Most advisors today know that technology is changing the financial services business. From digital investment to advisory platforms offering advice to consumers, the way most advisory firms do business today is different from how they operated just five years ago.
What many firm owners don’t realize is that changing technology is not a passing phase — it is the future. Not only is the use and functionality constantly changing, its rate of change is perpetually accelerating.
Most importantly, technology is changing the expectations of consumers, including advisory clients. And it’s changing the way they want to get advice and interact and communicate with their advisors, essentially, receiving financial advice on demand.
In this new and changing business environment in which technology and client expectations are driving up costs, owners of independent advisory firms face two choices: One, grow larger and work toward the $1 billion in client AUM mark by increasing scale with more financial and employee resources; or two, get smaller by reducing services and overhead and working with a very select group of clients.
Here’s why this choice is unavoidable. As independent advisory firms grow, they run into “growth barriers” at various levels of revenues. The most difficult of these barriers for most firms to break through is what I call the “limbo zone,” between $2 million and $5 million in annual revenue.
At this point, most firms reach the operational limits of their staffs and systems, so growth slows and profitability declines. Most businesses struggle, and owners need to make significant investments, both financial and in work load, to grow past this point.
It can be difficult to make the transition to a new operating method and build the businesses. The key for owners is to train themselves to be better leaders and to get resources and experts to help them — including, in some cases, financing for growth. The goal is to get out of this “Valley of Doom” as quickly as possible, either through organic or inorganic growth strategies.
The Growth Choice
Today’s technology-driven advisory industry dictates that firm owners make a conscious choice to either grow larger and get to $1 billion AUM or get smaller, when their firms approach this “limbo zone.”
Reaching $1 billion in AUM doesn’t have to be your goal, nor does it mean you will go out of business if you don’t attain it. There are thousands of advisory firms that have made the intentional choice to stay relevant by radically changing how they offer financial advice to clients: focusing on a smaller client base within a specific target market.
In fact, I believe the second largest group of advisory firms on the rise are small or solo firms: what we refer to as the quiet, very profitable “sleeper” firms — businesses we don’t read about very much in the trade press.
If, on the other hand, you decide you want to attain that $1 billion AUM goal, you’ll need to focus on these three business aspects:
- Leadership. You must designate a CEO. That means a full-time executive whose sole job will be to lead the firm to achieve the designated goal. This usually is the firm owner/founder, but it could be another partner or employee, or an outside hire.
Granted, this can be a difficult decision for many firm owners. In my experience, most independent financial advisors love what they do: working with clients and helping them to reach their financial goals for their families and themselves. And even though a business with a few million dollars in annual revenues is still considered a small business, to get there, stay there, and keep growing it is a full-time job.