The most difficult part of skydiving is summoning the courage to jump. It couples the basic instinct to survive with gut-wrenching fear. When you launch your own independent firm, the anxiety is very much the same: Will I survive? Have I done everything I can to prepare and succeed? Is this really worth it? When making the decision to go independent, advisors spend most of their time focused on these questions.
Initially, it’s not difficult to be seduced by the idyllic advantages of business ownership - potentially greater cash flow, operating autonomy, brand flexibility, tax benefits, and the accumulation of equity value in your enterprise. The only hurdle seems to be taking that first leap of transitioning – a known unknown. But unlike skydiving, operating as an independent business after the transition is not as easy as coasting to the ground. You are solely responsible for your practice’s operations, the risks associated with business ownership, as well as the opportunity cost of time away from clients and new business development.
When making the decision to go independent, it’s all too easy to overlook your ability to execute on the key processes associated with running your business. The capacity to grow your practice is the ultimate determinant of success. Ironically, it is the focus on growth that many independent advisors inadvertently sacrifice.
Why Growth Matters
Growth creates enterprise value, and value enables choice for the future of your business. While your succession may be in the distant future, potential buyers will place a premium on consistent and healthy growth. The possible increase in take-home economics from going independent is certainly appealing in the short-term, but it does not necessarily ensure a premium valuation for your business asset in the long-term.
If you do not have the proper business planning tools, growth strategy, and operational support and resources, you’re likely hampering your own growth. To maximize the potential value of a growing business, consider the following safeguards.
Considerations for Assessing & Augmenting Your Current Growth Strategy
1. Business intelligence – In my conversations with hundreds of financial advisor principals, I have realized that business intelligence is sorely lacking. Most advisors – especially business owners – do not have access to the data they need to create meaningful benchmarks, evaluate their growth versus the industry, identify profitability trends or challenges, and optimize their revenue potential. Managing new assets- without a focus on revenue composition, per-client profitability, or industry benchmarks-means you are not looking at data that will determine the value of your business. Identify a technology solution or a strategic partner that will synthesize your business intelligence to create meaningful, actionable data.
2. Operating structure - If your annual revenue is at or greater than $5 million, you should strongly consider hiring a senior operator to run your business. Industry studies tell us that independent advisors spend nearly 20% of their time on the administration of their business. If you are the senior evangelist and business development professional for your firm, losing 20% of your time to administration is crippling your firm. A senior operator – insourced or outsourced – ensures business focus without shifting your attention away from growing the company.
3. Technology – Technology is your key to scale. It is also largely underutilized across the independent financial advisory landscape. Invest the time and energy to integrate high-end technology solutions, or identify a strategic partner to do this. You will need core business, financial and technology services from a sophisticated platform and strategic partner to operate your current business and support your future growth. Your clients expect this, and you will not scale efficiently without it.
4. Shared business development accountability – A few weeks ago, I was speaking with the principal of a $5 million practice who was struggling to find the time to grow more aggressively. In looking at his organization structure, he was the only individual on his team whose compensation was based on business-development results. The lack of personal accountability for business development was putting all of the pressure to deliver on him, and none on his talented teammates. While you are committed to growth, you may not have fully anticipated how the additional operating and management responsibilities will impact your growth strategy. You will need to share responsibility for growth and the cultivation of business development opportunities, as well as revise your compensation plan to reward performance and retain talent.
5. Strategic idea “infusion” - As an independent entity, your inability to leverage an established brand or access a community of like-minded advisors may be a disadvantage. Shared experiences, best practices and business insights from your contemporaries can help refine and improve your processes and practice efficiency. Find a strategic partner or organization that will connect you to top-performing advisors. An infusion of shared ideas and best practices – that are proven effective by top practitioners – will augment your growth potential.
Without a sustainable growth strategy, the increased cash flow produced by independence will likely be fleeting. If your business is not growing, plateauing revenue and stagnant enterprise value will not be your only challenges. You will have to reinvest dollars into your operating systems and human capital at a rate that will ultimately lead to eroding cash flows; you will struggle to generate enough revenue to keep up with technology upgrades, regulatory requirements and employee retention costs.
The risk of being sucked into the operations of your business is not an empty threat; as an independent business owner, be proactive in the five areas described above to create the framework for successful business growth and value creation.
Michael Parker is National Director, Enterprise Development for Hightower Advisors.