Starting an advisory firm is a bold risk, but even after it is established, growth introduces new and evolving risks that can undermine long-term sustainability if left unexamined. Advisors are trained to assess and manage risk in client portfolios, yet many give far less attention to the risks embedded in their own businesses. As with clients, the goal is not to eliminate all risk, but to align a firm's risk exposure with its goals and capacity – removing unmanaged or misaligned risks while embracing those that offer strategic upside. For firm owners, this requires clarity not only on where the risks lie, but on when to act, when to monitor, and how to prepare for inevitable disruptions.
In this article, Senior Financial Planning Nerd Sydney Squires discusses how advisory firm risk manifests across seven different dimensions, and how advisors can evaluate and integrate risk into their advisory firm in a thoughtful, strategic way as their firms grow.
First, profit margin functions as a firm's shock absorber and growth engine. A healthy margin (ideally around 40%) enables hiring, experimentation, and resilience in down markets, particularly for AUM-based firms that are exposed to market volatility. However, excessive profit retained at the firm level can become a retention risk if compensation growth lags. Introducing variable pay structures can both boost advisor well-being and more closely align team incentives with firm performance.
From there, advisors can consider the various risks and rewards of different service models. For example, recurring revenue provides predictability and stability – and at the same time, many advisory firms integrate AUM into their fee model, which scales well in bull markets, but compresses quickly in downturns. Blended models that combine AUM and planning fees offer more durability, especially when paired with stress-tested revenue scenarios.
Additionally, client types can pose different types of risk. Firms that depend heavily on a few large clients or underprice certain client segments create fragility in their revenue base. Much like concentrated portfolios, these risks require proactive diversification – either by gradually adjusting fees, 'graduating' misaligned clients, or growing segments with similar profiles. And in the realm of client acquisition, many solo or small firm advisors rely heavily on their own time and energy for marketing, creating a bottleneck as the firm scales. As the firm grows, this advisor-centric approach becomes unsustainable. Shifting to scalable marketing channels, outsourcing, or delegating to team members reduces dependency on the lead advisor and lowers long-term acquisition costs.
Finally, advisors may consider the risks inherent in their team structure and capacity. If a firm waits too long to hire, it risks burnout and turnover – yet hiring prematurely also introduces cashflow stress. At the same time, as the firm grows, it is easy for processes to increasingly exist in 'just' one advisor's head. This, in turn, creates a severe risk of turnover or leave of absence! Without process documentation and cross-training, firms are vulnerable to knowledge loss and inconsistent service. Establishing regular process reviews and redundancies improves team resilience and allows firms to scale more confidently.
Ultimately, the key point is that none of these types of risk is inherently bad. Rather, the challenge is for advisory firm owners to embrace 'their' risk that best aligns with their goals. Strategic use of guardrails, backup plans, and market stress testing can help firm owners make more confident and strategic decisions over time. Further, reducing low-reward risks while doubling down on growth-aligned ones allows advisory firms to scale more sustainably. Advisors who understand and intentionally shape their firm's risk profile are better equipped not just to survive, but to grow something uniquely molded to their long-term vision!
