advocates on all accounts. Broker-dealer reps get paid on a grid for the products they sell, including fee-based programs, and for the most part operate under a suitability standard (though a recent ruling by the Department of Labor will change that condition for retirement accounts).

These distinct identities have morphed in the past decade as many IBD reps have either formed their own RIAs or become investment advisor representatives (IAR) of their broker-dealer’s corporate RIA. (Those who are registered reps and have their own RIA are known as hybrid advisors, while those who operate under the supervision of their broker-dealer’s corporate RIA are known as dually registered).

This background helps in understanding the transformation of the retail financial advice business and the current catalysts for growth. Not only have we seen a big shift from brokerage to advisory, from transactional to fee revenue or suitability to fiduciary, but also from single books of business managed by solo practitioners to larger, professionally managed practices, many operating in multiple locations.

Perhaps the biggest leap in the evolution of the independent advisory business has been the shift from small to medium-sized firms. Consider this: The U.S. Small Business Administration (SBA) regards Financial Investment Firms (NAIS Code 523) such as securities brokerage, portfolio management, investment advice or trust and fiduciary firms as small businesses when their annual revenue is below $38.5 million. An advisory firm with $1 billion of assets charging an average of 80 bps would be generating under $10 million of annual revenue, so to exceed the small business threshold, an advisory firm would need to be managing somewhere between $3 billion to $4 billion of assets. While few fit into that mid-sized category today, it won’t be long before we see a meaningful cluster of such firms as more and more merge, acquire or grow organically to a new level of critical mass.

Just a decade ago, it was a big deal for an independent advisory firm to achieve $1 billion of assets under management (AUM). According to Evolution Revolution, produced by the Investment Advisor’s Association (IAA) in March 2015, more than half of all SEC-registered advisors have AUM between $100 million and $1 billion. Today, nearly 650 RIA firms manage more than $1 billion of assets, according to Cerulli Associates. Even more significant, according to the 2015 InvestmentNews Study on Compensation & Staffing, sponsored by Pershing Advisor Solutions, there are now more non-owner advisors within advisory firms than there are owners. Few indicators mark the emergence of a real business more accurately than this dynamic.

Many firms experience growth in the same way that we experience the expanding waistline of middle-age, adding a pound for every year we are on the planet. It’s insidious, it’s persistent and it’s maddening. Principals in larger advisory firms look around at their holiday parties and wonder how the guest list got so big. Managers must simultaneously juggle the challenges inherent in being a small practice with the added complexity of a larger business.

Where Does Advisory Firm Growth Come From?

How did this unmanaged growth occur? For the most part, firms have grown organically with the addition of new staff and new advisors. In other cases, mergers or acquisitions contributed. Oftentimes, growth was not conscious but merely reactive to the increasing demand for services as a firm’s brand became stronger and their value became more appreciated.

Over the years, we’ve discovered that advisory firms hit a series of walls when they add more staff, almost in accordance with the Fibonacci sequence (a pattern of numbers where each number is the sum of the two preceding numbers). They hit a wall at five people, eight, 13, 21 and so forth. By hitting a wall, I mean that quality control, staff management and the client experience all suffer.

Think about the challenges when each advisor has his or her approach to working with clients, developing recommendations and even producing reports. Far worse than applying a different approach to clients is when teams of individuals form cliques to pursue and serve clients a specific way for a specific need that is different from the firm’s stated strategy. Often, firms lack any consistent method of training, quality control or staff development. The unevenness ultimately hurts the firm brand because clients have distinctly different experiences. Even certain employees feel disadvantaged if they are on a team that is less productive or effective than another.

The good news is that this strain is caused by business growth, and therefore the problem is eminently fixable. The bad news is that partners and employees often grow attached to their way of doing business so changing their behavior requires mutual sacrifice for the good of the enterprise.

Organizational specialists provide a good resource for examining one’s business processes. In my experience, however, it has been most effective to begin with an understanding of the vision and strategy for the firm. If you are heading in the wrong direction, the last thing you want to do is get there more efficiently. Serious discussion, and ultimately agreement, on where you and other key people want to take the business provide a roadmap for the tough decisions around people, process, structure and systems. This self-examination also reveals who is on board with the corporate vision and who will be a detractor and should separate from the firm.

When advisory firms evolve from small to medium-sized, relationships experience strain and profitability suffers. Remember the awkwardness of adolescence, when your clothes did not fit right and mood swings ruled your day? Metamorphosis from one form into another requires patience and self-awareness.

When you hit a wall, ask the right questions: Are we all in agreement about the goal and how we get there? Is our strategy still relevant? Are we structured right to achieve our strategic goals? Do we have the right people doing the right things? Are we clear on what success looks like? Envision the form you want to take, and then build a bridge to carry your business to its next glorious stage.

— Read Dealing With the Difficult: 5 Growth Strategies Advisors Ignore on ThinkAdvisor.