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The Terrible Twos: The Key Decision Point for Advisory Business Growth

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The independent advisory business has matured to the point where more than a few businesses have reached $1 billion in client assets under management, and many more advisory businesses have set their sights in that goal. That’s the good news.

The bad news is that to get there, they will have to break though the barrier that I call the “Terrible Twos” — when you get to $2 million in annual revenues.

The problem with the Terrible Twos is that once you get to $2 million in revenues, owners have to reinvest a higher percentage of their profits than ever before. While these businesses will be growing, they are so large that the growth rates will be lower than they have ever been. That makes most owners feel that their businesses aren’t growing as fast as they should be. In response, they usually either lose heart, or they increase spending on excessively risky marketing plans. Neither is a formula for success.

In my experience, to get through the Terrible Twos and continue growing the business on up to the $1 billion AUM mark, the owner-advisor (or owner-advisors) have to make the most difficult decision of their professional lives. To successfully grow a business beyond this point will require a full-time chief executive officer (who will take the time to understand what’s involved in growing the business and devise and implement a practical plan to get there).

That typically means the owner, or one of the owners, will have to stop being a financial advisor and become a business executive. (Yes, some advisory businesses bring in an outside CEO at this point, but I don’t recommend it and will tell you why below.)

As I said, for most owner-advisors, it’s the most difficult decision they have to make. Virtually all the financial advisors that I know love being financial advisors. They love their clients, they love working with their clients, they love being financial professionals, they love solving financial problems for their clients and they usually love being the “big” revenue producer. Typically, they also love the flexibility and the lifestyle of owning their own businesses.

(Related: Don’t Let Your Business Control Your Life)

Consequently, it’s very important (and I can’t emphasize this enough) that they understand that if they become a full-time CEO and grow their business significantly larger, all that is going to change. Goodbye clients, goodbye being a financial advisor, goodbye being a revenue producer and goodbye flexible lifestyle. Being the CEO of a growing business is a full-time job — and then some.

And say hello to an entirely new job. In my experience, the rudest awakening for advisors turned CEOs is the realization that CEOs don’t actually do anything. Instead, they make decisions about what other people are going to do, or try to do. They make sure those people have what they need to do it, and then help them evaluate the results. For many advisors — most of whom tend to be “doers” — this role can be very frustrating. When you’re managing a bigger business and trying to grow it even larger, you’ll need to be accessible almost 24/7; which can put a crimp in that flexible lifestyle they were used to.

As I mentioned, there is the alternative of bringing in an outside CEO or promoting one of the junior partners into that role, but I don’t recommend either. From what I’ve seen, it’s very difficult (read: darn near impossible) for most owner-advisors to turn over control of their business to either an outsider or an underling. Despite their best intentions, they almost always end up inserting themselves into decision making and management, and create confusion, ill will and, ultimately, a business going in the wrong direction.

My advice for owner-advisors who want to take their business beyond the Terrible Twos is to have a conversation with someone who has hands-on experience of what that will really mean for them and their business — and then do some serious soul searching about whether that’s really want you want.

— Read High Profit Margins or High Growth: Choose One on ThinkAdvisor.


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