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When It Comes to Growth Plans, Advisors Must Make a Decision

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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:

  1. 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.

This means to be successful, the CEO is going to have to turn most (if not all) clients to another advisor in the firm. Generally, I advise the leader to turn over “all” their clients, but I have worked with effective CEOs who continued to work with a small number of accounts.

Of course, firm owners can designate another partner to be CEO or even bring in a CEO from outside the firm. That option has proven successful in some of the largest firms in our industry.

But if you’re contemplating going in that direction, think long and hard about whether you’ll really be able to turn over the reins of “your” firm to someone else. That can be very difficult for many owners, and most of the firms I’ve seen in which the owner regularly interferes with the CEO would be much better off with no CEO at all.

I’ve often worked with advisory-firm owners to make the decision to go to $1 billion and to decide who is going to run the firm to get there. A recurring problem is filling the role the owner-turned-CEO has been playing.

One such case was with a firm that was generating $3 million in annual revenue. Before he became CEO, the primary owner was producing around 60% of the firm’s revenues. His own rainmaking skills had produced a good-sized firm. But to reach his goals, the firm needed a full-time leader, so he became CEO.

When he transferred his responsibilities to other advisors, they suddenly were working with more clients. This both decreased the quality of their services and virtually eliminated their time for bringing in new clients.

What’s more, he realized that if he hired more advisors to solve the problem, that would increase his costs faster than his growth rate. The moral of this case is to expect a decline in profit margin when you become a full-time CEO. Over time, tap someone to think about growing the business, which usually leads to a substantial increase in profitability — just don’t expect to see an immediate increase in revenues or profits.

In this example, it took three years of lower profits. It was a struggle for the CEO not to take on client relationships during that time. The good news is that although it was painful, the CEO liked his new job, and the firm eventually grew four times faster than it had before, largely due to his trained advisor strategies to attract new clients.

  1. Your brand will be challenged. Someone must monitor your brand to be sure it doesn’t change and defend it. The job of a CEO is both to develop a brand and to monitor employees and clients to protect the brand.

You should expect that as your firm grows, your competitors will increasingly attack your brand. One client got sued by one of his competitors over his firm’s marketing message. His attorney said this was a signal that his business had truly become a success.

  1. Corporate finance. I continually am surprised to find that more advisors don’t understand corporate finance. If you want to run a larger business you have to start making decisions based on the numbers, not your intuition.

The key metrics are operating income and return on investment. As CEO, you should be concerned about more than what you are taking home: You are working for all the shareholders. It’s a different responsibility.

The key to running a growing independent advisory firm is to get out of limbo as quickly as possible. To do that, surround yourself with people who have done this before. And, if you don’t want to do this, I suggest you go the other way and get smaller.

Whether you decide to get small or grow larger, a decision about the future of your firm must be made. It’s either to get to $1billion in AUM or to get smaller and change how you offer exceptional financial advice.

The limbo zone is not where you want your business to be these days. It indicates a pattern of indecision. Make a decision and go for it.

Angie Herbers is an independent consultant to the advisory industry. She can be reached at [email protected].


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