When I started consulting with advisory businesses almost 20 years ago, the goal of most independents was to get to $100 million in assets under management. As a goal, that made good business sense for three reasons.
First, two or three advisors could fairly easily manage the 150 or so clients it would take to get to that figure. Second, at 1% (the standard AUM fee back then), there were enough revenues for all of them to make a very good living. And third, running a business with three advisors isn’t all that different from running a business with one advisor.
Today, $1 billion in AUM is the new $100 million. That is, it seems like everybody wants to build a $1 billion business. Problem is, running a business that can attract and manage $1 billion in client AUM is very different from running a smaller business. Yet most business owners don’t understand this, and what they don’t know can greatly hamper the success of their businesses.
The biggest mistake that I see (over and over) is that many owner-advisors today have somehow gotten the idea that they can build a billion-dollar business in seven years. Now, I’m not saying that you can’t, but I am saying that most firms don’t. Not within that time frame.
While thinking big can be a good thing, the problems come when owners start trying to build a billion-dollar firms today, long before they have the revenues to support one.
I sometimes wonder if this thinking doesn’t stem from the “building a house” analogy that financial planners use with their clients: start with the foundation, etc. But the difference between building a house and building an advisory business is that you usually don’t have to live in the house while you are building it. Your business still has to function successfully today, even while you’re building for the future.
To position their businesses for what they envision will be the near future, many owner-advisors start right in, spending money to create the foundation of a billion-dollar business today. Typically, they move into larger offices, ramp up their compensation structure, create the organizational structure of the future, and start hiring people to fill it.
Hopefully, you see why this might create some problems. Perhaps the most obvious is that if one’s anticipated growth in AUM doesn’t happen — or it happens more slowly than anticipated — you will have created a whole lot of expensive overcapacity.