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Want to Grow Your Firm? Get Over Yourself

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While in college, I decided my career goal was to help business owners build and run successful companies. Over the past 17 years, I’ve had the privilege of working with the owners of hundreds of independent advisory businesses.

Truth be told, I’ve learned as much by observing these owner advisors as they’ve learned from me.

For instance, while there are a number of critical points along the growth curve of an advisory firm, two are the most vital to the success — or failure — of an independent advisory firm. How business owners handle these critical junctures largely determines the fate of their firms.

The first of these critical points is when you start your business. Contrary to conventional wisdom, a “sound” business plan is not the key to success. In fact, the key to success at this point isn’t really about planning at all.

Once again, there are two basic problems with business plans. One is that a “business plan” almost always takes your focus off what needs to be done “now.” To avoid this mistake, I advise owners of new firms to focus on their single biggest challenge — attracting clients.

To accomplish this, their initial focus should be on what they need to do to draw investors: Develop a solid service model, write a good pitch to sell that service model and get in front of good client prospects. Everything else is just a distraction from getting those first revenues in the door.

When you have developed some business, the next step usually is to hire an administrative assistant, so you’ll have time to service your new clients and go out and get more clients.

Another problem with business plans is that they prevent you from making good decisions. The key to business success is to make a decision, take the next logical step, see how it turns out and let those results shape the next move.

In contrast, a business plan that lays out the steps to take, one after another, seems to assume that you somehow magically know how each step will turn out. Yes, it would be nice if they succeed, but chances are at least some of them won’t. When that happens, your “plan” goes out the window.

$2 Million Crux

The second “critical point” for growing advisory firms generally occurs when they reach $2 million or so in annual revenues. Typically, this is the point at which an advisory “practice” becomes an advisory “business.” Or, simply put, the business can no longer be run by the seat-of-the-pants of a person dividing his or her time between acting as a financial advisor and a business owner.

The result is a business that’s out of control, though nobody (or at least the owner) wants to admit it. Even if the owner is savvy enough to realize that he or she might have a problem, this advisor rarely wants to hear what the problems are or how bad they are. And, more often than not, these business owners don’t take any action to remedy the situation. This means that the firm’s growth slows to a crawl, hitting a revenue plateau somewhere between $2 million and $4 million and facing falling profitability.

At this point, in my experience, many firm owners have a sense that something is wrong, but their egos get in the way of fully understanding the problems, let alone addressing them. And even if they do get professional business help, they tend to dismiss the findings and typically jump from one consultant to another rather than fix the problem.

Here are the factors to review to see if your firm has a $2 million barrier problem:

Client retention. Top advisory firms retain more than 90% of their clients year over year. As client bases get older, that number might go down slightly.

If your client retention rate falls below 80% in any year, chances are you have a problem, and usually that problem is with client service.

As firms grow, new employee quality and training often decline, and that’s a bad combination. For successful growth, it’s essential that new employees are thoroughly trained in the firm’s services and how they are delivered.

Quality and consistency of service is the mark of well-run firms, and you must maintain that consistency as the business breaks through the $4 million barrier.

Profit margin. Business owners tend to focus more on cash flow and revenues than they do on profit margin. While cash flow is important (so you can keep the doors open) and revenues show business growth, profitability is a measure of a firm’s health.

A healthy profit margin tells you that you are delivering client services efficiently. Weak profitability tells you that your overhead is growing too fast for your current rate of revenue growth. To successfully grow an advisory business, it’s essential to keep operating costs in line.

Competitiveness. This is the other side of losing clients — it’s losing clients before you even get them. Virtually all independent advisors face local competition from other independent firms and other segments of the financial services industry.

While no business gets all the clients it competes for, well-run firms win more new clients than they lose. And whether they keep a running score or not, most firm owners have a pretty good idea of how they stack up against the competition.

Revenue Growth. You might think this would be obvious considering that the goal we’re focusing on is growing an advisory firm, yet I can’t tell you how many owners I’ve worked with who don’t regularly keep an eye on business revenues.

I’m not saying you must track it every day, but good business owners monitor their revenues at least every quarter — and monthly would be even better.

A steady increase in revenues tells you that most aspects of your business are working. Declining or stagnant revenues let you know that you have problems somewhere.

Business valuation. On the other hand, most firm owners don’t track the value of their business. But they should.

For most owners of an advisory firm, their retirement depends on the value of the firm, and this figure also is an excellent indicator of whether a business is heading in the right or wrong direction.

Yes, it’s true that from time to time you will feel the need to make a decision that won’t enhance business value, such as doing some pro bono work, taking on smaller clients or keeping on an employee because they need the job. There’s nothing wrong with that, as long as most of your decisions involve actions that are good for your business.

Efficiency. This means how many clients there are per advisor. Successful advisory firms maximize the number of clients its lead advisors can work with and still maintain a high level of client service.

These days, this usually is accomplished through a combination of staff support, organized systems and technology. In the best firms, advisors often can handle up to 125 clients. If your firm isn’t operating in that ballpark, it is undoubtedly affecting your profitability.

Success of recent projects. This is a more subjective than objective measurement, but it’s still important. When I see an advisory firm with a history of projects that didn’t work out as hoped, it tells me two things: The business doesn’t have a solid foundation, and the owner is unaware of this fact.

In my experience, the majority of advisory firm owners are smart individuals who are very motivated to boost the success of their businesses. When I see that their recent plans haven’t worked out very well, I start to look for deeper problems.

Don’t misunderstand me. Not all marketing plans bring in a herd of new clients, not all new hires meet expectations, and not all new services are a hit with clients. When the seemingly good ideas of smart firm owners regularly fail, you must go deeper.

Right now, you’re probably scratching your head and muttering something about this being a pretty long list of things to stay on top of while you’re running your business and working with clients. This brings me to my final point.

The real $2 million barrier isn’t the business, it’s the owner. At that size, the business has outgrown what even a gifted owner can do “part-time.”

To get “beyond you,” owners need to decide whether they want to be financial advisors or want to run a successful business. This is because the odds are you can’t successfully do both.


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