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Angie Herbers, advisory firm consultant and columnist

Practice Management > Building Your Business

The Real Reason Your Midsize Firm Isn’t Growing

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What You Need to Know

  • Firms with with $1 million to $10 million in yearly revenue have outsize growth potential, but many hit a common roadblock.
  • You might blame flawed marketing, training or client experience, but there's likely a more fundamental culprit.
  • Intuition won't cut it at this level; you need a data-driven growth strategy.

Why do so many midsize advisory firms — those with $1 million to $10 million in yearly revenues and with greater potential than both smaller and larger firms — hit a growth roadblock?

Depending on who you ask, you might hear that failures of marketing, training or client experience are to blame. But as I’ll explain, there’s a different and more fundamental culprit. 

Midsize firms not only have a great potential for growth but also have compelling reasons to grow. They possess a distinct advantage because they have more resources than small firms and more flexibility and potential to scale and adapt than large ones. And their owners are usually highly motivated to push their advantage. 

First, when a firm hits the midsize tier, its valuation can really expand. A small firm (with less than $1 million in yearly revenue) has a market value that is usually flat. But once it becomes midsize, its valuation can increase relatively quickly and dramatically — expanding up to 3.5 times revenues within just a few years. 

This reflects the fact that deep-pocketed acquirers are willing to pay a premium for midsize firms’ robust assets under management, stable client bases and potential for profitability. Simply put, one big motivator for owners to grow a midsize business is the enhanced opportunity for extra return — or alpha — that they can harvest from it. 

The second reason that owners of a midsize firm typically want to capitalize on its growth potential has to do with the speed of change in the advice industry. At its core, a financial advisory business will always be about providing beneficial and needed advice to clients. At the same time, the quality and types of services that firms offer will continue to evolve. 

Midsize firms have a big advantage to press here: They are small and nimble enough to change quickly, yet large enough to have the resources needed to keep them at the forefront of the industry’s evolution. 

But robust growth isn’t a given once a firm reaches the midsize realm. Many run into roadblocks — demonstrated, for instance, by the strong turnout at a recent Herbers & Co. event focused on this topic. Why do so many firms find that their growth stalls out once they reach a certain size? 

Some argue that it’s due to a niche-marketing focus, which can be effective at getting firms quickly off the ground but may later constrain their ability to grow. Other often-stated culprits include a lack of capital, an outdated client experience or difficulty in recruiting, training and retaining talent.

But 20-plus years of consulting has persuaded me that the biggest and most common pain point for midsize firms is intellectual capital. 

Midsize financial advice businesses are often run by their founding owners. Many of those leaders are good at building and running a business, but a lopsided amount of the firm’s intellectual capital and decision-making authority resides with them. 

These leaders may have lots of ideas on how midsize firms can renew their growth. But they often don’t have enough time to deploy, implement and manage impactful strategies.

Also, they usually don’t have a management team at this stage that is able to share the heavy lift, because funding these human resources may not be economically logical or feasible. Thus, midsize firms often fail to achieve the valuation alpha that seems tantalizingly within their reach. 

To break the growth logjam, firm founders may want to consider hiring more executives. However, this doesn’t solve the need to clearly identify and compartmentalize what needs to be done to get the firm growing again. 

Many firm founders became successful by trusting their gut in making decisions. But to move on from the mid-lifecycle growth plateau, they also need to move on from this intuition-based approach. As their bandwidth becomes narrower, embracing clarity, focus and a disciplined approach becomes not only advantageous but also essential. 

Challenges and Implementation

Midsize firms tend to struggle with three key business planning areas. The first is building a growth strategy built on identifying the key performance indicator that your firm wants to move. This underlines the importance of data. 

While an organization’s initiatives and decisions may have been guided by intuition at an earlier stage, it’s critical to rely on high-quality information and data to build strategies going forward. Identifying the exact trend line you want to move will dictate the strategy you’ll need to deploy.

The second tricky area is management of the strategy — in other words, deciding precisely what steps your firm will take. Let’s say you target your firm’s close ratio as the KPI to move, seeking to increase the percentage of prospects that it converts to clients from 33% to, say, 50%. 

What strategy should it deploy to increase that ratio? There are lots of options, such as retraining advisors so they can close prospects in one meeting, rather than doing lots of uncompensated legwork and then trying to close. In addition to this step, how does a firm pick what’s best?

Finally, once a management strategy is decided upon, implementation becomes another tricky area. Who’s responsible for mobilizing and marshaling the people and resources needed to make the change? 

All these challenges lead us back to intellectual capital. Who on your team can make sure the right implementation happens? We have to keep in mind that the firm owner or owners already have plenty on their plate handling day-to-day operations. 

Carpenters like to say that they measure twice and cut once, to avoid wasting wood as well as time. The same principle applies to advisory firms. Unless owners have the capital to invest in extra talent, they must prepare well and then handle the heavy lifting of implementation. There’s no doubt that it’s the hardest stage of the process.

Firm owners often hope that the playbook that got them to the middle tier of the industry takes them to the next level. But what they really need is to ask for more help and to embrace a data-driven, more tightly focused leadership style. In other words, substantially expanding their leadership abilities is often the answer.


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