Breaking down barriers to growth is something Michael Kitces knows all about. Better yet: He knows how to break through them.
As a partner at financial advisory firm Pinnacle Advisory Group, as well as the writer behind the popular Nerd’s Eye View blog for advisors, Kitces has seen the obstacles advisors repeatedly face — and dealt with them himself. These issues appear almost like clockwork as advisors evolve from a solo practioner firm, often called a “lifestyle practice,” to a multi-advisor business or an even larger advisory enterprise.
Here’s the good news. Advisors can keep growing past these barriers, which typically arrive in three stages. As soon as advisors recognize the first barrier has risen in their practices, they can better equip themselves to handling these challenges by focusing on three barrier break throughs:
Barrier 1: An Unfocused Business
Who Faces It: Recently Established Solo Practitioners
The first hurdle sets in for most advisors when they reach between $150,000 and $250,000 in gross revenue, or perhaps, $300,000 or $400,000 in some cases. This is the point when many advisors realize their early efforts to gather any clients they could is causing the firm to have a lack of focus or (niche).
At first, there’s no problem being so indiscriminate. When advisors are just starting, they’ll add any client they can. That’s a prudent way to build a business as advisors push their revenue from nothing. But this early hustling for clients can cause problems later as a firm looks to move to the next level.
Data bear this out. Kitces compared advisory firms that focus on a niche versus those that don’t. In the first three years, there’s no difference in their growth trajectory. The revenue per client for the generalist firm is the same as the focused firm. But that changes gradually as a practice develops. After 10 years, the niche firms have double the revenue per client compared to the generalist firms.
It doesn’t take long before the “lifestyle firm” that hinges on a hard working solo practicioner realizes it’s trying to serve too many clients and the lack of focus is hurting growth. This requires focusing the client base. Kitces says, “the only way you get over the wall is you have to start getting focus for your practice.”
How to Break Through
A business can be focused in several ways. Applying business thresholds, such as minimum account fees for clients or minimum client sizes is effective in paring down the clients that don’t fit the practice any longer. These minimums can work, but in the long term, finding a niche and focusing on it will be more effective. A niche might be a specific demographic of client, say members of the baby-boomer generation, or retirees from a local company.
Barrier 2: Inadequate Capacity and Infrastructure
Who Faces It: Fast-Growing Solo Practitioners
The next barrier arises when advisors get to $600,000 and upwards of a $1 million in revenue. That’s the point where an advisor has so much business they cannot adequately service what could be 75 to 100 clients. The challenge can be all that more laborous as your clients build wealth and expect more service and expertise. “You just hit the personal capacity wall of what anybody can do with a subset of affluent clients who pay well but tend to be a little more demanding,” Kitces says.
How to Break Through
Adding staff — namely another advisor — is the logical first step in dealing with this capacity challenge. But that creates additional challenges as more advisors and staff members are onboarded into the practice — keeping everyone in sync is a new management issue the solo practioner never faced. It’s at this point that forward-looking advisors build out their infrastructure to set them up for additional growth.
Technology investment is called for as a solution. The key is making sure the firm has a robust customer relationship management system (CRM) to track customers’ interactions with the firm, and a portfolio management system in place. “If you don’t have systems and process in the central CRM, no one knows what anybody else is doing and clients get horrible service and the whole thing starts to fall apart,” he says.
With focus and infrastructure in place, growth should be sustained for some time. This sets up a golden period where you and a small team of advisors can grow. “You get another great growth cycle that continues for awhile,” Kitces says.
Barrier 3: Marketing Isn’t Scalable
Who Faces It: Multiple Advisor “Ensemble” Firms and True Enterprise Practices
The golden period only lasts so long. The next wall often arises when firms try to get from $1.5 billion to $3 billion in assets under management. Driving enough new business to keep the practice growing becomes cumbersome. Traditional marketing just isn’t enough. “You can just say, ‘Hey, we’re gonna have lots of advisors that we’re gonna ask their clients for referrals and we’re gonna to form some relationships with centers of influence,’” Kitces says.
But that can’t work since it’s a mathematical reality. A firm’s growth rate is its new business divided by its assets under management. It doesn’t take long before, what Kitces calls, the "tyranny of the denominator" challenges even the most successful advisors to show growth. As the firms’ business grows, keeping up a reasonable growth rate is all the more difficult.
How to Break Through
It’s at this point that advisors need to understand that quickly and effectively ramping up their marketing is essential. Just as solo practioners were pushed into being managers to break through the second barrier, they too need to become digital marketers to break through the third.
Becoming a digital marketer might feel unnatural for many advisors who have likely have grown through word of mouth until this point. Digital marketing calls on a new way to reach clients as a firm looks to be a true enterprise with the ability to prospect large numbers of clients. Advisors at such firms write articles or appear in videos or podcasts — activities that might seem foreign and uncomfortable for advisors used to spending time across the desk from clients.
Breaking through these reservations require advisors to:
The Bottom Line
Advisors face a number of barriers on their growth path, but none of these are insurmountable. Knowing growth will stall at certain points and having the framework to deal with these periods when they occur can help advisors go from solo practitioners to true enterprises that can endure.
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