Many advisors want to grow their business. Yet there’s a subset within the RIA community whose biggest challenge is not growth, but misery — namely, their own.
Unhappiness seems particularly prevalent among firms managing between approximately $100 million and $300 million of AUM — a subcategory of firms I call “accidental business owners.” Though these individuals may have built successful and profitable businesses, they might have never imagined having to spend so much time managing.
The fundamental tension here is that a successful advisory business is different than a successful advisory practice. This subtle but critical wrinkle has wide-ranging ramifications for these accidental owners. Happily, there are ways to soften, if not outright eliminate, the tension, but some hard choices must be made along the way.
Why “accidental”? We often talk about advisory firms being businesses, but I make a distinction between true businesses and practices.
A practice is built around the individual advisor — i.e., you and the services you provide to clients. You might have a staff member or two, perhaps an administrative assistant, client service manager or paraplanner, but you create the primary value. You are the one who brings in the revenue. You are the one who drives the outcomes.
By contrast, in an advisory firm business, it goes beyond just you as the founding advisor. There are other advisors who manage clients and who may bring in revenue. You may not even manage or service clients yourself anymore because you manage the business of serving clients and giving them advice. It’s a very important distinction.
QuoteIt took me a long time to learn that I'm actually not very good at managing people.
Historically, very few advisors were ever business owners, per se. We were salespeople. We were paid commissions, and our practices — and they were practices — were built entirely around ourselves. When we didn’t work, no revenue came in. When we retired, the practice vanished because there was nobody left to service clients.
But the transition away from our commission-based roots — and particularly to the AUM model, with its recurring revenue — has fundamentally changed advisory firms into businesses. Indeed, one of the primary benefits of transitioning into that fee-based AUM model is that you have this recurring revenue, which means the firm gets paid even if you’re not out getting new clients. And because the cost of servicing clients is lower than the cost to get them, you can create a bona fide business that’s beyond just you by hiring other advisors to service those clients and retain them — thereby earning a profit as a business owner.
In turn, all you have to do to start building a real business under the AUM model is just keep bringing in clients and handing them off to other service advisors. Suddenly, you may have several hundred million dollars under management, millions in revenue and a healthy profit margin. You are now primarily running the business and growing the revenue.
For advisors who want to grow a business, this is an amazing way to do it. In fact, when I look at the landscape of $1 billion AUM firms today, almost all of the ones I know grew with this basic formula. One or several founders was pretty good at marketing and business development, and just kept bringing in new client revenue, which was handed off to employee advisors who gave great planning advice and retained clients. Wash, rinse, repeat: Bring in more clients, hand them off, bring in more clients, hand them off. If you’re good at landing new clients, you can power your way to $1 billion of AUM.
But the fascinating quality of the AUM model is that, because our client retention rates are so high — typically 97% or 98%, and even bad advisory firms often see 92% to 94% — advisors tend to accrue clients over time, even if they’re not necessarily trying to grow big.
You eventually hit a capacity wall. And the only way to keep moving forward at that point is to hire a paraplanner or an associate advisor and hand off some clients. Usually, I find advisors are most actively involved with around 75 to 100 clients.
As long as someone is continuing to serve clients well, retain them and get a few new referrals every year, the accidental-business-owner phenomenon eventually rears up. On the face of it, this is a good problem to have, but not if you never had an appetite to manage a full-blown business.
The job shift: Being an effective advisor is all about you and your ability to service clients. You may have some support staff, but it’s all built around your personal ability to connect. And because that’s challenging work, you’re rewarded well for it. Being a successful solo advisor pays really well, with standout solo firms netting as much as $500,000 in take-home income — to say nothing of the psychological rewards from having all those client relationships.
By contrast, running a successful advisory business entails teaching and training other advisors to be good at business development and planning, as well as servicing clients and tending those relationships. It’s your job now to manage the firm, hire staff, make technology and infrastructure decisions, set the direction and be the person who leads the growing team forward.
But that doesn’t mean you can take your eye off of growth. After all, that’s how you give more opportunities to team members whom you’ve invested in developing and retaining.
Consequently, if giving people advice and having those relationships were the primary reasons you started your firm, being an advisory business owner is pretty miserable. As they start crossing that $100 million to $300 million range, advisors require more staff to handle it all.
It took me a long time to learn that I’m actually not very good at managing people. Having an interest in managing and developing client relationships is very different than having the skill set to manage and developing talent in your firm. And unfortunately, few experiences actually teach us how to be good business owners of our advisory firms — until we’re doing it.
To add more salt to the wound, once you grow past about $100 million of AUM, you don’t make any more money either. In fact, when we actually look at the industry benchmarking studies, the typical advisory firm owner or a partner with anywhere between $100 million and $1 billion of AUM takes less pay home than successful solo advisors. You have to actually exceed $1 billion of AUM for take-home pay per owner to exceed what the most successful solos achieve.
This is simply because all that additional revenue and profit as you go from $100 million to $1 billion under management ends up being continuously reinvested into more staff, infrastructure, technology and everything else it takes to scale a business from $1 million to $10 million of revenue — because that’s the path you’re going to pursue.
Granted, you are building a more valuable business enterprise. Someday you may have a liquidity event where that business is sold for a chunk of money and maybe you make back some or all of those foregone years of income. But it’s a long haul.
Consider how rare it is to see a firm grow from $100 million to $1 billion in less than 10 years. Most firms do it over a lifetime, if they do it at all.
The path forward: All this being said, the question that arises about accidental business ownership is this: What can you do about it?
In essence, there’s a fork in the road. The path to the left leads you to embracing your role as a new business owner. You may not have set out to do it, but here you are and this is an opportunity to grow. Learn something new, do this well and you can build some incredible value.
But this path entails learning how to effectively run, manage and lead a business. This isn’t about going to conferences to learn how to become a better advisor; it’s about learning to be a better business owner.
Walt Disney was an amazing visionary, but his brother Roy was the integrator that actually made the business survive. Walt would have run it into the ground — and he almost did more than once. You don’t have to master all of the tools, but you do have to be ready to hire people to wield the tools that are required.
The other path is to go back to being a successful solo advisor. This I find to be by far the most painful path because it means downsizing the firm. This has ramifications for both the number of clients you serve and the number of staff you nurture and retain. Given we’re so wired toward growth, scaling back can feel like failure. And yet, it may be the single fastest way to make you happy in your business again.
Most advisory firms are still dominated by the 80/20 rule, where 80% of the profit is derived from about 20% of the clients. So you could just take a deliberate step and say, “I’m only going to serve my top 20% or so, and from the rest, I’ll walk away. Maybe I’ll sell them off.”
Just think for a moment about what the impact would be. You might be down to 50, 30 or 20 of your top clients, you might only need one or two staff members to support you, you’d probably be working half the time — and you’d probably be making at least the same amount of money. You might even be making more.
If you’re at a firm that’s at $100 million or several hundred million of AUM, how much do the top 20% of clients pay you? What’s the cost of one or two staff members to service them and support you? Beyond that, you won’t have much overhead cost. How much would you be taking home? How many hours would you actually have to work to service just those 20, 30 or 50 clients?
The one thing you can’t do at this fork in this road is just stand there. If you stand still, so does your business. And with no one to lead and develop your people, ambitious team members start to leave. Then you have a turnover problem. Then it feels harder to make progress because you’re too busy trying to stanch the bleeding.
As a first step, consider taking a good long look at what you’ve built so far. Is it a practice? Or is it a business? And more importantly, what do you want it to be? Do you really want to build a business and acquire the skills it takes to truly lead it to success, or do you just want to run a small practice, make good money, serve your clients and regain control of your time? Truly, both are fine. But at a minimum, you have to decide what you want to build toward.
I think we bash lifestyle practices way too often in our industries. If you are one of those accidental business owners, recognize that going back to a lifestyle practice is an acceptable path. You can do it gracefully.
In any event, I hope this forces some hard but helpful thinking about your goals and how they intersect with your happiness. It’s OK to want to make a change. Just be sure to be honest with yourself about what you want to run in the future — so that the future doesn’t end up running you.
So what do you think? Have you become an accidental business owner? Have you been a part of a firm where the owner couldn’t decide whether they wanted to be a business or a practice? What should advisors do when they face this fork in the road? Please share your thoughts in the comments below.