Over the years, my longtime friend Eric Hehman, CEO of Austin Asset in Austin, Texas, has publicly talked at conferences and to me about his experience becoming a partner and CEO at his firm.
He has talked about how he and his firm's founder, John Henry McDonald, worked together to make the transition from a startup firm to an ongoing business. It's such an important issue—and he had such an important perspective—that I convinced him to let me share his story. It's one that I feel a lot of owner-advisors and future partners could truly benefit from.
He and McDonald grew their firm from $25 million in client AUM in 1997, when Hehman started as an intern, to $540 million in AUM ($4 million in revenue) today. But all you younger advisors who hope to run your own firm someday, take note: It wouldn't have happened without Hehman taking the initiative.
"John Henry never came to me and asked: 'Do you want to be an owner?'" Hehman told me. "You have to be a catalyst, to make a case that lays out what you see. We had an interactive discussion about why he needed to sell shares and build a management team. He was brave enough, and I did research to build a case and walk him through what I saw so that we could find solutions together. John Henry was amazing in his ability to separate who he was in the business and what he wanted the business to be."
Most advisors who start up independent advisory firms aren't entrepreneurs, at least not in the usual sense. They don't have a particularly unique business idea that they built a business around like Bill Gates, Steve Jobs, Jeff Bezos or Mark Zuckerburg. (Maybe the guys who launched the first independent financial planning firms back in the '70s, or the first fee-only firms in the '80s, but that was a long time ago.)
Today, most owner-advisors launched their firms using well-established business and service models, taking on the challenges of a startup because they wanted to take care of their clients their own way. Consequently, most of today's business management wisdom doesn't really apply to independent advisory firms, with one major exception: the changing roles of firm founders and advisors who were hired as the firm grew. In our experience, failure to understand the evolution of the founder's role in advisory firms is the single biggest stumbling block to building ongoing businesses that have real market value.
To understand how the roles of a founding advisor and the other advisors change over time, we like to talk about their relative importance to the business. In a startup firm, the person who brings in the clients, which is almost always the founding advisor, is most important—there isn't a business without client revenue to fund it. Over time, providing a consistently high level of service to keep the clients it has taken years to attract becomes more important. What's more, the way new clients are attracted changes too, from prospecting to referrals from existing clients. The stature of the firm becomes a powerful marketing tool as well, especially when a firm's advisors maintain a visible presence.
The result of this shift is that managing the growing business effectively and efficiently gradually becomes more important—to client service, to the bottom line and to growing the business—than attracting new clients. More often than not, a founding advisor's skill set and inclinations won't be well-suited to these new challenges. The issue facing the advisory industry is how to make this transition from firm founder to others who are more suited to taking advisory firms to the next levels of growth.
Hehman said this is called "Founder's Syndrome." He did a lot of research about it before he had "the talk" with McDonald. "I realized that at first, I didn't have much to offer and he had everything," he told me. "But pretty soon, connecting the management dots became a much larger piece of the business, and then we had to decide where the business was going to go."
