In my experience, some firm owners “build” their businesses similar to the way many people furnish a new house. That is, by purely random selection.
“Oh, that’s a nice couch, let’s buy it.” “And I like that dining room set, it reminds me of my mother’s.” “And look at that rug, it’s it beautiful!” “What about those paintings; I’m sure could find places for them.”
We’re talking about no plan, no strategy, no overall design, no thought for how the new furniture will fit or work together. But after some time and the newness feeling fades, you realize you have a collection of “stuff” that doesn’t necessarily fit together.
That’s how some advisory firms are started, too: With a focus on meeting immediate needs, based on preconceptions, and a bit of advice from friends and other advisors.
While some of that “advice” can be helpful, its major flaw is that it’s based on someone else’s vision of the business they want — not on your vision for the business you want. At some point, firm owners come to this realization and turn to a business consultant to sort it out.
But we don’t have the luxury of telling our clients to scrap their existing business and start over. Instead, starting with what they have now, we help firm owners create a plan for the lives they want today and in the future, based on a vision of where they want their businesses to go and a plan for how to get there. It’s similar to why investors hire financial advisors.
It’s true that some advisory firm owners don’t think strategically about their businesses and instead take more of a one-day/week/month-at-a-time approach.
The first step toward a business strategy is creating a design. How is the firm structured? What services does it offer, to whom and by whom? What does the process for delivering those services look like?
We do get push back over “wasting time” going over how an advisory firm does what it’s supposed to do. The problem is fully understanding and appreciating the benefits of a well-designed business.
While more free time and less stress are among the results of this approach, some firm owners are surprised to find that their re-designed businesses are significantly more profitable, too — without an increase in revenues or AUM. In other words, we take your stuff and make it valuable.
Higher revenue doesn’t necessarily equal more profit, and quite often will result in a decrease in profitability. This is because some firms are too complex in their operations, too cluttered with tasks that don’t relate to client services, and they require too much management. All this increases costs, while taking up time and resources.
Simply put, in business, design is margin. I work with some firms with $5 million in annual revenues that generate more profits than some $15 million revenue firms, mainly because these “bigger” firms are focused more on revenues rather than on design.
That’s not to say you can’t have both high revenue and high profitability; a well-designed firm should have both rising revenues and profits. That’s the goal.
To do that, though, you have to properly allocate your human capital. Here are two ways to make that happen:
As the owner, save yourself some time. Surround yourself with experts who provide an outsider’s objective perspective — a lawyer, an accountant, and an independent business consultant.
Nobody is good at everything. Demonstrating that you understand that about yourself will not only make your life easier, it also will set the right example for your employees.
Start leading your people. When employees don’t understand what they are supposed to be doing, they end up doing whatever they want to do, and this requires a lot of management to get them back on track and to keep them there.
It’s better to be a leader than a manager; leaders make sure their people know what they are supposed to do, and not do. And a well-designed business will show them what they are supposed to do.
There are different approaches to take in order to accomplish this. Smaller firms tend focus on their “client experience” and hire the right people to deliver it. Larger firms use organizational design to formalize the flow of work within a business, so everybody knows what they are supposed to do when.
No matter the size of your business, it’s important that your people have specific jobs. Firm owners tend to hire people with multiple skills. That’s because it’s the kind of people they tend to be. And it’s a valuable trait when initially launching a business.
But as a business grows, these “jacks of all trades” become less useful and more of problem. For one thing, they usually are not experts at anything, which makes it hard to find the right job for them. And because they usually wear too many hats, it’s usually not clear to them or anyone else, what they are supposed to be doing at any given time.
This means these people require a lot of management, taking up the owner’s time, causing her/him to tend to not want to hire more people — even when their business really needs them.
The solution is to focus on hiring more experienced people, with narrower expertise as you grow. In firms with limited resources, this often means replacing some of their current people with new people.
Because this is a hard decision for most owners, I often suggest they first try moving people into new, more defined jobs that still fit their skill sets, and provide additional training if necessary.
Not infrequently, advisory firms find it hard to get some people to move as they feel threatened by the change. A discussion about the need to specialize in a growing business is all it takes.
Point out that the change is not a reflection on their performance. Instead, it will enable them to make an even bigger contribution to the business’ success if they work with you toward a more focused role.
To help smooth these business transitions, the owner should lead by example; show them what you want to do, specialize yourself, get yourself more help, and let go of your other hats. Don’t focus on replacing you, just focus on what you do well. And the silver lining is that if more owners focused on themselves, their businesses would be a lot better off — and easier to lead.
The best advisory firms based on profit, efficiency, and growth are led by the best leaders — and the best leaders ask for help.
Angie Herbers is managing director and senior consultant at Herbers & Company, an independent growth consultancy for financial advisory firms. She can be reached at [email protected].