On the road to growth and success in an advisory practice, there is a fork, and the direction you take as the owner will define the rest of your career. You could keep your one-on-one relationship with clients, creating strong personal connections and controlling your practice. But you will always feel a strain on your time and energy.
The other road will take you to a model where you have a professional team, a group with different talents to serve clients. This ensemble approach will allow you to develop a business with unlimited growth potential, high profitability and lasting equity value. But it will take away your control of the business and require you to transform yourself from an advisor into a CEO.
The choice is difficult, and most advisors defer it, consciously or not. But the decision has to be made sooner or later for the practice to be successful.
Both models are valid. Both can also lead to disaster. The team model can be mired in conflicts among partners and place seemingly endless demands on your time. Yet a personal practice can feel precarious. It relies on you alone to supply all the expertise and effort. There is likely no succession or continuity planning. This can make you feel like you’re adrift on a tiny boat like the character in The Life of Pi.
But again, you can’t put off the choice forever. Revenues will likely grow to the point that you can no longer operate without an associate. Sometimes you’re forced to for succession reasons, realizing you have very limited time to groom a replacement, sell the firm or create size and scale through a merger.
The Team Model
In a large firm today (one with more than $5 million in revenue), the service team (or engagement team) usually consists of a senior professional (a lead advisor) and an associate (a support or service advisor). These two work under the direction of an investment committee with general service guidelines set by a partner group or they work under a more formal client service committee.
In some of the largest firms, the teams may have additional levels, such as a support advisor and an analyst, and may also involve an investment specialist (a portfolio manager), a planning specialist or a tax expert. The power in this approach is that the team can use less experienced professionals to perform parts of the client process, people not ready to be the “lead” yet.
For example, let’s assume that a lead advisor, working on her own, can service only 80 client relationships because each requires 20 hours of work. Imagine we hire an an associate advisor who can perform 10 of those 20 hours of work. The team doubles in capacity and can now work 3,200 hours (2 x 1,600), serving 160 clients with 20 hours each.
The profit margins improve as well. Let’s assume the lead advisor makes $160,000, while the associate makes $100,000. The revenue from each client is $5,000 in advisory fees. Before there was a team structure, the advisor brought in revenue of $400,000 (80 clients x $5,000 = $400,000) and the profit margin was $400,000 less $160,000 in compensation. That equals $240,000, or 60%.
Now notice what happens with the team structure: The revenue is now $800,000 (160 relationships x $5,000) and the cost is now $260,000 ($160,000 for the lead advisor plus $100,000 for the associate). The profit is $540,000 and the profit margin is 68%. This is the power of leverage.