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.

At $100 million, may firms also consider hiring a full time executive, but most firms look to hire a CEO when they reach $1 billion AUM, $7 million in annual revenue, according to Pershing. Most importantly, the business should produce revenue sufficient to support the strategic focus of the executive.

“These later stages of growth are critically important for custodians like us: our average firm custodies $350 million in assets with us, and many are multi-custodial,” says Garcia. “At this stage, advisors don’t want to die with their boots on, they need clients to be served throughout their life cycle. We think that’s why, in 2015, we for the first time had more non-owner advisors in the industry than owner advisors. That requires a decision-making and governance model.”

At $1 billion in AUM, most firms adopt or consider adopting a corporate governance model, either a board of directors or an executive committee, depending on the ownership structure, to hold the executive leadership of the firm accountable to the values of its owners and founders.

Many firms will also look to mergers and acquisitions to boost their growth, says Garcia, and Crossroads addresses the timing of M&A activity for growing firms.

“As generations X and Y become the core of these businesses, the trend of transactions has shifted to where most people now see themselves as buyers of firms or books of business, not sellers,” says Garcia. “Many of these buyers have a vision to create something greater than the sum of two firms. Whether its to expand a geographic footprint, access new clients or to grow to become a regionally or nationally dominant player, their goals require growing capacity through mergers and acquisitions.”

When an advisory firm crosses the $500 million AUM mark, it could be time to consider the first merger or acquisition, according to Pershing. This may take the form of the purchase of an operating business or a book of business, or tucking another local small advisor’s existing practice into a firm. Before making any deals, advisors should consider valuations, earnout or clawback provisions, compensation and the potential offer of equity ownership.

After firms hit the $1 billion AUM level, they should consider opening a second office and moving into additional geographic markets, says Pershing.

The report suggests that firms move their branding away from their owners and founders as they approach $1 billion in AUM. Successful branding for advisors involves developing a narrative that tells a firm’s story, and delivering that story effectively to a target audience.

“The first generation of founders wanted to put their names on the door of their businesses,” says Garcia. “Frankly, that has become a barrier to their continued success and growth. Through mergers and acquisitions, firms are extending themselves and creating new businesses that extend well beyond the personalities of their founders. Big financial businesses should be bigger than any individual, the branding should reflect what they stand for over the long term.”