Financial planning guru Michael Kitces has written an article that was posted on financial-planning.com for advisors that are have reached or are near full capacity in the number of clients they serve.
The financial advisory industry is becoming more relationship based and less transactional. This means that individual advisors are reaching their capacity in terms of the number of clients that they can serve much faster than in years past. But, do advisors have to grow their business in order to stay successful? Is hiring staff in order to gain additional clients worth the investment in time and money?
Kitces doesn’t believe so. In fact, he says that the end result in terms of income for most firms is the same:
Yet for those who choose the latter path, little suggests that they’ll realize any economies of scale. In fact, top-performing solo advisors often have the same take-home pay as the average partner at a $1-billion-plus ensemble.
The advisor should base their decision on what they want for the business and not for additional income as there seems to be little financial upside to growing the business for most solo advisors.
Adding staff increases the advisor’s already full workload that results in diminishing returns as the cost of the staff cut into the profit margins of adding more clients. Also, some advisors don’t want to manage people. They would rather stay solo. This is a lifestyle firm. Firms that grow beyond the founder are enterprise firms.
Yet some firms don’t really fit into either definition. Some firms focus on being high income solo advisory firms. Others focus on scaling into a large enterprise, but they lack the mentality of being enterprise builders. They don’t focus on growth, they focus on getting better at delivering their service.
A book by Bo Burlingham, the former executive editor of Inc. magazine, called “Small Giants” focuses on companies that choose to be great not big. It concludes that these firms are purpose-driven. They don’t focus on growth. They focus on getting better.
These firms are not publicly traded. They are privately held. This allows the advisory firm to maintain its control over how they conduct business rather than worry about answering to shareholders. Kitces states that Burlingham concludes that the defining traits of small giants are their mission-driven purpose; their service leadership; their intimate, employee-first culture; their relationship-centric approach to customers and suppliers/vendors; their deep roots in their communities; and their ability to protect gross margins without compromising company values.
It’s not a lifestyle firm, but it isn’t quite what we think of as an enterprise that mainly pursues growth and maximizing shareholder value.
It takes much longer for an enterprise to grow to the point that it starts to generate the revenue for the owner that makes it worthwhile to pursue growing an enterprise. Most firms would be better off staying solo firms in terms of money generated per client and actual income.
Unless the firm becomes one of the very top large enterprise firms the money generated from growing the business merely makes up for the reinvested profits that would have been realized had the owner stayed solo. In other words, this is just a delayed payment that may not be seen for years.
This leads to the question Kitces is trying to answer in the article:
If continued growth doesn’t necessarily result in greater wealth, what is the best path for an advisory firm owner to take at the capacity crossroads?
The answer depends on what the advisor’s goals are with the firm.
Lifestyle firms are for advisors that are paid for the advisory work that they do. These advisors typically want a work-life balance. They may also prefer client interaction instead of solely focusing on managing a team. Lifestyle firm owners need not sell their businesses as it does not matter than staying solo.
A small giant is for advisors that want to make a good income and have their business deliver a better solution. They realize that they will have to be advisors and firm owners that manage a growing team. Small giants have internal succession plans or employee stock ownership plans with the purpose of maintaining the original mission of the organization.
An enterprise then says Kitces:
…is the preference for those who truly feel driven and motivated to transform from an advisor to an advisory firm business owner.
For enterprise builders, it’s common and even likely that the founder will eventually move away from client relationships altogether, and instead immerse themselves in the growth and development of their people and their culture instead, as well as building and maximizing the shareholder value of the business by whatever path it takes.
Often the endgame for an enterprise is to cash out and sell part or all of the business.
The main takeaway here is that there is a middle ground between being a solo firm and an enterprise. This is the small giant. Advisors should have a vision ahead of time of what their firm will be. This will allow them to deal with what Kitces has dubbed “the capacity crossroads” before reaching it and make them happier in the long run.
To read the full article, click here.