Within the independent financial advisory industry, many use the term “business” to describe their firms. But what does the term “business” actually mean, and what are the challenges businesses face as they strive to evolve beyond their current state?

Before we answer these questions, it’s important to have a general understanding of how advisory firms operate and evolve. As is the case with other service professions such as law, accounting and medicine, most financial advisory operations begin as “practices.” Eventually, some practices evolve into “collaborations,” which, in turn, can evolve into “businesses.” That is usually the final stage of evolution, though certain organizations can evolve from businesses into “enterprises.”

The Evolution Of A Financial Advisory Organization

Practice

We define a “practice” as:

1. One or more people working together and in concert;

2. Under the supervision of one person;

3. Substantially all of whom are directly focused on providing or administratively supporting financial advisory and ancillary services.

When almost all the people in an organization are working in concert, either directly involved in providing services or offering support, the organization is likely a practice. Practices tend to have few (if any) people focused solely on management or operations.

Collaboration

The same way cells divide and reproduce, a single financial advisory practice can turn into multiple practices (under the auspices of the same organization). Or an external practice can join another to form a collection of practices. A collaboration is formed when multiple practices share resources (such as rental space and technology) or knowledge (such as investment and wealth management approaches) but otherwise remain largely uncoordinated. Their services offerings are likely inconsistent.

This type of arrangement can involve few or many people. Size doesn’t matter so much as how the people are working within the organization.

Business

Now about the word “business.” Just about everybody offering financial advice says they work in a business, as the term can broadly include any activity engaged in for profit. When we put it next to the terms practice and collaboration, though, a more distinct definition emerges.

A financial advisory “business” has several traits:

1. People within a business share resources and knowledge.

2. They provide services in a coordinated, consistent fashion.

3. Each person in a business tends to have a clearly designated function that doesn’t overlap with those of others.

4. Businesses include one or more people primarily focused on management and operations.

5. The people within a business generally share the same values and operate under a clear plan, with a clear mission and vision.

Using this construct, many financial advisory organizations are likely practices or collaborations, not businesses, though that’s not to say that one form is better than another. Well-run practices may be far better positioned to offer services than poorly run, burdened businesses, for instance.

Still, being a business has its advantages. Advisors in a business are less likely to be pulled in multiple directions. Businesses may also benefit from efficiency and scale and, in turn, greater financial strength. They are better able to attract, develop and retain top talent, offer broader services, invest in better technology, access better third-party services and stimulate faster growth.

Enterprise

Some of the rhetoric within the industry suggests that the evolutionary spectrum of financial advisory organizations ends with the business stage. Yet, for those who seek it, there is something beyond being a business. Advisors have been nebulously thinking and talking about it for years, though they often don’t define or describe it holistically. They tend to use terms like “innovation,” “succession planning,” and even “sustainability,” but, in the aggregate, what they really are getting at is what may be the final stage of evolution: enterprise. An enterprise:

1. Is a business;

2. That is not overly reliant or dependent on any one person or small group of people; and

3. That can be sustained over time by new generations—in its offerings, functions and ownership.

Enterprises are meant to survive—and thrive—beyond their current group of employees, which means they are less dependent on individual people and instead propelled by what those people do and how they do it as a group.

Enterprises are in a state of constant renewal and need to evolve through constant innovation. Such evolution is central to their long-term survival, as no organization can remain static and expect to survive the test of time.

Importantly, enterprises need more than just succession plans. They must create perpetual, continuous succession processes to ensure transitions to the next generation and future ones.

Evolving From Business To Enterprise

Those firms that want to evolve from businesses into enterprises have to balance their near-term goals and the prerogatives of the founders and other leaders with the future aspirations and needs of other stakeholders.

To that end, an enterprise should show certain qualities:

1. A Willingness To Transition

A business does not become a truly sustainable enterprise until there are structures and processes in place for shifting the leadership and other key responsibilities to the next generation. In turn, the organization must ensure that next-generation talent possesses the increasingly diverse and focused skills and experience necessary to propel the organization forward.

Such transitions require founders and other leaders to pivot—focus less on themselves while identifying and mentoring future replacements. Thinking and acting for the greater good of the entire firm may not be the natural inclination of entrepreneurs (or anyone else for that matter). They likely spent their entire careers narrowly focused on managing their legacy books of business. If they want to shift the focus away from their own roles in their firms, it requires them to overcome existential worry.

At the same time, a firm’s next generation must possess not only enough talent and willingness to assume greater responsibility for the firm’s success but also a healthy respect for the work and contributions of those who preceded them. These “up and comers,” like their predecessors, must also learn how to make decisions that contribute to the greater good of others in the organization. In other words, as individuals, they must change from independent superstars into interdependent and collaborative team players. Our industry has historically tended to focus on individual accomplishments, which means some promising next-gen talent might opt to leave rather than learn to play with the team more. That means firms must continuously cultivate many high-potential employees, even those at earlier stages of their careers, to ensure the talent pool is large enough to supply the future needs of a successful and fast-growing enterprise.

2. Leaders Must Know When To Leave

The willingness and ability of leaders to face their own replaceability is just one requirement of enterprise status. Even when all leaders recognize and buy into the concept of eventually handing over control, disagreements about timing or process can stall or prevent that transition. There may be age differences among the current owners, differences of opinion on valuation, or divergent thinking about what it will take to remain competitive in the industry. Equally risky is the prospect that disagreements arise in the middle of the transition process and derail it altogether.

3. Successful Firms Must Know How To Allocate Capital For Transitions

When next-gen leaders are asked to assume more responsibility and act like owners, they’re typically expected to have “skin in the game”—in other words, buy into their firms. The obvious challenge is that they often lack the financial resources to fund a buyout. In that stage of their lives, they are usually paying for family, children, college funding, etc. It’s even harder for them when the firm’s got a high valuation.

A firm that’s changing hands will have to strike a delicate balance coordinating the share purchases of new partners with the payouts to departing owners of differing ages who have various retirement goals and demands on their own liquidity. Enterprises solve these significant capitalization challenges by creating a clear structure for ownership investment and divestiture. They also provide clear communication about career paths and an understanding of the investment required to become an owner. They manage relationships with banks or other organizations willing to provide capital to the less wealthy next-generation employees, recognizing that sweat equity is also critical to the ongoing financial success of a firm.

4. The Company’s Vision And Culture Must Transcend The Organization And Its People

While firms operating as businesses often have company mission statements or statements of values, these can be uninspiring or narrowly focused on boosting the shorter-term bottom line. Business-success metrics and employee-performance goals may also be overly centered on bottom-line results.

An enterprise, however, must focus not only on profit but also emphasize a powerful vision and culture with broader aims.

A vision that articulates key, long-term goals will more effectively align employees’ daily activities with the firm’s true mission and values. More importantly, such a vision helps everyone understand their interdependence and creates a common sense of meaningful accomplishment beyond the bottom line.

When the employees understand a firm’s culture, they understand what behavior is expected of them, including whether they are on a path to ownership. A strong culture also contributes to stronger brand recognition, especially when it’s communicated to clients and the community.

An enterprise can only come into its own when there is successful collaboration among the main stakeholders, who must recognize their interdependence and display a willingness to make decisions and take actions for the greater good of the entire firm over time. All employees of a firm must be willing to think less about success for themselves and more about a future where they depend on others.

A Final Thought About The Future

Evolution is an interesting thing. In nature, it never really ends, and while we can guess where it might lead, we do not know for certain until it actually happens.

In the financial advisory world, is there something beyond enterprise? Surely there must be something, but what will it look like? Is it possible that we can learn from the experience of other, more mature service industries? If so, then perhaps we can postulate that the few true enterprises currently in the independent financial advisory industry will eventually become many and that, in turn, some of those enterprises will grow into global organizations with widely held ownership and the broadest possible capabilities along the lines of today’s largest accounting and law firms. The future will tell us, as will those pioneering financial advisory companies who seek to discover what is beyond enterprise.   

Dawn Doebler, MBA, CPA, CFP, CDFA, is a principal and senior wealth advisor at The Colony Group. Michael J. Nathanson, JD, LLM, is chairman and chief executive officer of The Colony Group.