For Heather Locus, a principal at Balasa Dinverno Foltz in Chicago, the ‘aha’ moment came she came back into the office after a meeting with clients and saw Susan Korin, the firm’s chief operating office, in a conference room discussing restructuring with senior advisors.

“I thought ‘This is exactly what should be happening,’” she recalls. “’I’m out helping clients and Susan is in an internal meeting helping to grow the business.’’

The surprising thing: Two years ago, Korin knew nothing about the financial advisory business.

The owners of BDF had doubled their assets to $2 billion between 2005 and 2012, and, as Locus put it, “as we evolved and grew, we realized we needed help from a professional manager who had a different perspective.” When they found Korin, she was working for a psychological testing company, after spending 16 years as a publishing executive.

BDF is one of an increasing number of growing advisory firms reaching from outside the business to bring in professional managers -- as they should be doing, say industry experts.

“Firms are seeing they are creating great value when they’re growing,” says Nick Georgis, vice president of practice management and strategic business development at Charles Schwab Advisor Services. “But as they grow, they’re seeing more complexity, which requires having professional managers. Ultimately, they will be slowing their growth if they lack professional management, and they’re going to have a hard time attracting and keeping the best talent if they’re not growing.”


In fact, firms with more than $500,000 in gross annual revenue that have dedicated professional management can point to 161% more total revenue than firms without dedicated management, according to a recent TD Ameritrade Institutional study on breakout growth.

“The endgame is to put everyone in the firm, especially the founder and the principals, to their best use,” says Christine Gaze, TD Ameritrade’s director of practice management.

That was exactly the thought process at Rockford, Ill.-based Savant Capital Management, which had tripled its AUM in five years to just under $3 billion in 2012, from just under $1 billion in 2007, when it lured Dan Rezin away from the telecommunications industry to be its chief financial officer.

“We were entrepreneurs,” says CEO Brent Brodeski. “We never had real jobs. We were producers, rainmakers and managers, but we did not have a great deal of experience when it came to leadership. As we grew and had over 100 people in the firm, we knew that’s what we needed.

"We wanted someone with a strong background in systems, structure and scalability who had led a large organization," he says, "to develop our team to the maximum extent possible so we could do what we do best.”

Indeed, getting “human capital issues right is essential for advisors who have set their sights on exceeding $1 billion in assets -- and absolutely critical if they’re at $1 billion already,” Gaze says. Dedicated professional managers should be brought in as a firm approaches $1.5 million in revenue, she tells advisors.

“They’re reaching a level of complexity where it’s unavoidable,” she says. At that level, firms reach a scale that makes “more formal functional divisions possible,” according to the TDAI report.

Timing is critical for wealth management firms, argues Schwab’s Georgis.

“Most people wait until it’s too late,” he says. “Any firm intent on growing will grow faster if they bring someone in when the firm is at $250 million in AUM rather than wait until they’ve reached $500 million. You don’t want to wait until you need the position; you want to have that person in place when you get there.”


So what should firms seeking to bring in outside professional managers be looking for, asking and offering?

Chief operating officers should have experience managing complex business systems in large organizations and supervising large-scale business initiatives, says TD Ameritrade’s Gaze. “They should have really strong project management skills and be able to effectively build teams,” she adds.

Outside managers should also have a proven process for business building and growth, says Schwab’s Georgis.

“The hire is about growth, and you want someone with operating experience who understands how to create structure and the framework to have effective workflows,” Georgis says.

And beware of candidates who don’t consult with other senior executives before making a decision, Gaze cautions.

“Bringing in new managers and dealing with loss of control is an emotional issue for owners,” she says. “If the managers are not consultative, and don’t take the time to listen and talk to the owners, you’re inevitably going to run into issues.”

Firms looking to bring in outsiders should take their time, suggests BDF’s Locus. “We took a long time to make the hire,” Locus says. “We evaluated the candidates’ performance, did our due diligence, had multiple interviews and gave psychological profile tests.”

Locus also recommends that advisory firms not outsource the hiring process. Before Korin came on board, the firm had hired two previous outside managers, using executive recruiters both times.

Neither worked out.

“They were experienced and professional, had clearly had done their homework and were well-rehearsed for the interviews,” Locus says. “But in a business like financial advice, culture is really important -- and we missed the little touches you can only pick up when you’re hands on doing the hiring yourself. You get a feel for the person from their voicemail, how they respond when you call them unexpectedly and how quickly they get back to you. You want to see how they react spontaneously, not just in formal interviews.”


Hiring an outside manager should be seen as an investment in the business, industry experts advise.

“Don’t think of hiring an outside manager as overhead,” says Jay Hummel, president and chief operating officer of Cincinnati-based Lenox Wealth Management. “Think of it as the foundation to grow and bring greater value to the firm. If you hire the right person, the benefits far outweigh the costs.”

Median total compensation for chief operating officers in advisory firms is $156,238, according to the TD Ameritrade study; in the upper quartile of the 700 firms surveyed, that figure was nearly $200,000.

Equity is also a "critical" part of the offer, either up front or down the line, Georgis says: "You need to [offer] an ownership stake and share in the growth to keep people.”

Locus says BDF didn’t guarantee equity to Korin, but made it available if her performance measured up.

“We wanted someone with skin in the game for such a critical role, who couldn’t just walk away,” Locus says. “They need to share in both the risk and the growth.”

Hummel, who was hired to run Lenox after stints at Deloitte & Touche and a financial consulting firm, agrees. “I could make a lot of short-term decisions that could make a lot of people here a lot of money," he says -- "but it would hurt the long-term equity value of the firm.”


Before bringing in an outside manager, experts say advisory firms should be clear about potential pitfalls.

Outsiders who don’t know the business also have to gain the respect of the advisory firm’s employees, says TD Ameritrade’s Gaze -- and that's not always a slam dunk.

A manager may have trouble shifting from a buttoned-up corporate environment to the more fast-paced and informal workplace that’s characteristic of growing RIAs, she adds.

And an outsider’s initiatives may also miss the mark because of lack of what Gaze calls “contextual knowledge” of the advisory industry.

When Jay Hummel was hired by Lenox three years ago without industry experience, he immediately joined a client-facing team to come up to speed.

“I spent six months working with clients and our junior and senior advisors,” Hummel says. “I was able to find out how the business worked, and what we did well and needed to do better. I still work with around 25 clients and am convinced that the person running the company has to have a direct line of communication to the client experience.”

And when Dan Rezin joined Savant last year as CFO after spending 11 years in an accounting firm and 15 years in telecommunications, he made an effort to learn everyone’s job who reported to him.

“It brought instant respect,” Rezin says. “It helped build a trust factor that was invaluable.”

Hummel says his background working for a consultant, combined with his hands-on learning experience at the firm, made him aware of blind spots at wealth management firms.

“I think our industry sometimes doesn’t understand that our clients also have financial transactions with other companies,” he says. “When our clients can get a better report of transactions from American Express than from their financial advisor, then there’s what I call an experience gap, which we have to be aware of and fix.”

Yet if done right, industry experts say, hiring a professional manager should free up the principals’ time to concentrate on working with clients -- ultimately helping the firm accelerate its growth.

“There is a high degree of trust required for RIA firm owners to hire a COO," says industry consultant John Furey, principal of Advisor Growth Strategies. "In my experience, many owners struggle with letting go of control. However, with the right COO hire, RIAs can be unlocked and experience higher growth.”


Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access