Is It Time to Pivot? Identifying Inflection Points in Your Business

What’s the Story?

• If the size of your solo practice has become unmanageable, hiring a nonproducing service advisor could be an ideal pivot.

• Co-op firms seeking to develop economies of scale and grow the overall firm may need to evolve into integrated ensembles.

• Multiadvisor firms making the leap to large-scale enterprises need to build infrastructures to sustain their size and growth.

• Next: Ready to Grow Your Advisory Business? | Previous: A Plan for Success(ion)

Are you a solo practice needing greater scale to avoid hitting the growth ceiling? A multiadvisor co-op that wants to evolve into an integrated ensemble? Or maybe a growing firm trying to build a large-scale enterprise with a dominant market share? If you find yourself at any of these critical junctures, it’s likely you’ll need to pivot to team up with others and hire just the right talent to propel your business forward.

From Solo to Leverage Firm

If you run a solo practice, the good news is that you can operate in a flexible manner, often with a lean infrastructure. When the size of your practice becomes unmanageable, however, you may no longer have the time for the business development necessary for future growth.

Inflection point. As a solo practitioner, you may be at an inflection point if any of the following statements are true:

• You’re overextended and can’t keep up with your core business.

• You’re managing too many client relationships.

• Client interactions are reactive, not proactive.

• You don’t have time for prospecting or marketing.

Where to pivot. At this point, you may need help serving your increasingly large client base. Although sharing decision-making duties may not sound appealing, you can retain full autonomy while adding to your advisory capacity by hiring a nonproducing service advisor. That way, you’ll be able to spend more time on A and B clients and strategic matters and get help serving your C and D clients—or even have someone manage those relationships outright.

Another option is to scale down your client base or sell a segment of your book to focus on a smaller number of clients. You might also consider outsourcing certain functions (e.g., investment management).

From Co-Op to Integrated Ensemble

Many multiadvisor firms operate as co-ops, sharing resources (e.g., rent and staff) but having each advisor operate with their own approach to investment management, financial planning, client engagement, and firm economics. But when ownership and compensation are based on siloed practices, there’s no financial incentive to grow the firm. And, from a succession standpoint, each advisor could decide to sell outside the firm, putting its long-term legacy at risk.

Inflection point. When operating in a co-op structure, here are signs you may be at an inflection point:

• Advisors and staff are disconnected, with little or no shared objectives.

• Advisors are more concerned with building their own practices than the collective business.

• Advisors feel inequity in how responsibilities are shared or how expenses and profits are divided.

• Clients have a different experience depending on which advisor they work with.

• Advisor skill sets and interests create redundancy and lack diversity.

• The fiscal health of the overall firm receives limited attention.

• Compensation flows directly to advisors, rather than through a centralized business entity.

Where to pivot. You may want to evolve into an integrated ensemble if you’re in a co-op seeking economies of scale, have a shared interest in growing the overall firm, or envision a legacy business that will continue for years to come. If so, there are important considerations to weigh before making this move.

By giving up individual preferences to adopt a firm-focused way of doing business, you can achieve greater scale and profitability because core functions can be processed in a centralized and consistent manner. But you need to decide if you’re willing to budge on investment methodology, financial planning strategy, and how you conduct review meetings. Pushing too hard for individual interests and preferences can sidetrack the ensemble model, so there needs to be wholesale adoption of a unified firm approach.

Connecting owners’ financial results to the firm’s overall performance is also crucial to making this work. Many firms that are predominantly or fully fee-based have expressed an interest in equity models where clients are contractually pledged to the firm’s corporate entity. In this structure, both compensation and value are based on an equity ownership formula. Owners are tied to the financial success of the firm, and value is allocated to the business itself rather than to siloed books. This structure allows for equity buy-ins for future partners and structured exits for retiring partners, in addition to creating a business that can exist in perpetuity. The perceived downside is that equity structures don’t reward business development to the same degree.

From Multiadvisor Firm to Large-Scale Enterprise

Many firms have sought to grow more aggressively and build a dominant presence in their target market. They are driven to build large-scale organizations that can sidestep industry threats and create competitive advantages.

Inflection point. If any of the following sounds familiar, your emerging enterprise is likely at an inflection point:

• The partners have a relentless hunger to be the biggest and best.

• Management of people and daily workload diverts attention from strategic matters and growth initiatives.

• At least three advisors are in support, service, and associate positions.

• When looking to make an acquisition or recruiting a new advisor, there is no clear financial structure for how to approach such a deal.

Where to pivot. At this stage, you need to build a growth engine that achieves your desired scale. Beyond organic growth, this can be accomplished by:

• Acquisitions or recruiting advisors to join the firm

• Hiring and grooming younger advisors who will prospect for new business

• Recruiting or acquiring strategic partners to add business lines or market share with niche client segments

Of course, recruiting established advisors, acquiring practices, and offering sell-and-stay deals can be complex. And, the more deals you strike, the more convoluted your profit-and-loss statement and ownership structure can become. Building financial competencies will allow the ownership team to evaluate deal profitability, model best- and worst-case scenarios, and structure deals in a deliberate manner to maximize upside while limiting risk. Here, the CFO lens becomes increasingly important and can be assumed by an owner or a senior staff member.

Enterprises need infrastructure to sustain their size and growth. This requires actively investing in the business to build capacity and account for growth. As the number of employees and complexity of responsibilities grow, you may also want to invest in management and leadership positions. When you surpass $500 million in AUM, for example, you might add professional management positions, such as a director of operations. At $1 billion or more, C-suite positions such as a CIO, COO, and even CEO will become necessary.

Last, but certainly not least, brand strategy will be paramount no matter where you choose to pivot. How is your firm positioned in the marketplace? Is your brand compelling for clients, ideal prospects, prospective sellers, and strategic partners? This is a strategic investment, easily worth the high cost of hiring creative talent.

Pivot on the Path of Success

Inflection points vary based on the model and may be influenced by the size and growth rate of your firm, as well as the objective of leadership. But whatever your model and however you see your firm growing, identifying whether you are nearing an inflection point will help you pivot in the right direction to continue on your path of success.

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