In the independent advisory industry, the term “lifestyle business” is often used as a criticism of advisors who run smaller firms with an eye toward how much time they spend out of the office, rather than investing more of their time and effort to grow their firm.
However, in my experience, the majority of advisory firms, small and large, are lifestyle firms, but instead of guaranteeing vacation time, most large firms guarantee owners’ income to support their lifestyles.
Now, don’t misunderstand me: There’s nothing wrong with knowing what you want to get out of your business and setting up so that you get it. If you only want to work 40 weeks a year and have built a life around the income that generates, more power to you.
But there are more problems when firm owners determine how much income they need to finance their lifestyles every year, and then run their firms with an eye toward generating that level of income. By making decisions year after year based on hitting specific profit margins for their personal lives, rather than what’s best for the business, owners not only limit the success of their businesses, they often erode it.
(Related: Don’t Let Your Business Control Your Life)
Here are five ways profit margin targets can hurt your advisory firm:
1) Limited reinvestment in the business. When owners are fixated on what their take-home pay is, discussions about whether to hire another advisor, add a new client service or launch a marketing plan tend to revolve around whether it needs to be done immediately rather than how much it would improve the business. As you might imagine, it’s often hard to make a case for doing it now, rather than holding off until later. As a result, firm growth tends to slow down — and often, eventually start to go in reverse.
2) Stop innovating. Not every new idea for independent firms is a good one, but some of them are and a few are essential; think computers, cell phones, flex time, etc. The industry is changing all the time. To make sound decisions about where to invest for the future, and when to pass on an investment, owners need to think clearly. In my experience, having conflicting pressure to maintain profit margins makes good decisions much harder.