Many advisors think running a successful small business is easier then running a successful larger business. But that’s usually not the case, and here’s why.
Typically, the people who get the top jobs in larger corporations have professional business school training. What’s more, they have more resources at their disposal to get help when they need it.
In contrast, the owners of independent advisory firms usually have professional training in finance and/or financial planning. Plus, their resources often limit the amount of professional help they can get when they need it.
As a result, owner advisors tend to make “rookie” mistakes when they are trying to grow their businesses. A classic example is how many owner advisors react to movements in the stock market.
My consulting firm does internal assessments of all our client firms, which includes the standard financial data that result in “key performance indicators,” lie the growth rate, lead flow rate and close rate.
Based on these assessments, we can form a good idea of a firm’s growth problems and its opportunities. This info serves as a good starting point for working out a strategy to move toward the owner’s growth and other goals.
Unfortunately, what we can’t predict is the behavior of the firm’s owner and other leaders. Even though we can pinpoint the problems, the behavior and decisions of the owners and/or CEO determine the ultimate outcome — success, failure or something in between.
Success or failure often depends upon not just a willingness to make changes but also the rate at which a firm makes changes. The simple rule of thumb is that the faster you change, the faster your business grows. It’s that simple.
Consequently, the key to growth for most advisory businesses is to work toward a high rate of change. The firm leadership needs to keep moving forward, as quickly as prudence dictates.
Focusing on gross revenues is one way to monitor a firm’s health and growth. While profitability might be a better measure of the owner’s benefits, many believe revenues are the best measure of a business’s health.
However — and this gets back to issue of limited business training — most advisory firms derive the majority of their revenues from asset management fees. These fees, of course, are higher when the markets are going up, and lower when they are moving in the other direction.
As owner advisors don’t typically influence the markets, this means that to accurately assess the effectiveness of owners’ decisions and changes to the business, you have to factor out any recent increases or decreases in market pricing.
By doing so, you can accurately assess the true success of your recent changes. As one advisor put it following the market crash of 2008: “We all thought we were Olympians, but it turned out we were really running downhill.”
The other benefit of adjusting your revenue figures to account for market changes is that it will enable you to ignore decreases in revenues that are outside your control and thereby more accurately assess the success/failure of your growth initiatives.
It’s the owner’s behavior that most often determines the success of an advisory firm. If you don’t focus on your behavior, you’ll miss opportunities for growth.
The path to the highest growth rate is by fully understanding and tracking what is actually happening to the business, regardless of the market. This way, you have the information you need to make better decisions going forward.