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.