Most firms in our industry start their race like racehorses: dynamic, exciting and growing rapidly. But after a couple of decades, many firms begin to resemble a pack mule: stodgy, predictable and relatively stagnant.
We have the unique perspective, having conducted analytical benchmarking reports for hundreds of independent firms of varying sizes and backgrounds over the past decade, about how things are evolving. We see why some firms are stuck and will likely stay that way, and why others are likely to burst to new levels with a little help. That's really important to us because it lets us know whether we are likely to have a modest success or an exceptional success in any new partnership.
DEGREES OF SEPARATION
Most firms start with a person (or a partnership) — with strong people skills and work ethic — delivering some form of financial advice to people just like them. These firms typically plateau after 20 years because they build their base of clients with one core group over the first 10 years, spend the next 10 building on that core with a referral group, and then maintain their client base.
Here are the four major stages of development. These are guidelines, not rules, with many exceptions:
1. One degree of separation, 150 clients: I look after my clients like friends and family. At this size, the adviser typically knows all the clients. The founders are the primary reason the clients are with the firm, and staff is normally deeply ingrained in a “family” style culture. The size and revenue of the business are wholly dependent on the size of the clients. The wealthier your clients, the bigger the revenue stream (and no doubt the more profitable). The adviser spends days meeting clients and usually has generalist support staff.
2. Two degrees of separation, 150-500 clients: I look after my clients and their friends. This size firm operates similar to a dentist's office. The team has more clearly defined roles, clients are often segmented and top clients serviced by the founders, while smaller clients are often serviced by junior advisers. The adviser is swamped with daily client meetings and managing operational issues like compliance, people and technology.
3. Three degrees of separation, 500-1,500 clients: My team and I look after clients, their friends and their friends. This firm is making the transition from owner as adviser to owner as business leader. The adviser has transitioned most of the relationships to other internal advisers and primarily concerns him or herself with ensuring high-quality work is being given to the clients (some of whom are strangers) and evolving the firm.
4.
Four degrees of separation, 1,500 plus clients: I look after my business and ensure it looks after clients. This business is a standalone enterprise, with clients who are loyal to the brand and the business, rather than to any one person. Often, leadership has no client relationships and is primarily focused on running an enterprise.
THE LEADERSHIP PERSPECTIVE
While firms in any of the four stages above might be in the same industry, their leaders experience very different workdays. What we see is that many firms make the leap from Level One to Level Two, but not as many successfully make the leap from Level Two to Level Three. Why is that? Because the first two are still typically lifestyle businesses, but operating at different scale, while the third and fourth have become standalone operating companies that can grow exponentially.
Here's what we see as the most common reasons firms cannot get from one level to the next:
1. Unable to shake old habits. History and size has a way of becoming heavy baggage — sometimes the leaders assume the only reason they are successful is because they have operated a certain way and want to keep it that way. More often than not, the leader is having a good enough life and has no desire or need to build something bigger. The challenge is that without growth, the business quickly goes into maintenance mode and it becomes hard to rebuild a growth mindset. The racehorse has become a pack mule and simply can't (or won't) move any faster.
2. Unwilling to let go. Advisers often have the perspective that clients have to work with them because no one else can care for the clients the same way. That kind of thinking typically extends beyond the relationships to all aspects of the business. When the adviser at the top has to control every major relationship and every major decision, there is no scale and the practice will very quickly flat-line. If the horse isn't running, it's usually the jockey that's the reason.
(More: Goodbye wealth management, hello financial life management)
3. Unable to maximize people. In a service business, we are reliant on people and systems to create scale. However, making the most of employee relationships is a very different skill set than managing client relationships. Sometimes, we see leaders who treat clients like gold but their employees like mud. Also, we often see advisers who hire people they like (people who are just like them) rather than people who complement the team and the leader's weaknesses. If you don't have more horses to share the load evenly, the speed of the group will be compromised.
4. Trapped by capacity limits. The leaders want to make the shift to the next level but are overwhelmed by the complexity of building the systems, making investments in the business and finding the time and expertise to make the right choices. Often the shift between Levels Two and Three can lead to disagreements within a partnership, especially if there have been failed attempts in the past. Understanding what you and your team are exceptional at and offloading the weight of everything that slows you down is the only way to get your horse to run faster.
Every business is a reflection of its leadership. Ultimately, whether you want your practice to be a racehorse or a pack mule, it's up to you and the choices you make. But have no doubt, it's much easier to slow down a racehorse than to speed up a pack mule.
Joe Duran is chief executive of United Capital. Follow him @DuranMoney.
