There are approximately 250 advisory firms with more than $1 billion in assets under management (AUM) in the financial advisory industry. No more than 30 of those have more than $5 billion in AUM. If you were to ask any such “super ensemble” (a billion-dollar AUM firm) what its vision is, the likely answer is that it wants to “grow to the next step.” For those at $1 billion, that means reaching $5 billion. For those at $5 billion, it means reaching $15 billion and beyond. There is no question that the largest firms are aggressive in their ambitions. The real question is, what changes do they have to make to reach the next step?

There are numerous surveys of the top firms in the financial advisory industry. Financial Advisor’s 2014 RIA ranking, to name one, lists 170 firms with AUM of more than $1 billion. Since the list relies on 2013 data, it’s conceivable that 20 to 30 firms have joined the club by the time you’ve read it. Fifteen firms had more than $900 million at the end of 2013 and with 11% growth in 2014, likely joined the super-ensembles.

Financial Advisor’s list is a survey—the participants chose to be listed when they supplied their information. Another list using ADV data contains 202 firms with more than $1 billion for the same time period (by the end of 2013). Several other lists show only the top 100 firms. Some lists exclude firms that receive commissions or are registered representatives of broker-dealers. That eliminates names such as Edelman Financial, HighTower Advisors, United Capital and even firms such as Plante Moran and Moss Adams—accounting businesses that own broker-dealers. If the hybrids were included, we would have approximately 250 super-ensembles across the country.

According to the 2014 Moss Adams survey of financial advisors, sponsored by Pershing, 47% of super-ensembles say their No. 1 strategic priority is revenue growth, while 12% say they are focused on mergers and acquisitions. Twenty-nine percent list organizational development—the internal view of growth—as their focus.

After witnessing some of the largest firms in the industry deal with growth, we believe there’s a path that a super-ensemble must take to reach $5 billion. And we believe that growth begins with a vision that unites a firm and its leaders.

The Vision
A vision is a destination—where a firm wants to be in the long term. For most large advisories, the vision is not just to be twice or three times their current size but also to be among the premier firms in their industry and market.

A good vision gives a firm a sense of purpose, and it gives the professionals and owners who work there a reason to devote their energy to it. The founders of a firm can naturally speak of “our firm” in a very non-abstract way—much like my family says “our car.” We drive the car, we fill it up with gas and we take it wherever we want. We know the car well and we know all the passengers. But a $5 billion dollar advisory has a different definition for “our firm”—one that is more abstract. It is much more like “our community.” We belong to it. It defines a lot of our quality of life. But we don’t know all the people and we don’t control it beyond our front door.

I often joke that the test for a real firm is when you have a client you’ve never met—and the test for a large firm is when you have an employee you’ve never met. I guess the test for a $5 billion firm is that you have a partner you’ve never met. If you don’t see a partner daily, what brings you together is your vision of the firm—what you can achieve together that you can’t achieve without it.

Developing Business As A Firm
Even with the huge asset levels, many super-ensemble firms continue to draw clients because of the personal reputation of the founders and the influence of a small group of individuals.

There is a dramatic disconnect between the growth ambitions of firms and their sources of growth. The average super-ensemble grew revenue by 18.2% in 2013 according to the Moss Adams survey. But only about 40% of the new assets in 2013 came from new clients—the rest came from market performance (appreciation) and continued contributions from existing clients. Of the new business developed in 2013, approximately 35% came from referrals from existing clients and 25% came from professional referrals. Only 40% of the new client assets (16% of net new assets) came to the firms as a result of new business development.

Part of the problem is that lead advisors and partners at more than half the firms don’t have new business targets. At those firms with targets, lead advisors are supposed to bring in only $100,000 in new revenue while partners are supposed to bring in $150,000. For a firm with $30 million in annual revenue, it would take 20 partners or 30 lead advisors to grow by 10% with such targets. And even those firms with targets don’t always enforce them.

There are two dimensions to fostering business development. One is training and encouraging all professionals to develop new business, something that’s only in a nascent stage in the advisory industry. Most firms have only a basic marketing planning process without specific activity or revenue targets or ties to compensation.

The second dimension to business development is the brand—developing the reputation as a firm, rather than as individual professionals. Firms like Aspiriant and Laird Norton have sophisticated branding strategies that develop their firms’ presence in all of their markets and includes advertising, event sponsorship, the publishing of white papers and articles, public speaking, a social media presence as well as graphic and visual representations of their brands in the form of logos and other materials.

A Lasting Ownership Structure
To continue to grow, a firm needs to be able to add new partners and retire older ones. A large group of owners will always have someone close to retirement and will thus need to deal with succession. When there is a large number of partners (20 or more) the continuity of ownership has to be a process—it can’t just be a bunch of individual deals with different partners, since some will do better and foster internal conflicts, harming the firm’s performance eventually.

There should be a clear understanding of the criteria for firm owners, and they should know what is expected of them. There should also be a fair and equitable partner compensation method. The culture should put the firm’s interest above those of any individual partner. Everybody should understand the firm’s economics, and value the idea of continuity.

The toughest part is when the founders retire—they often have concentrated stock positions that are expensive for the others to acquire. Less well known is the difficulty transitioning from the second generation to the third. G2 often treats the firm the way my son treats my car—he is waiting for his turn to drive it and is not sharing it with anyone or driving his sister around. That eventually leaves the firm with the same problem all over again—a concentrated position of ownership, rather than a democratic governance and ownership model.

Separating Ownership And Management
It’s impossible to have an effective, competitive organization with 30 people managing it. Such a firm would be paralyzed by discussion and politics—the slow process of seeking consensus and involving every owner in every management discussion, even in things like the selection of a new CRM, which not every owner wants to deal with.

Large firms already understand the difference between leaders: Owners can lead by example and motivate people. But it’s the managers who make business decisions that affect the firm in the long term. Thus the corporate governance structure should not be a club of owners who simply get together but a group of corporate officers in structures where they can make the right decisions.

Yet today, the vast majority of the super-ensemble firms are still led by the founders who started them 20 or 30 years ago. Thus, the governance structure of the firms is commonly dominated by the founders. The firm is following Bob because Bob is the founder and the leader, not the CEO or the office of the CEO.

To get to the next stage, a firm has to successfully transition authority from a person to an office. An army follows a general—not a person—which means you can change generals without changing combat success. The same is ideally true of a business—changes in leadership may result in changes in approach and style but not changes in authority.

To achieve such a transition, super-ensembles need to establish several structures:

• The executive committee of a firm frequently acts as a board of directors, representing the shareholders (owners) and checking the executive power of the CEO. An effective committee will allow for a more disciplined management approach.

• The president of a company typically manages the executive team and is more focused on day-to-day execution while the CEO focuses more on high-level strategy. Though the distinction may seem unnecessary in a service firm, the president’s office can be used to groom future CEOs. It can give the president a chance to handle some of the top-level responsibilities and participate in the leadership of the firm.

• Chief operating officers are most often hired from the outside to improve a firm’s operations, and most firms already have one when they are ready to step to the next level. That next step for super-ensembles usually means elevating their COOs—raising them from their back-office management duties and putting them second or third in command of the firm so they can manage the overall infrastructure the firm will need to pursue its strategy.

A key concept in this discussion is the notion that authority comes from an office and is “bestowed” on the person in that office. Nothing reinforces that like a term limit. A CEO should not be “CEO for life” and the same is true for other positions, including those on the executive committee.

Firms with large structures and institutional ownership understand these concepts more. The presence of the institutional owner creates a more functional board of directors (since that’s often how the institutional owners exercise their control and rights) and a more disciplined governance process.

Lateral Partners
When a firm is young, its partner ranks are often filled by company employees—people who have worked their way up, been promoted and earned the right to be owners. They are strongly connected to their firms since they “grew up” in them. This model is comfortable and ensures the continuity of culture.
But if a $5 billion firm is to retain its pace of growth and add the talent it needs, it will eventually have to find “lateral” partners from the outside. Some may join with their own established practices and client bases. Others may be valuable technical specialists.

To be successful, firms will need a mechanism to attract and embrace such partners and quickly integrate them (not push them away as culturally incompatible). This seems logical, but in practice it is very, very difficult to do. So much of the information and decisions in a firm flow through a naturally established system of personal relationships and historical patterns that the “newcomers” are not part of.

Growing In New Markets
Finally, firms that want to get to the next level must find a way to enter new markets—either through mergers and acquisitions or by starting from scratch somewhere. Advisors in large markets like San Francisco, New York and Chicago may not need to open a second office, since they are already in places they can expand, but otherwise, many firms will want to branch out (out of Seattle, into Washington state, for instance) as a way to seek both opportunity and dominance.

Aspiriant, for example, is in both San Francisco and Los Angeles, as well as in several other markets. Brownson, Rehmus & Foxworth is in Chicago; Palo Alto, Calif.; and New York. Firms such as United Capital have been structured from the beginning to be national brands, and they have acquired pieces of the map strategically.

But managing both operations and culture in multiple locations is a challenge that has proved very difficult for advisory firms. Many have lost satellite offices—smaller locations with one or two partners—either because the far-flung partners chose to become independent or simply withered away.

To be successful in attacking a new market, a firm will need critical mass in that new market to convince clients that it is a viable competitor. Usually that means the firm must acquire a well-respected local firm. Advisories will also need critical mass to attract talent, and must be able to offer incoming advisors a well-developed career track.

New advisors must be hired or acquired who can articulate the firm’s vision in a new market. Or else, people from within the ranks who already know the culture must take over leadership responsibilities in those new markets. The culture must be exported—which means the new office will have to accept and adopt the culture of the firm. But that is also very difficult. The key to such transitions is the presence of leaders who lead by example. Every professional wants to join a culture that is successful.

Conclusion
The largest firms of today stand at $15 billion to $20 billion in AUM. There are only 28 firms with more than $5 billion in AUM, according to the Financial Advisor list. However, if this rate of growth continues (23.7% growth in AUM in 2013 for super-ensembles), we can expect to see today’s $2 billion firms reach $5 billion in only five years, meaning that another 70 to 100 firms will reach the $5 billion level by 2020, based on growth and math alone.

Success in business is not just a combination of math and growth, however. To reach this rare size requires changes in culture, organizational structure and ownership mentality. The changes could be difficult and painful, as are all changes in culture. But the process of growing is a process of constantly tearing down and rebuilding bits and pieces of the organization so that they are ready for the next phase. The firms that succeed in that mission will be the ones who write the next chapter—the future of the industry.