Six Stages of Growth
Practice Management / Business Intelligence / Strategy / Business Growth / 24 November 2020
If there is one aspiration that most financial advice firms share, it is the desire for growth. But less widely known is the remarkably consistent stages of growth that firms go through and the walls they hit along the way.
At the start of this cycle is the sole practitioner building clients. Eventually, the adviser hits a capacity wall which is overcome by converting to a multi-adviser firm. Reinvestment and growth soon bring another wall as the firm becomes so large that even the collective efforts of the principals is not enough to sustain the growth rate. This in turn leads to the final stages of M&A and, finally, integration – with a full branded enterprise and truly scaled marketing.
While each of these stages brings its own challenges, what’s interesting about the progression of firms is not just that the pattern of growth is so consistent, but that the capacity walls tend to occur at consistent points.
The takeout is that firms charting a growth strategy should be able to anticipate the steps needed to navigate the next stage. By recognising the stages of growth, they will be better positioned to scale those walls along the way.
For small firms who wish to stay that way, it is still possible to enjoy a profitable lifestyle practice. But those in the middle stages may need to navigate carefully, or risk being unable to get past the final growth wall.
So, let’s break down the typical growth trajectory into six recognisable stages:
Stage 1 - Start Up
This stage is about securing sufficient revenue to earn the principal a living. Of course, many founders don’t manage to attract enough clients (or do so quickly enough) to survive in the first place. But for those who do make it past start-up phase, the firm can become reasonably financially rewarding, especially with the productivity-boosting tools of today.
Key features of this phase are a tendency to say ‘yes’ to everything, selling the founder’s name, focusing on keeping costs down, and fitting any hire into multiple roles, which means people multi-tasking outside their core competencies.
However, even with technology, efficiencies, and support staff, the firm eventually will hit a capacity wall. For highly inefficient practices, that can come as soon as $150,000-$250,000 in revenue. For most advisory firms, it seems to come somewhere between $300,000 and $500,000.
A small practice can anticipate this first wall by hiring junior planners who can service and eventually take over client relationships. This dividing line – between a highly efficient sole practitioner operation to an actual saleable business – is one that many advisers choose never to cross, preferring to remain as ‘lifestyle’ practices. And if that is the goal, there may be no need to worry about the capacity wall.
Ultimately, however, those advisers who do want further growth will only get past the capacity phase with a significant reinvestment in the business.
Stage 2 – Administration
Alongside bringing in new advisers, investment also needs to be made in new and improved systems. Otherwise, a sole focus on revenue will lead to stress, burnout and higher staff turnover. Clients may will stay only through loyalty.
But in this next stage, the focus necessarily becomes administration and getting on top of the mounting paperwork.
Stage 3 – Management
Once through the administration stage, the management wall appears. While founders typically have core skill sets in advice, rainmaking, and/or client relationship management, they now find they also have to manage a small team, in which each member has his or her own career paths and aspirations.
Facing competing priorities, principals have to decide whether they are in advice or management. Without the right call, they can be stuck in stage three forever.
Around this stage, there is often significant growth in business value. The focus is on building infrastructure and capacity. A junior planner turns into a team. The firm transitions from a founder-centric practice to an embryonic real business.
The client service and investment teams deepen. The firm may hire a practice manager or operations manager to handle the staff, along with internal technology support and marketing. Like many stages, this phase includes a series of mini walls that the firm gets over through reinvestment in staff and infrastructure.
The growing number of partners and advisers expands its capacity to generate new clients. The value of the business as an entity grows significantly far beyond what the founder alone could have achieved.
That is until, eventually, the next wall is reached: the firm becomes so large that not even all of these efforts together can sustain its growth rates.
Stage 4 – Branding
This stage is the time for the practice to become bigger than the founders.
There now needs to be clear and distinct value propositions for clients, staff and shareholders. The focus becomes the team, productivity and profitability. The firm needs to start saying ‘no’ to non-ideal clients and to ensure people fit their roles, rather than the other way around.
The firm has to transform itself from a team of individual advisers into a standalone branded business that can scale its marketing efforts as an enterprise. This capacity wall requires significant investment – relative to the size of the firm – to advance to the next stage.
Stage 5 – M&A
At this point, growth typically plateaus again. A size wall is hit. Organic growth is insufficient to meet the desired growth rates of all stakeholders.
Think of the growth rate as a fraction. If the numerator is new business and the denominator is the current size of the firm, eventually the denominator becomes so large that the growth rate can’t help but decline.
Several factors can lead to this wall. The client base may have fully tapped its network for referrals and the number of newer clients is too small to have a lot of prospects to refer. Centre-of-influence referrals that were a healthy contributor to growth at lower AUM don’t even cover a month’s growth at $1 billion. Many of the advisers may be reaching their own individual capacities. And the growth requirements far exceed what a handful of principals/founders alone can sustain.
This size wall for larger advisory firms is more dangerous than the capacity wall for small firms, because the sheer size of the business makes it impossible to simply shift to a low-growth “lifestyle” model, as the lack of attractive career opportunities that growth brings may lead to rising staff turnover. As well, even a small percentage of client attrition can transfer to a significant loss of revenue.
But firms that have been through the earlier stages and have built the systems and processes may now be in a position to seek inorganic growth via mergers and acquisition, and mould a like-minded business (or client base) into their existing systemised operation.
Stage 6 – Integration
At this point, after M&A, integration becomes key. Exercising leadership, vision and values, newly combined firms have to manage competing values, systems and processes, staff responsibilities, cultures, etc.
Marketing becomes truly scaled, built around a centralised and dedicated marketing department, and the business develops real value as an enterprise.
Arguably the largest firms that figure out how to scale their marketing have the greatest growth potential, because this effort cuts the client acquisition cost that are the greatest growth barrier for most firms.
While firms exist at all these stages, those that push past the sole practitioner phase raise the stakes for themselves.
While it’s feasible to convert an individual practice into a lifestyle, it’s not feasible to do so as a multi-adviser practice. Different partners may have different goals and even if they are content with where the business is at, chances are staff may not. In other words, growth becomes necessary for the firm’s own sustainability.
On the plus side, there is the potential to build an enterprise with extraordinary business value, which is the compensation embedded in the risks of getting stuck behind a wall. In the US, many of the largest firms achieve such scale and efficiencies that they seem to even be out-competing firms from all the prior stages, raising the question of whether the landscape for advisory firm growth itself will shift in the coming years as more and more firms make it into the final stage.
For now, ceilings are the reality. No matter when they hit in your lifecycle, they will appear insurmountably difficult to overcome. Expect them, anticipate them, and know how to break through the wall – if you want to.
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