Who plans for the planners?
Advisors create detailed financial plans for their clients. But when it comes to planning for the growth and evolution of their businesses by considering the strategic decisions they will have to make along the way, many come up short.
That's the message of a report from Jersey City, N.J.-based Pershing Advisor Solutions. The report, entitled “Crossroads,” guides advisors through many stages of their business’s growth, from a fledgling book of business to a full-service, multi-office firm. The report comes during a generational transition in the industry, says Gabe Garcia, managing director and head of relationship management at Pershing.
“The average firm within the RIA space was established back in 1997,” says Garcia. “It’s been 20 years, where we are right now is founders transitioning their businesses to the second generation. Unlike other industries and businesses that had enjoyed several generations of evolution and established best practices, advisors face new decisions. It’s helpful to look at forebearers who have crossed some of these milestones.”
The choices advisors make at each stage of growth are crucial within a consolidating industry challenged by new technologies, shifting regulations, aging demographics and a shortage of advisor talent. Recruiting young advisors, hiring staff and retaining both are essential to building a sustainable practice, says Garcia, but few advisors have a plan for when and how to grow their firm through hiring.
“Yet if you ask experienced advisors at mature financial firms to tell you their stories, I would wager that they would include experiences about these kinds of decisions,” says Garcia. “These are critical decisions that need to be thoughtful, as opposed to waking up some day and deciding that you need to hire someone.”
Even small solo practitioners can realize impressive growth by hiring the right associate. Advisors typically add a supporting advisor – one that does not serve in a lead-advisor role – when they reach $92 million in AUM. Pershing says that solo practitioners are limited to advising at most 80 to 120 clients, but a firm can serve 160 or more clients as a support advisor take over some of the client relationship duties.
As they approach $100 million AUM, firms may also want to consider hiring an employee lead advisor or promoting an employee to partner. Hiring an additional lead capacity can more than double a firm’s capacity as synergies develop between a firm’s staff, says Garcia. Solo advisors should look for an additional lead advisor as the near or reach capacity.
“You should have an idea of what your ideal capacity looks like,” says Garcia. “If you estimate your capacity at 90 households, you know that around 75, you need to start making decisions on making a hire to increase the capacity well ahead of hitting 90 so that you don’t damage your service. The greatest impact to growth in our industry is capacity.”
As advisory practices cross the $1 million in revenue mark, may also want to consider promoting an employee advisor to partner. Additional owners reduce key man risk within firms, facilitate additional growth and income and increase the value of the business.