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.”