This is the third and final installment of what is involved in transitioning your practice to a real business.
In my recent post, How old will you be in 5 years? 10 years? I discussed the one question the typical 57-year-old-ish founder-owner of an advisory firm must first answer: whether to maintain the practice as is and keep it on autopilot, or commit to the hard work of transforming it to a real business.
While transitioning a practice to a business is a worthwhile and rewarding pursuit, we noted, deciding to keep your practice on autopilot is an attractive option as well.
Further, we defined “business” (vs. practice) according to Philip Palaveev, and based on the definition, the advisor who wants to transform his or her practice to an enduring advisory business must, at the very minimum, work diligently on the following:
In my most recent post, Your successors are slackers, right? Are you sure? I addressed issues and challenges pertaining to finding and developing successors, the first item above.
Today, I will discuss in some detail the second and third items listed above: implementing a business development plan and developing a written succession plan.
Business development plan: reaching $1 billion in AUM
Depending on who you talk to, $1 billion in AUM is one important criteria of being called a “business” in the context of the wealth management industry. If you are the founder-owner of a successful, but still founder-centric, advisory firm, chances are your firm’s AUM is far below $1 billion, and quite likely below $500 million.
Moreover, when it comes to your firm’s growth, you might have been somewhat complacent because the markets have provided a tailwind for your AUM and revenue growth. That may well continue for the next several years so that perhaps you won’t have to work so hard to get to $1 billion in AUM — though I doubt that you would want to leave that to chance.
If you decide to work honestly for growth, ignoring market fluctuations, 15% annual growth will double your AUM in five years, give or take. Note, that’s net growth inclusive of withdrawals. Accordingly, depending on your client demographics, that can be a whole lot of gross assets to add. Needless to say, a formal, disciplined business development plan would go a long way in helping you grow by 15% per year. (As an aside, consistent net asset growth is the only antidote that I know of to an AUM plunge from a market downturn.)
What got you here ain’t gonna get you there
In growing your assets (and your business), it’s important to understand and fully internalize this fact: The skills that brought you thus far are not the skills that will take you to the next level. You simply cannot work twice as hard to grow twice as big. You cannot, with sheer will, grow your firm’s AUM to $1 billion. Your days as an award-winning producer are long gone.
This simple truth notwithstanding, some otherwise rational and intelligent founder-owners choose to work harder, wondering why their practices aren’t getting bigger and better. In fact, it’s highly probable that most of their daily activities aren’t all that important or relevant and can easily — and should — be delegated. Their activities can be what Nick Murray calls avoidance behavior — like reading The Wall Street Journal for the latest investment ideas, or spending hours analyzing a 0.5% allocation shift. Perhaps they are avoiding the discomfort and hard work of transformation, and resorting to your routine.
When was the last time you received a performance review?
Perhaps you too would rather carry on with your daily routine than to change. After all, your practice is doing fine and you are making a comfortable living.
If so, suppose you answer to an imaginary board of directors. They probably couldn’t care less how many hours you work everyday or that you work almost every weekend. They likely wouldn’t want to hear about how you can’t take a real vacation because you are always plugged in. They definitely wouldn’t want to know about your under-performing employees.
Instead, their questions might go something like this:
As you can see, you are accountable and evaluated not for your individual performance, but your entire firm’s performance. Success is defined collectively rather than individually.
Another way to say this is, leadership.
Reflect on that for a moment. Would you still want to be in the loop on every aspect of your business as you do now? Should you? Do you still think you should spend hours on end on the details of next year’s health insurance quote griping about the unconscionable premium increase? Do you really think that such actions are important and contributes to your firm’s growth and well-being?
Or, do you feel that you got better things to do with your time — something far more consequential with maximum impact?
Are you an advisor or leader? Or both?
Incidentally, this leads to another decision you should consider.
You should decide to either:
It’s safe to assume that you cannot handle both. It’s just not possible to be both an advisor and the leader and be effective at both. It hardly matters that your business card reads “CEO” after your name. Those are just three letters in the alphabet.
What your firm desperately needs is professional management. To this end, you should accept the reality of separation of ownership and management. As Tim Kochis and his friends wrote in Success and Succession, ownership is a status whereas management is a job, a function. An owner can be — and often is — an effective leader and manager, to be sure. That’s well and good, but you should also embrace the possibility of a non-owner managers and executives as well, including the CEO position.
Perhaps this real-life tale of two firms will serve as a sobering reminder. The two firms were both founded around the same time in the same city by equally smart and capable men. The owner of the first firm assumed the role of a professional manager and leader as soon as it was feasible to do so. He also delegated client relationships to his non-owner advisors at the earliest possible opportunity. He did this so that their clients would become loyal to his firm, not to him personally. His firm grew and now manages well over $3 billion with no single partner owning more than 25%, a “super ensemble.” The other firm’s founder-owner continues to be the primary client advisor and manages his firm, often burning the midnight oil. Its AUM is just shy of $400 million. Respectable to be sure, but distant from $3 billion.
Developing a written succession plan
As for developing a written succession plan (the third point above), assuming that you successfully located and developed a successor or two, you should create a formal, written succession plan. This may not be easy given how emotionally attached you might be to you practice. In your defense, your practice is your life’s work. You made too many sacrifices to get to where you are today. How dare anyone enjoy the fruit of your labor.
To be absolutely clear, most are sympathetic to your sentiment. You are simply asked to be rational because ultimately, your succession plan is a business transaction, an exchange of like values. So removing your emotions can help you see more clearly without clouding your judgment. The next-generation owners are simply buying a business at a fair price. Likewise, you are being fairly compensated for your effort and sacrifice.
Thus, while it’s true that you started your practice with virtually nothing but by pulling yourself up by your bootstraps, the new owners will likely be carrying a significant amount of debt for an illiquid asset that they can potentially run to the ground. So it can be an enormously stressful life event for them — not exactly a stroll in the park. (And, yes, for you as well as a note holder.)
Furthermore, while the new owners want to be respectful of your attachment to your firm, they don’t want you to feel entitled to hanging around in the corner office until you’re 75 (or older) taking up valuable real estate. They also don’t think that you should receive full-time pay for part-time work. They might resent you for showing up to work twice a week, but still taking your full share of distributions simply by virtue of your ownership interest. Does any of the above sound fair or make sense to you? Me neither.
So try to be rational. Make it fair and equitable for all parties. Go for win-win.
Transforming your practice to a real business is hard work. But it can also be fun and rewarding both financially and emotionally. Make your decision soon though because you are not getting any younger.