Advisory Firms Are at a Growth Crossroads

For years, I have referred to the lifecycle of an advisory firm as "Wonder, Blunder, Thunder and Plunder."

Many seem to appreciate this clever phrasing, which I borrowed from an expert on family businesses, the late Leon Danco. In the advisory business, these phases translate to birth, growth, maturity and decline. Truth be told, each of these stages encompasses countless decisions made in a whirl of activity. Leaders must recognize when they reach a crossroads where a critical choice will change the course of their business.

A new white paper entitled "Crossroads," produced by Pershing Advisor Solutions, where I am CEO, and constructed by The Ensemble Practice, reveals the pivotal decisions at each phase of the advisory firm lifecycle. The journey from practice to business passes through several important waypoints. At these junctures, firm owners face key questions such as:

Should I add staff, specifically a support advisor?
Should I hire another full-time experienced advisor?
Should I promote an employee to partner?
Should I hire a full-time executive to manage the business?
Should I formalize my corporate governance model?
Should I merge or acquire?
Should I invest in building a firm brand that extends beyond my personal reputation?
Should I open offices in other locations?

The first question arises relatively early in the journey, once the owner has established a successful sole proprietorship. Most advisors decide to hire a support advisor, a paraplanner or another senior advisor to add capacity and depth to their practices. The typical advisor spends less than 50% of his or her time on client service and the rest on activities such as office administration, compliance, technology and continuing education. With these time constraints, advisors cannot grow clients, assets, revenue or earnings unless they consciously trade out smaller clients for bigger clients. Ironically, most lack the time for business development, so this becomes a circular path to frustration.

The addition of staff moves the firm to a new stage. The owner starts generating revenue from other people's labor, not just his or her own. Of course, new hires are not free or cheap, so the proprietor must create more growth in order to generate a return on human capital. People are expensive and not always immediately productive, so there is risk in whom we select and how we ask them to perform. Further, more growth means the firm will need to add more staff to keep up with the administrative tasks. Before long, the firm runs the risk of becoming unwieldy or unmanageable, and the firm owner has arrived at another fork in the road.

Should you take on a partner? Structured properly, the addition of a partner can transform an advisory firm. Partners help firm founders share risk, build firm culture, distribute responsibilities and celebrate successes. Partners can also introduce complications: different values, behaviors and attitudes that rub you the wrong way or have the potential to derail the business.

The process for admitting new partners requires rigor. The candidate must demonstrate an ability to make a meaningful contribution to the business, either in direct financial terms or in managerial terms. They must prove their own interest in and talent for developing others behind them. They must be aligned on the business strategy and respectful of the people they work with. And they should have to buy in, not be given ownership.

Typically, the first partners in a firm are other advisors. They may assume some management responsibility, but their primary role is procuring and serving clients in order to generate revenue. At this point, the firm is able to demonstrate that there is a legitimate career path for employees and the founder can share accountability and risk. As advisory firms cross the $5 million to $7 million revenue mark, however, the business becomes more involved. Firm leaders need to evaluate how they will keep pace with their growth and if they require a dedicated and active manager. Individuals in this role are usually hired as chief operating officers (COO) or general managers. The scope of their duties covers operations, service, talent, financial management and risk management: Their job is to execute on the strategy of the firm. Should your firm take this step?

Avoiding a 'Death Grip'

Many advisors shy away from hiring a professional manager because they fear the fixed cost of an expensive non-revenue producing individual. Advisors also worry about the loss of control over their business, perhaps not recognizing that control in their case may be a death grip. The term "corporate governance" makes entrepreneurial advisors cringe. Many choose to leave large companies or a bureaucracy of any kind to avoid the rigidity that comes with structure. Regardless, as a business grows it becomes more complex and owners lose track of all that is happening around them, impacting firm health and the effective servicing of clients.

The decision to add dedicated management is significant in terms of driving growth. A professional manager enables the firm to create more formal processes and procedures to guide future choices. This valuable framework aids in client acceptance, pricing and quality control. The governance process also helps ensure the integrity of your proposition and the development of the staff. Ultimately, the corporate governance model creates accountability for top leadership, giving all partners a tool for defining expectations and managing to a desired result. Just as advisors have a discipline around managing risk and return with their clients' investments, so too can owners of advisory firms use this model to provide a filter for making management decisions.

What's Next?

Firms at this stage of development have made a series of important decisions. New hires have been financially absorbed. The process of relinquishing certain management duties has been tolerable. The anguish of adding a partner has added a new dynamic in a leadership and ownership capacity. The firm is being managed well. Now new questions emerge from the misty trail ahead: Do you open a new location? Do you merge with or acquire another firm?

This crossroads challenges the most seasoned traveler. The negotiation is relatively easy compared to the process of incorporating a new business into an existing enterprise — and the implication of this undertaking is significant. The wholesale integration of another firm into your practice brings natural conflict and potential rejection.

Perhaps even more challenging is the building of a brand that can spread to multiple locations. Opening a new office and managing it remotely requires a means of transplanting firm culture, delivering a similar and consistent client experience and keeping employees in the branch engaged with the rest of the firm. Too often, advisory firm leaders underestimate the complexity of managing from afar. It is not just another revenue center or a new market. The branch is a living, breathing organism that must be nurtured. A merger or firm expansion requires the management bandwidth to digest these events for years after the deal is done. This decision requires careful contemplation and planning.

As we shepherd a cottage industry into a legitimate business model, we are beginning to see winners sprinting ahead and losers falling by the wayside. Success rarely occurs by accident. As advisors clear one hurdle, they must begin thinking about the next decision in their path. Where is your firm on this journey? Now is the time to craft an implementation plan to guide you through the stages ahead. Take the time to plan and organize and be prepared to tune out minor distractions as you process through the timing and nature of your business growth.

— Read Managing by the Numbers: Customizing Your Growth Strategy on ThinkAdvisor.