#FA Success Ep 254: Maximizing A Firm’s Human Capital To Better Scale Its Financial Advice, With Eliza De Pardo

Resources Featured In This Episode:

• Kitces Well-being Study
• FA Insights
• The 6 dimensions of stand-out performance
• Moss Adams LLC
• FA Insight Annual Study of Advisory Firms

Full Transcript:

Michael: Welcome Eliza De Pardo to the Financial Advisor Success podcast.

Eliza: Thanks for having me along.

Michael: I'm really excited for the discussion today and having a conversation of, I think that this is really good to get into what, what happens when you actually try to make an advisory firm a lot bigger than just yourself and you try to start scaling it beyond you.

Uh, you know, we, we did a, a study late last year, kind of shared it out to the advisor world earlier this year, looking at like the wellbeing of advisers, right? Wellbeing as a sort of broad-based concept of just like, how do we feel, you know, like day-to-day living our lives? How do we feel about our satisfaction with our life and our worth, and like, do we have more positive feelings than negative feelings in the day? It's all the things that can describe our wellbeing. And we had done this study looking at the wellbeing of advisors and one of the most striking results that came from it was that if you just graph the revenue of an advisor against their wellbeing, we got this shape that looked like an upside-down U, where as advisory firms start growing and getting more revenue, just our wellbeing improves. We feel better and better because it's hard at the beginning when there aren't many clients and not much revenue, and it's very stressful, and you've got bills to pay and to put food on your table. And like once it starts growing, you feel a lot better, you get to a certain point where you can be making some really good money in the industry with a very comfortable base of clients. We found that peaks somewhere in the range of about one, one-and-a-half million dollars of revenue. And then there was this interesting thing that cropped up in our research whereas revenue got higher from their wellbeing started going down again. The wellbeing of advisors with 2 million of revenue on average was materially lower than those that were only at one and a one and a half. And then as they got above 2 million of revenue, it got lower as they got above 3-and-a-half million of revenue, which was kind of the top bracket that we've measured. It was the lowest, like the lowest well-being of advisors that we measured anywhere where those that manage more than 3-and-a-half million dollars of revenue, it was even worse than the advisors who were just starting and had no revenue yet for anybody, how stressful that was when you're getting started from scratch.

Eliza: Right.

Michael: And so, it just struck me. And I guess having lived this journey myself of what happens when you when you grow and scale a business, there is a phenomenon that somewhere in that range, right around $2 million of revenue, give or take, a little is usually where firms get so many team members.

At that point, you're getting somewhere around 7 to 10 team members and you get to the point where you just can't manage them all because there's just too many, especially with 100+ clients to manage as well. And you have to start actually like creating management and layers, creating an organizational structure, and the business starts to move from a point where your primary challenge, our clients, managing clients to where your primary challenge is managing people and teams and human capital.

And I just was so struck that at the end of the day, I feel like this was the empirical evidence that, you know, we're really good at managing clients. And this business gets really hard when suddenly the primary focus is managing the humans in the business, not the humans you're serving with the business.

Eliza: Yeah. I think that's incredibly interesting research, but I can't say that I'm surprised by the results, having been in human capital management for so many years as a consultant. I do think that once you start to move away from perhaps the work that you love the most, which is for most advisors, why they got into the business, which is sitting in front of clients and having great conversations and delivering advice and helping your clients, once you start to move away from that and you end up having a very high percentage of your time taken up by people-related issues, then the fun can absolutely come out of the job if that's not something that you love doing.

But I have to say that if I look back over the last 15 to 20 years of consulting, when I think of the firms that I've worked with, which have really created significant levels of scale where the partners are still very enthusiastic about what they do in the business. It's not always the case, but those who are really enthusiastic tend to be those advisors that, over the course of time, have really developed themselves some very deep human capital management capabilities. And they also have a very natural inclination for wanting to work with people, take care of team members, develop team members and really support their growth, and they hold that kind of central to what they do in the firm. So I do think there's something very much in it. If you love that work, I think you'll continue to flourish and feel that energy and that the satisfaction around the work that you're doing. But if you really don't like it, you're going to obviously have to bring in dedicated management, which is a very necessary step in any firm’s evolution, but it can also bring about more challenges, right? That is never an easy decision to make. It's a necessary decision. It's never easy. If you are lucky enough to recruit the right people, you can hand over a great deal of responsibility.

But if you don't, you know, that can be obviously some ongoing challenges for a firm.

How Firms Fail To Prepare To Be A High-Revenue Business [8:31]

Michael: I just thought the way that you frame that there's just this transition moment, I find, where just suddenly the outcome of the business is not actually driven by how well you're serving clients, or at least it’s not driven by how well you as an individual advisor—it’s driven by how well you can take your approach, your views, your philosophy around how clients should be managed and turn it into a system that other advisors can do, that other advisors, can be trained in, that other advisors can execute, and that you can then find, hire, and develop the talent to do that into and to implement and execute on your system.

If you have trouble kind of visualizing or thinking about that, that systematizing shift, then it just, it, it gets hard. We ended up hiring advisors who don't do what we do, who don't do it the way we do it, who don't necessarily live up to the style or the philosophy of whatever it is because we didn't teach them ours., so they came up with theirs, and it may not be the same as ours. And then the business can get frustrating, or it gets harder to grow or you end out letting every advisor do their own thing, but then they basically do their own thing for their own clients with their own book, which basically means it's their own mini-business.

And at some point they decide they don't necessarily need you around, and they go across the street and bring their clients with them because why wouldn't they at that point? And just the hard stuff starts kicking in that showed up for us in lower well-being scores for advisors that have gotten to the point where they've got these multi-million revenue firms and they're struggling with or possibly just mired in some of these challenges.

Eliza: Yeah. And I don't think that for the most part, when you're founding a firm, an advisory firm, and growing it in the early years, I don't think that many advisors think about what their ultimate end game is in the business. That is, what is the role that they really want to fulfill within the firm? Is it to continue to always see clients, or is it to evolve into something else within the firm to be able to progress towards full-time CEO?

And maybe for some of them, that's not really something that's appealing at all. Some of them love the investment management work and prefer perhaps to maybe move in that direction over the course of time. But I think without that vision, it’s really challenging. And because as you grow, you're going to be forced in a certain direction, right?

You're not going to just be able to continue to sit in front of the clients that you love to see and not focus on all of the other areas of the business that require attention. So I think going into it, you've got to know what you're in for, and that with scale, your role will change. But you can certainly create the path for yourself just as you create the career path for your team members.

Hopefully if you're focusing on the right things and developing talent, you've got to think about your own role as well. How, how do you want to see it unfold over the years ahead? You know, some, some people will just want to sort of take a back seat. Once the revenue gets to a certain level, they don't want to be working full-time within the firm.

They would love to be able to be out of the office a couple of days a week. You know, others just want to be in front of those clients every single day, as much as they can. So these are the things that I just think that for any business, I don't think it matters which industry you're in thinking about how your role in the firm ideally is going to evolve is important and oftentimes just completely overlooked.

And that's perhaps why there is this dissatisfaction that they experienced because perhaps the expectations were not necessarily all that realistic.

Michael: Well, and the thing that strikes me is that this becomes an almost inevitable outcome for so many advisory firms is particularly that now that we've kind made this wholesale industry shift from commission-based routes to assets under management, and not for all the other conflict of interest sort of discussions around compensation models, but just the sheer reality that assets under management is a recurring revenue model. And we live in an industry where once clients go onto that model, even struggling firms, the “bad firms,” best service and capabilities often still have 90 plus percent retention rates.

Averages are closer to 95%; really good firms get to 97–98%, which means as long as you have any level of marketing sales or  business development capabilities, the firm just tends to grow and accumulate over time for a material number of years, because you just don't lose that many clients. And so if you spend enough years doing this and you accumulate enough clients, it is essentially inevitable that you will outgrow your individual capacity to serve all these clients.

And so if you don't have a vision for words going, it can almost guarantee that it's going to happen to you. If you're doing a pretty good job serving clients and they don't leave often and work with you occasionally, and you do some things out in the marketplace to make it known that you have an advisory business and work with clients, we - whatever your sales, marketing, networking process is- almost all eventually accumulate past that point.

It can take anywhere from probably 7 to 20 years, depending on the advisor and how quick they grow, but everybody eventually compounds past that point. And if you didn't have a clear vision of what you were doing and where you're and where you're going, I think you articulated it really well that if you don't have a sense of what your end game is as the advisor, you just kind of land in something. And that often doesn't really turn out to be the ideal fit for you, which I think is what we see showing up in the wellbeing numbers.

Eliza: Yeah, I think that's exactly right. We've done a lot of research over the years previously at FA Insight, we would conduct the people in pay study, and we would always examine organizational design in a great deal of detail. It's one of the areas that we consulted in frequently and still consulting. What we learned is that for many firms, that there is an enormous opportunity to be planning more for the future around how the organizational structure will need to evolve with the creation of scale.

Most firms don't think about it. They might just think, three months ahead or six months ahead in terms of, “Well, maybe my next hire is going to be another client services associate or an associate advisor.” But there's a great opportunity to think about, “Well, if I want to double revenue in the next three to four years, what does that look like on an annual basis?”

And based on that, “How am I going to accommodate that growth and think through just kind of map out year by year, and what that transition plan will look like?” Then there are no surprises along the way, and within that, you can also think about, “Well, what does that going to mean for me, exactly? How is that going to change the way I serve relationships? Will I need to perhaps transition some of my smaller clients at that point in time to an associate, um, in order to, to free me up to do some other things in the firm?” It's completely overlooked by the majority of firms, but I think there's a lot of merit to just think about: “Well, I know we'll get to try and grow this thing. I don't want surprises around structurally what I'm going to have to do along the way, so let's map it out well in advance.” It’s, again, just a lost opportunity for many businesses and probably a good way of managing expectations within the firm also.

Staying Grounded As An Advisor’s Firm Deepens [16:18]

Michael: So, can you, can you talk about that a little bit more? Like just how, how does that org chart at least typically evolve? I mean, I think we usually know where it begins. Like it's me, then I usually get like an administrative assistant/operations person so I'm not doing as much paperwork and scheduling. Then I usually get a paraplanner so that I've got someone to help doing the planning stuff, the planning, prep work, the meeting prep, and follow up.

Then maybe I get an associate advisor as well, if my paraplanner’s moved up and, and I'm, and I'm offloading, um, maybe some of my smaller clients and working with them jointly, then if I'm growing large enough, maybe maybe I get one more operations person, cause there's more client paperwork to do by now. Perhaps I work in a trader to handle more of the investment stuff in trading. And it usually finally that that's about where firms start topping out in, in kind of the classic like advisor founder-centric model. Like it's a lead one or two support planners, one or two support, admin staff - maybe someone helping on the investment end.

Eliza: Yeah.

Michael: That's sort of this like four-to-six person team. You can manage that. It's a little crazy, but like you can manage that on top of your clients and then people start hitting a wall, and just mathematically, if you're going to support that many people, you're probably about one, one-and-a-half million of revenue, which again was sort of that wellbeing sweet spot we found in our research.

But then you have to grow larger and things start changing and breaking. So what comes next? I mean, I think about like the firm that's going to go through the next doubling from there, they're going to go from one in one-and-a-half million of revenue all the way, suddenly up to 2 to 3 million of revenue.

And now there's going to be 10 to 12 people like. What comes next? How does that org chart start to change?

Eliza: Well, there are a number of different things that take place. And one of the easiest ways to figure out the evolution is to look at the data and to pay really close attention to things like productivity metrics.

So for example, revenue per revenue, generator, revenue per full-time equivalent, the ratio of revenue-generating roles to non-revenue-generating roles. All of these metrics can give you like extremely valuable input into those organizational structured decisions. So for example, we know in the research, once you get to $750,000 revenue, you've already at that point ideally recruited your associate advisor somewhere between $500 and $750. Your first associate advisor, in all likelihood, comes while progressing towards a million dollars. Adding an operations manager is always a really smart decision progressing towards $3 million towards there at $3 million.

It's when the, the, the COO position generally comes into play progressing towards $5 million. You've got a full-time CEO at that stage. Along the way, the advice team model typically deepens in capability. So we create, with scale, additional levels of advisory positions, and that builds a beautiful internal career path along that advisor ladder, and we start to kind of carve out more distinct accountabilities within the team. So more distinct accountability for brand new client acquisition, more distinct accountability for servicing certain types of relationships by complexity, if you like. We create more and more specialization as we create scale. All of the capabilities deepen, and management capabilities obviously have to deepen along the way. The skills that got you to your $1 million firm are not going to be the same set of management skills that will get you to your $5 million firm. And so, there's some basic principles, but so much of it can be guided by the data, although it's not an exact science, right? It's an art and a science.

And depending on the service model that you have, that will also influence the kind of decisions that you make. But the data is a great thing to have in your back pocket to help you figure out what makes the most sense for your firm based on the revenue size that you're at now and what it is you're trying to accomplish over the next, say three to five years. I think organizational transition planning though, is probably done only up to a three-year period only because it can become a little bit complicated. And I think you always want to be able to feel like that the planning that you're doing is grounded in some sense of reality, and there aren't too many variables that could influence those decisions that would make it perhaps less tangible for you. So I kind of encourage these firms to think in sort of like up to three year increments, if you like that sort of planning work.

Finding The Right Financial Window To Scale Firms And Increase Capacity [19:45]

Michael: So, you've mentioned a few times about have coming at this from a data-driven perspective. I'd love to hear more of what are the data points that you think are, are, are the things we should be paying attention to and what are the numbers that we're, that we're managing to? You know, you mentioned a few milestones there around revenue and just the, the sheer stuff that tends to come from revenue, but you'd also mentioned things like revenue per revenue-generating position revenue per full-time employee. So can you talk a little bit about more about those metrics? Like just what numbers are ‘reasonable.’ What should I be expecting? How do I think about this?

Eliza: So the metrics that I mentioned that relate to organizational design are really productivity metrics. So if we look at revenue per revenue generator, let's first just sort of clarify. When I say revenue generator, we defined that at FA Insight in the research as every lead advisor, associate advisor, or just generally a servicing advisor, and any pure rainmakers or pure business development positions that you have within the firm.

So have a think about like, what is the head count across those positions? Take your total revenue and divided by that head count. Now that number, of course, varies from year to year, and it varies by firm stage. So that's important to pay attention to, but I, as a median, we're generally like a really strong, steady year would be somewhere around $540,000 in revenue per revenue generator as a median for all firms.

But then if you were to look at the really big firms that we research, perhaps those $8 million in revenue, that number is dramatically higher. Revenue per revenue generator could be as high as a million. I think it's around the $920,000 per revenue generator. So the reason that that happens with scale is that as you build advice teams typically, and you create a system where our lead advisors and rainmakers and business developers have the ability to generate the opportunities, convert the opportunities, and then move lower value work typically down the organizational structure to roles that are more aligned and more appropriate to be doing, for example, servicing of lower of medium complexity clients. That frees up more and more capacity for more and more brand new client acquisition activity or growing the most valuable relationships of the firm. These are the sorts of changes that take place with the growth. So revenue per revenue, generators are excellent ones pay attention to, and so on.

Michael: So let me pause there just before you jump into the next one, cause I'm just trying to sort of process those numbers that it's like a median of $540,000 of revenue per revenue generator. I guess, just to make the language easy, I'm just going to call this revenue per advisor. With the asterisk that you had, like lead advisor, servicing advisors, biz-dev advisors, like I think the point that we're not necessarily including support paraplanners, other support staff. Job titles notwithstanding, like this is the, “You're responsible for revenue, keeping it or making it” - those advisors.

So $540,000 of revenue per advisor, just to make the math easy. I'll use the proverbial 1% AUM fee rule of thumb. This is essentially like, every $50 million of client assets is another, is another advisor higher. Is that fair to think about if I'm at $60 or 70 million, and I have not hired a second advisor, I may be falling behind on this metric, which essentially means I've probably got more clients than I can handle.

I'm not going to have as much time; that's going to make it harder for me to grow and do other things. Is that how we should think about that number?

Eliza: That's a helpful way of thinking about it. But it's one of those metrics where you don't ever want that number to get too high for your film stage in terms of revenue stage, because like, to your point, once it gets too high, it means maybe don't have capacity for growth.

We might look like we're shooting the lights out. And according to the benchmarking data, we might look amazing, but actually, perhaps we're seeing more client errors; maybe we're seeing a decline in service standards. Maybe we just can't keep up with the growth of the firm. And oftentimes what we see is this correlates when it gets too high, you'll find that growth is hindered in that the time available for new client acquisition activity is dramatically impacted on the flip side.

Michael: Oh, and just to say, I've seen advisors that have struggled with this in, in, in kind of more, more indirect, insidious ways. I have an advisor friend - we'll just say Rob, for appropriate anonymity. Rob was a very overloaded advisor in this perspective, you know? He was, I think, approaching $100 million as a solo. We had no support advisors. He was very, very proud of this like, “look at how leveraged and profitable the practice is.” But, you know, like growth was really kind of slowing to a halt.

And, I had said to him, “I know you serve your clients well, and you've grown really heavily through referrals. Like, are you really telling me that, like the referrals stopped after all these years of driving all of these referrals, what's like, what's going on?” And what it came down to is, as we got deeper into the conversation, was that he realized like he had no hustle to follow up.

When the referrals came along, he had gone from the early stages where it was like, “I got a referral; I better call them immediately.” He is now on stage of like, “I got a referral. God, I'm gonna have to do another new plan. I have 7 reviews this week and 11 next week I can't do another plan. This is going to kill me.” He wasn't even thinking about it consciously, but subconsciously he had gone from, “I'm so excited. I got to another referral” to like “No, another new client to deal with.” Subconsciously, he was basically sandbagging the referrals because he wasn't following up with them enthusiastically anymore, because he was so far past the capacity mark, but hadn't really acknowledged and embraced that yet.

Eliza: It's a common story. And if you think about the implications of that happening more broadly across the firm where you have a team of advisors and all of them feel a complete capacity crunch, they're at their limits in terms of the number of clients they can serve. And if all of them are either delaying getting in front of prospects, not returning calls, it might be several months before they could see a new prospect. What is the impact on firm growth rates as a result of that kind of activity, that kind of behavior? You wouldn't want to be a shareholder knowing that that is what's taking place.

Michael: Yeah. So that becomes that first metric. And I guess obviously worth putting an asterisk on that if you're doing this because you serve a very high volume of, of smaller clients and you've got 200 clients, you're going to probably get a feel differently about $540,000 of revenue than if you've got like a, a super-focused clientele where you've got 20 clients that have 2 to $3 million each, and you're doing $540,000 of revenue off of 20 clients. Although I will say like, because I've watched this play out as well it's amazing how consistent the revenue number holds even between advisors that do this with fewer large clients and those that do it with a large number of smaller clients because in practice, if you have a large number of smaller clients, you don't see them as often. So you got a little more time to have more of them. If you've got much bigger clients, you tend to do more for them and see them more often. And so like the, the number ends up being more consistent than you would expect between advisors with a few dozen and advisors with a few hundred clients, because that's kind of the point.

You can do a lot for some high-value clients. You can do a little less for a large number of low-value clients. But at some point, a human being advisor can just only make so much revenue happen before this gets difficult - before you start running out of time.

Eliza: Right, and on flip side of that metric: if that number for a firm is coming in quite low - below the median, according to the research - then the natural inclination might be to think, “Well, gosh, we've not got capacity. Our advisors are not operating maybe in an efficient way. They're not doing their jobs in a productive way and that could easily be true, but it could also be that perhaps they don't have the capability that the know-how that we would expect.”

Perhaps it's their training and development needs for those advisors. Maybe they need more support around them if they don't have any support. So there are, there are so many levels of the metrics. It’s not always straightforward to figure out what's going on.

You've got to look at your own circumstances and then apply the metrics. Also, consider benchmarking against yourself as opposed to just looking at the industry data, because you really want to see what you're capable of year after year under a range of different market conditions also. I think that's worth calling out: you've got to make it useful to your own business.

How Hiring An Associate Can Free Up The Time Of Your Revenue Generators [31:08]

Michael: So one more follow up on this, then I want to hear the next chapter, which I think you said was revenue per full-time employee, but is there like a typical number of clients this 540,000 of revenue tends to represent? I mean, is there a tip? Because most firms, I find, right or wrong, tend not to think as much about client capacity in a revenue perspective. We tend to think about client capacity in a client perspective. Like there's how many people relationships we can support. If we think about this in client terms, is there a typical for the number of clients per advisor or clients that make that generate $540,000 of revenue that kind of fills this picture out?

Eliza: Again, firm by firm, that’s really going to vary, but you know, somewhere in the ballpark of 60 clients, if you're to look at the research, it's likely to fall around that point. Over the years that's come down some.

Michael: It’s come down? I feel like the classic view would be we're getting all technology productivity enabled. Isn't that supposed to go up?

Eliza: Well, perhaps, but it kind of depends on the nature of the relationships that firms are working with. And maybe as they move more up-market, in terms of dealing with larger clients, more complex clients over time, you know, the size of those relationships requires a greater commitment of time and effort, so it's not always going to be the case. That's kind of a ballpark figure, but from firm to firm. Even within a firm I’m just working with now in the Midwest and they have several advisory teams, and between each advisory team, the numbers vary dramatically.

You might have in one team, one advisor taking care of 150 clients, and in another team, they'd be lucky to have 30 or 50 clients. So, you know, I always encourage businesses to work backwards when it comes to that question around client numbers, like what is the right amount number of clients?

If you take the typical client for the firm and you try and figure out, what does that client look like in terms of the complexity of their needs? And what are the number of hours approximately that advisor would have to spend with that relationship? And how many support hours would that relationship need?

Then we can back into what would be a reasonable volume of clients for any advisor to handle. It’s a simple, but necessary because from firm to firm, those relationships vary so dramatically.

Michael: All right. If your average client is a $300,000 household - lovely middle America, or technically upper-middle class America - that's still a good client for a lot of advisors, particularly in the first 5 to 10 years, but just 60 clients with $300,000 is you're talking more like $180,000–$200,000 of revenue, not $540,000 of revenue. So your ability to get clients that have a higher revenue per client, whether that's assets per clients or fees for clients if you're fee for service, just that revenue-per-client and how big of a client you can attract is still an anchor point for this.

Like if you're working with less affluent clients, you're probably not getting the 540,000 revenue per advisor. And if you're working with really, really affluent clients, you probably should be higher than $540,000 of revenue per advisor. You just don't have that many clients, and you could probably handle a little bit more.

Eliza: Yeah, that's right.

Michael: I feel like the other thing worth noting for this, just because you had said, this is not clients per founder or clients per lead advisor. This is everybody in an advisor business revenue generation role. This might be 60 clients for an advisor. This might be 120 clients for two advisor team. Maybe that's even a little bit more if they're not growing in their capacity. Two advisors and a support person. I've seen teams like that that are doing 140 or 150 clients. They don't have much capacity. They basically don't grow much more than if they lose a client, they take one on, but by then you might be a million to a million-and-a-half dollars of revenue on that team, or even a little bit higher. If the clients are more affluent on average and it’s a good team, those are good numbers.

Eliza: Yeah. It's a good number. And again, that, that organizational transition plan is so important because as you're creating that scale, you're thinking to yourself, “Well, at what stage do we begin to transition relationships? Because we know that we don't want to get to that capacity crisis. We don't want to cap out in terms of our growth capability. So when do we add the next associate advisor? When do we start moving medium complexity clients away from the lead?” and so forth. They're the questions you have to keep asking yourself in order to keep moving client relationships and revenue down the organizational structure.

Michael: So if you think about it from that perspective, whether we're talking about this, like 60 clients is an average client per advisor, and let’s call it roughly half a million dollars of revenue as a median revenue per advisor. So as a financial advisor that’s growing and coming up on these numbers. When am I supposed to think about advisor hire? Does this mean when I'm at 60-ish clients and or half million-dollar revenue, that's what I'm supposed to be hiring? Does it mean like, you can go a little beyond that, but if you go much beyond that, then you're going to start feeling, really feeling the squeeze? Or is that more like, no - what that really means is by 50 clients or $400,000 of revenue, you should already be out there hiring, because you have to stay ahead of the curve. Where should you be thinking about the next advisor hire if you're following this path?

Eliza: Again, for every firm, and one of the questions that you have to answer is, what is the expectation for any advisory role around the brand new client acquisition activities? If it's, let's say two days a week have to be allocated. That would be a lot. We know, according to the research, the median in terms of the amount of time that advisors spend in business development activities is about 15% to 20% depending on the study year. That’s one day a week on business development. So what is the expectation for growth, and where is that growth coming from? If you're a firm that is really laser focused on accelerated revenue growth, then you're going to have to find ways to free up the capacity of your best revenue generators much sooner so that they have time to start chasing opportunities and building networks and creating strategic partnerships, etc.

But other firms will say, well, actually our view is that we don't grow through brand new client acquisition. We grow through a very formal referral program, which means really serving existing clients really, really well. So who are the clients that generate the majority of the referrals and how do you then put your best people in front of those clients to make sure that that pipeline remains very healthy? Now, the reality is they just know every firm will have a different opinion about these things and much of that comes back to their culture and what's really important for, for them. What are they driving? What makes sense in terms of the focus on growth? They're the sort of questions you have to answer as you think about, structurally, what do we need to look like as we create scale? And at what point do I, maybe as a lead advisor have to start transitioning relationships? It may be in some firms that those, those lead advisors who are the best at business development in the firm might only manage 30 relationships, and spend the rest of their time focusing on generating new opportunities for the firm.

How Hiring At The Right Time Impacts Advisor Well-Being [38:56]

Michael: So then tell us about the next number that you had mentioned, which I think was revenue per full-time employee

Eliza: Yeah. We call it revenue per full-time equivalent in the research, which is very much the same thing.

Michael: So functionally, just like revenue divided by my total staff? Adjusting for, if you've got a bunch of part-time contractors that adds up to one, you still count it as one?

Eliza: Exactly, yes.

Michael: So full-time equivalents if you've got some more timers. Okay. Yes.

Eliza: And so in this scenario, all of your advisors are also included, and any active owners within the business are included in this full-time equivalent calculator. So the median in the research in one of the more recent studies in 2019 was $228,000 in revenue per full-time equivalent.

And again, that was a very healthy result in that study year. It's one of those metrics that increases with scales. For the largest firms, that number could be as much as sort of $350,000, but in that study year, it was at $312,000. Again, it's, it's because we are building teams which have, you know, kind of that ability to really push work down the structure.

One of those metrics which, once again, you've got to look at the positive and the negative side of this result. So if you're really, really strong in this area and I come across firms, it might be at $350,000-plus in revenue per full-time equivalent. The question is always going to be, you know, are we experiencing some of the pain and strains that come with this kind of capacity or lack of capacity? Are you going to be limited in terms of your ability to grow? Are you going to start experiencing challenges in the delivery of service to clients? Are we meeting our service expectations? Have we got an increase in errors, as an example?

The other side of the coin is if it's too low, does that mean that we're not a very productive business? Are we not using technology properly? Have we not trained and supervised our talent adequately and so forth? And those questions can only be answered once you kind of assess your metrics in combination with everything that's taking place in the firm.

Michael: It's a fascinating number to me, this revenue per full-time employee. I'll just say revenue per staff just rolls off the tongue a little easier, but mental note for everyone, count all your full-time equivalents, including adding up your part-timers to a full-time equivalent.

When we look at this revenue per staff number, even one of the things that we found in the wellbeing study was that adviser wellbeing tended to dip at $250,000 of revenue, $500,000 of revenue and $750,000 of revenue, which is basically exactly where you are if you're getting over this number, but you haven't done your next hire yet.

And you start getting behind on your revenue per staff number. Whereas once firms push through that there were huge lifts in adviser wellbeing at $300,000 of revenue, $600,000 of revenue in $900,000 of revenue. Which is usually right on the other side of that hire. Where now you're a $300,000 of revenue. You've added a second person, but you have a ton of capacity because you added the second person, but you're nowhere near the top end of the revenue for that second person, like just got the second person. You've got all this breathing room, because you've got the new staff support, and they're not filled up yet.

We could see it really directly in the numbers that owners tend to have troughs in their wellbeing and how they're feeling about the business as they hit these thresholds and then get these big lifts when they finally do the next hire. They come remarkably consistently at about $250,000 increments, which is where you would be just on the other side of this line. And I think as a note for the advisory firm owner, if you're coming up on $250,000 of revenue and you haven't hired, it's time. You're probably getting a little behind. If you're coming up on $500,000, and you haven't done your second hire, you're probably coming up again, which blends very well with the $500,000 of revenue per advisor. So just the first hire at $250,000 is the admin support. The second hire at $500,000 is the support advisor. It's the same numbers you were talking about earlier, right. Lining up that by $750,000, you're adding that associate advisor; by $250,000, you've already added your ops; by $750,000, you're probably adding another ops support; by a million, you got to add an ops manager because now there's four or five people.

There's a lot of stuff to deal with. And just that's what it takes to, to scale a firm. But I find it a powerful thing just for advisors. If you start thinking, you know, just every $250,000 of revenue, I should probably be doing another. And if you divide your revenue by 2$50,000, and that number is higher than the current staff you've got, you're probably behind on your staffing.

Eliza: Yeah. Probably behind. And you know, it's very natural for these numbers to change. So throughout the growth of the firm, you're going to see one year, very strong metrics the next year weaker and, and neither is necessarily a good or bad if your metrics are weaker or lower relative to your peer firms, well, that could be actually an awesome thing because maybe you've been really successful in hiring.

And now you're ready to accommodate all the growth that you're anticipating. Of course, if you're not able to fill that capacity in short order, then you're going to start to see that drag on operating profit margins. But, you know, you've got to just take an honest look at really what's taking place at that time to figure out whether or not you're behind in hiring, because that’s either going to soon create real problems, or you've created capacity. Are you making sure that you are filling that capacity quickly enough? Or is this going to become a problem? It's continually reassessing where things are at and making sure that you're making adjustments to ultimately drive the revenue growth you're seeking and of course get to the operating profit margin you're also seeking.

Leveraging “Non-Revenue” Staff Metrics To Give Adequate Support In Firm Growth [46:36]

Michael: Are these kind of the core two metrics? I mean, are the others that we tend to look at, or is this sort of like revenue per advisor/revenue per staff? Really our driver, if you just start thinking about like we're hiring staff every roughly $250,000. We're hiring advisors, roughly every $500,000, which is striking to me. That means like you basically end out alternating like staff, advisor, staff, advisor, staff advisor.

Eliza: The other metric that is speaks to that point, Michael is non-revenue role to revenue role ratio. That's taking a look at the number of positions that you have in the firm - that includes administration or support positions, dedicated managers or technical roles - everybody who's not generating revenue in the business relative to the number of advisory positions or revenue.

Michael: What should that ratio look like? I mean, we just kind of set it up as basically a one-to-one ratio. You hire a staff, you hire an advisor, you hire a staff, then an advisor. Is that accurate and as it continue that way, or does that ratio like change over time?

Eliza: It’s very consistent for smaller firms, but the median is at 1.3 to one. So at 1.3 non-revenue role, one revenue role for smaller firms. Those under, let's say $4 million in revenue, the ratio is generally around one-to-one and it was that case a couple of years ago in the research. But as you grow beyond that, the ratios consistently year on year, look different.

It's two-to-one ratio for the biggest firms in the industry. They’re building deeper support teams around their advisors, which enables more work to move down the structure. And again, that greater focus on brand new client acquisition work and conversion of prospects to clients.

Michael: But I'm struck just how, like how not far different that number is. If it's one-to-one, when firms are under 4 million of revenue, and it gets up to 1.3 to one, when firms get larger, I mean, you're still talking like the only difference here is whether you hire four ops for every four advisors, or if you hire five ops for, so—

Eliza: It’s actually two-to-one, sorry. The 1.3 to one is the median for all firms. And as you get to above $8 million in revenue changes to at two-to-one ratio.

Michael: Okay. Okay. So that's the scalability effect that starts showing up is as firms get larger and get better at pushing tasks down, they can get more stuff off their advisor plate.

And so now suddenly I've got eight staff supporting four advisors instead of four staff supporting four advisors.

Eliza: That's exactly right.

Michael: And so what's, I guess is what's shifting in practice, that number just like magically starts working where I can't get better than one-to-one when I'm under $4 million of revenue, but suddenly I'm at two-to-one when I'm over 8 million of revenue? What happened in that zone in between that sounds like a magical zone?

Eliza: It’s about the progression towards advice, team structures. So, when we look at the way that firms are structured and the way that they're delivering advice across the developmental spectrum, in the earliest stages, they're simply, you know, just a few people working together and doing our best to deliver to clients.

And then as you progress towards kind of that, the $1.5–4 million band, we start to see the emergence of what we call ad hoc collaboration, where you might start to operate in what kind of looks like a team. But in fact, we might have groups of advisors or teams that are kind of doing things in their own way, in a siloed way, where we're doing our own thing, but actualy, we haven't created efficiencies. We're not implementing brand processes. There is this sort of ad hoc way of getting work done and ad hoc collaboration between these kinds of teams that were silos, if you like that were starting to emerge. And then with more scale towards that $8 million, we certainly see defined advice teams, the predominant model, which means that we now have multiple levels of advisors and multiple levels of support personnel surrounding those advisory positions.

That creates, of course, deeper skills in different areas. And that ability to keep pushing work down the structure and clearing the plights of all of your revenue generators, so that they are put to their highest and best use at all times. And that is a key distinction.

When And How To Hire A COO For Your Firm [50:12]

Michael: So then, talk to us about the next level of the kind of scaling and building that goes above this, which you mentioned earlier. Moving towards $3 million of revenue, a full-time COO comes into play, moving towards $5 million, a full-time seat CEO comes into play.

I will admit practice. I feel like I very rarely see even dedicated COO's at $3 million of revenue. I really don't feel like I often see full-time CEOs in firms at $5 million of revenue who are also just the founder managing their 100 clients, and their team, and all their other stuff.

And they’re wearing the CEO hats, but it’s not a full-time standalone position. Do we mask this and do it in other ways? Or is that just like a broad-based, so many firms get behind in the scaling curve?

Eliza: Exactly. Right. I think that, you know, I've met with many firms over the years that can't quite figure out what that next move is.

That $3 million is really an inflection point for many businesses. And generally, they're a multiple shareholders at that point in time, and they know that something has to change, but they don't quite know what it is. The temptation is to just kind of continue to try and manage the firm yourself.

But oftentimes if that's at that stage, the capabilities that are required to continue to grow the firm don't necessarily exist within the firm. And so, it opens the door to, well, we probably have to look externally. And, and what is that position? And I think a lot of businesses really - I'm not familiar with what that takes - but that COO role is that generalist management position who is, uh, you know, obviously senior executive with very broad, but deep, management expertise in multiple areas that are necessary for the firm areas like human capital management, operations, and technology.

You're going to be pretty good at compliance and so on. You're going to have a very broad skillset, but you're going to be really, really clever in a number of areas, and in all likelihood, the right recruit for any given business has to come with a capability to fill a very significant gaps. So for example, at that stage, it's not unusual, like we've talked about in your research, that there is this drop off in dissatisfaction. Advisors are now managing people more than what they perhaps thought they would ever want to or have to. It's not what they love. And so for many firms recruiting a COO, that really is a gun. When it comes to performance management, compensation, planning, organizational design, all of these important things, it makes a whole lot of sense. For others it might be, well, we need someone who's really fantastic at operations and technology because that's our weakness.

So you want to be thinking, yes, we need somebody who's got a wealth of knowledge across multiple areas of the business, but we probably have a need for one area to be stronger than some of the others.

Michael: So just help me understand further, can you describe the job description of this person? Because my gut is that when most advisors are thinking about this, they're thinking about their ops manager, but a little more. And I think you're in practice talking about something that's a little bit different than that.

Eliza: Yeah, it’s different.

Michael: So can you just, can you describe further it's like what, what is this person's job description, and how does this simply differ from my ops manager, who I find in most firms is the jack-of-all-trades that handles a lot of different stuff, you know: overseeing some ops stuff and some office stuff and some facility stuff, and probably handles HR and benefits, which means they support on the employee reviews, and often they're helping with billing, and they're already doing so many of these different things. So what's the difference between that and what you're talking about here?

Eliza: It's a pretty big distinction between the two positions, and that ops manager is more likely to come into play, as I mentioned around that $1 million mark - perhaps a bit beyond that for many firms - but the key distinction is that the COO role is a more strategic management position, that is doing a lot of the design work at a very senior level contributing to the firm's strategy. Working with the COO, he's accountable for the execution of strategy in support of the CEO. That is very different to an operations manager who no doubt does a wonderful job of managing a very long list of challenges within the firm, but they're not expected to contribute at a strategic level.

They are handed tasks, they roll up their sleeves, and they get it done. Um, we're not having, for example, a COO position handling telephone related issues in the office, or when the printers break down, that's not what they're dealing with, but they are the ones who, this is an example from a technology perspective, they're thinking about how does our technology stack need to evolve in the two or three years, what technologies are we investigating and piloting potentially, where are we going to be? What are we going to be budgeting for our technology spend? How are we tracking the performance of our technology and the executional implementation? Yeah, they're very different levels of levels of responsibility.

And you kind of carry that through that same level of skill through to every other, you know, function that you'd ask them like financial reporting within the business, uh, financial performance management and reporting would, would be, would fall under that COO position. Along with, of course your people-related management.

From a people perspective, they are the ones who are helping to design a compensation plan, building performance objectives that are aligned to the firm's strategy and conducting performance reviews with some of the most seasoned team members within the firm, as an example – it’s a very different level of skill.

Michael: So. I think we're just feeling like I'm like channeling my like inner ‘scaling business owner’ thing. Now it's like, so, so Eliza, where do you find this magical unicorn that does all of these wonderful things?

Eliza: Over the years, it's always really interesting when you get to work with COOs, and they're oftentimes front and center in the strategic planning meetings, and you know, many of them have grown up in the industry and, and developed skills over time in management, but it is kind of unusual.

I have to say again, if I look back at all of the consulting engagements, I've done over the years, it is unusual for an operations manager to advance to a COO. That doesn't mean it doesn't happen. I have seen it more recently in one firm, actually here in Australia, But it doesn't happen very often because they are completely different skillsets.

And unless you are a firm, that's able to really focus on professional development and move that individual along, and that’s the career aspiration, you know, it's just not going to happen. So some firms will recruit COOs or poach them from other firms. They will look outside of the industry to find really great management capabilities.

One firm many, many years ago, recruited an individual from the military who happened to have incredible leadership and management strengths that worked out beautifully for them. So I don't think you have to be limited to our industry. Hopefully you're one of those firms that does a great job of developing talent internally, and you can progress an individual, but I think you have to look at a range of options

Michael: And What am I vetting? How do I figure out if this is the right COO, especially if I'm hiring outside of the industry, which means the one thing I would probably want to ask, which is like, ‘Hey, here's a problem we're dealing with in our firm, how would you handle this?’ They won't have a good answer because they have no familiar with the industry and the systems that we use. So like how, how do I even figure out if I've got the right person, if I'm trying to interview these people, what's the key to identify?

Eliza: Well, I think you always start with some of the fundamentals around, are they culturally aligned with our leadership team? Are they aligned with our growth aspirations? Are they people that, uh, is it somebody that, you know, that has a similar level of motivation and enthusiasm relative to the owners?

I think that's incredibly important, bearing in mind that it's not unusual for this position at some point to be raising their hand, wanting potentially to buy an ownership stake within the firm. This is a senior position that you want to retain for the long-term. You want to be thinking well in advance, “Hey, actually, we also want to know whether this person's going to be potentially a partner for us at the firm in the future.” So you want to be always having that view in mind as you're going through the process of interviewing, but there are, you know, six or so buckets of accountability, and you want to understand, “What is your experiencing in leading in leading teams? What is your experience in building a compensation model, or helping to develop performance objectives? What's your experience in executing on a strategic plan? If we build a strategy and we hand it to you, what's your experience in having a team, building an implementation plan off the back of it? What evidence do you have of your ability to do those sorts of things?”

The same applies across each of the areas of the management function that you would want them to really take a senior position in. You've got to feel ultimately comfortable. You've got to remember that partners will be handing over responsibility. Imagine handing over, for the first time, responsibility for the financial performance management of the firm.

Michael: Yeah, it sounds terrifying.

Eliza: Terrifying, right? You may not even hand everything over at once, but you need to know that you're hiring somebody that you have the confidence in, that will get there, that you will want to make that transition with so that you can focus on the things that you really want to be doing in the firm.

The Cost Of Transitioning (Or Not) To A COO [1:00:34]

Michael: What strikes me about this, just having seen a lot of advisors go through this transition. I mean, for anyone who's listening to this and just trying to imagine, like actually handing off that much responsibility for the thing that determines your financial future, like your business, this baby you've birthed, created, and raised until this point and, and feel like it's fundamentally kind of terrifying to handle that much responsibility and just the risk and consequences to you. If it goes wrong, for better or worse, what I've seen for pretty much every advisor that's managed to get through that and deal with that fear and still make the hire and move forward is just the fundamental recognition that if you're going to keep growing, this literally has to happen.

And if it doesn't, the business will stop growing. Or, usually, you will break. And I think most advisors don't do this transition, which is literally why we see, as you said, like this transition tends to come at $3 million of revenue, and the unhappiest lowest wellbeing advisors of everyone we met. Our advisors over three-and-a-half million of revenue, they're lower than advisors who have no clients yet and are getting started from scratch, for everyone who remembers how awful that was, this part gets worse. And, the worst just, I know it's all the advisors that have not been willing to do this hire and have tried to hold onto it. But the business keeps getting bigger, keeps getting more complex, and they've got clients, and they've got new challenges they've never dealt with before.

And for most of us, all the things you said, like leading teams, building comp models, developing performance objectives, and executing a strategic plan - nobody taught me to do that. I was taught to get clients and give them good advice and give them good service.

So they pay us for what we do and stick around. And we don’t have these competencies either which I think is why we see the wellbeing so low. It's really not pleasant to have the sole responsibility to do a thing that you know you're not good at, haven’t been trained in and don't have the capabilities. To me, for anyone who's struggling with thinking about, “How do you do this?”

How do you get over the fear, if you want to grow to the next level? And just the answer is, “Because it is worse if you don't.” Your only other choice is, you just stop growing. Like you just create a new rule that says, “every time we add a client, we get rid of a client.” And you could still grow your revenue a little because you take on more affluent clients and let go of your least affluent clients. Like you might make a little more money. You can even expand the profitability of the firm, but if you don't decide to stop the net addition of clients, you have to deal with this.

So it's only, the only real question is whether you're going to try to find the hire to do this, or if you're just going to continuously inflicts the pain on yourself, which I can tell you empirically from the data is worse. You’ve got to see, and you’ve got to believe for yourself – but I can tell you, empirically, it's worse.

Eliza: In business, there are always trade-offs to be made, right? You can make that call to just keep doing what you're doing, even if you're not loving it, but there is a massive trade-off for that. And yes, growth is one of those trade-offs, but the other trade-off, which is maybe even worse than some cases is . . . well, what is the impact on everybody else in the team?

Capabilities will deepen with scale, and they have to deepen in order for the firm to continue to evolve. If it's not evolving, what does that mean for our talent? Are they just going to get fed up? Are they going to get sick of a business that's perhaps not growing up, providing more opportunities for the future, or worse still, are they being managed by someone who doesn't really enjoy people management and doesn't put a whole lot of effort into it - when the alternative would be to have somebody professional come in, who loves dealing with people issues or technology issues andand so on and would run your work with enthusiasm.

Michael: Cool. To have someone who is actually excited to deal with the new comp model and the next technology deployment? Because someone out there loves it.

Eliza: And someone who loves, you know, improving on processes and coming up with new ways of doing things and reorganizing the structure.

Michael: So anchor my expectations. I mean, what, what should I be expecting to pay for this position?

Eliza: Hmm. Well, that's another one of those questions, which of course varies dramatically by location in particular. And so there's a lot of benchmarking data available in the industry which I encourage firms to tap into.

I'll give you an indication based on the last of the people in pay studies that was conducted. But whenever I share data like this, it's really important just to, to set the expectation that it changes dramatically based on your location. It might change dramatically based on the competency of any individual that you're trying to recruit, but as a median, total compensation was at $164,000, and at the upper quartile, $252,000 and at the lower quartile, $116,000. Many factors would contribute to those numbers. If you're a firm that's thinking about that recruit, you want to be really taking a close look at current compensation data for the industry and also thinking about what regional adjustments might need to be made to make it applicable to your firm.

Michael: You'd mentioned total compensation. So just that some combination of salary and bonus. Is this typically a position where I need to do equity as well and make them a shareholder? You had mentioned equity at one point, but I'm not sure if that comes here or comes later? Like, what is, what is this comp tend look like?

Eliza: That comp that I just described, that is a combination of base salary and variable pay vary, like incentive compensation of some sort, whether that be like a performance-based or potentially just a bonus-type incentive structure. Then of course the question of equity is entirely separate, but generally people have that level of seniority coming into a management position are going to ask that question, and they might even ask it in the interview process to understand what the breadth of the opportunity really is.

And I do think whether whether it's a really super talented COO or a super talented investment manager, or an incredible associate advisor that's on the path to becoming a lead advisor, those equity conversations have to be had. It's one of the great mistakes that I've seen over the years, even in some of the biggest firms - the most exceptional firms - when you learn about the way they have developed an equity plan or not quite developed an equity plan that's in alignment with the needs of the talent. It can create really huge challenges and you know, it's not until those issues are resolved, that you can be sure that your best people are safe. And in a market like we're operating in right now, firms are growing really rapidly right now, there is an acute shortage of talent. The race for talent is just accelerated so much this year that you've got to be able to demonstrate to your team members that you want them there for the long term, that you value them enough. And for those where it makes sense to do that, you’ve got to go to great lengths to be able to offer equity opportunities.

Finding, Recruiting, And Transitioning A CEO Into An Advisory Firm [1:08:26]

Michael: So now talk to us about the next hire that you had mentioned, which is hiring the CEO at $5 million of revenue. What does this role look like? How does this, how does this come together relative to where every other firm is, which is “I'm the founder I've been running it since day one. Or maybe there's a couple of co-founders or, or senior partners now. And we have a committee of two or three or four of us that manage it, and we've kind of divvied up the duties because Bob's good at this and Sydney's good at that. And we carved that stuff up because we have to, because we're also managing clients and growing the business and doing all the other things.”

Talk to us about the CEO position. Like, what does it look like when you hire a CEO at $5 million of revenue? And if I'm the founder, am I allowed to do this or do I have to go hire someone else to do this?

Eliza: Well, if you think hiring the COO is a challenge, hiring an external CEO is next level, of course.

And for that reason, you don't see it very often. In that going to the market to bring in an external CEO within an advisory firm is not common, that's for sure. And oftentimes it will be one of the founders that progresses to that position over time. It’s always a challenge, however, when you've got several shareholders within the business and maybe co-founders, who's going to take the reins. To your point, many of them will share that role for a period of time.

And in some firms - in some ways - that could work for some businesses, but I've seen several in several instances where that does not work and it doesn't work because, you know, over the course of time decision-making authority gets blurred. They're at stalemates on the bigger issues within the business that need to be resolved, which results in kind of protracted decision-making and so on and so forth.

And I think at some point, for most firms there is benefit in, in appointing one individual to that position who has clear accountability for the growth of the firm. And as it relates to what does that role look like? Well, it's very much driving and designing - driving the strategy of the business. You won't necessarily build it all alone. You'll want your leadership team involved in those conversations, but you are accountable for building that strategy, and then ensuring the execution of that strategy. You're entirely accountable for the financial performance of the business. You're entirely accountable for building the profile of the firm within the community, in which you're serving and, and, and very much being a presence in the community that will support the continued growth of the firm. It's a role that carries, obviously all of the final. That's where the buck stops.

Michael: How do I get comfortable with that? I'm the founder and it's still my equity - or primarily, my equity. That's an immense portion of my personal net worth to have someone else run.

Eliza: Yeah. Look outside of our industry. It happens frequently where founders will step aside, and they'll bring in brand new capabilities that have very broad and very deep experience. But it’s, within our industry of closely held businesses . . . it's just such a tough call to make.

And that's why you don't see it. You don't see it all that often, but you have to again, ask yourself, it comes back to the same point. Previously, like with the COO position, is what is the cost of not doing it? You might like the idea of leading a firm, but if you really don't have that skillset to be able to grow the business from $5 million to 1$0 million to $20 million, what does that mean for the future of the firm? It's a tough question to answer for most owners.

Michael: So for the firms that managed to do this, as you noted, I often don't see firms getting to this level until often $10 or $20 million of revenue, even. There's just a whole other level of complexity or things breaking.

If it's not going well for the firms that do this, is there anything unique or any commonalities you see as to who does hire a CEO at this stage and just actually does it, or gets comfortable with it, or gets over the hump of doing it?

Eliza: I think that it's all a bit all over the map. If you were to look at, you know, I can only talk anecdotally because we don't have data that would speak to that. You're basing it on sort of individual experiences of, of firms. I do think that there is a lot to be said for the kind of impact that professional management can have on the growth trajectory and perhaps the aspirations.

You know, we are only limited by our aspirations, and we're limited by our capabilities. And I think that if you have an individual that brings about an entirely new skillset, that looks at challenges in a very different way, it ultimately means that the trajectory of the firm could change quite dramatically.

Because if you're bringing a brand-new set of skills to existing issues, you'd expect quite a different result. The growth potential would certainly be something that you would expect would increase by bringing in those brand-new capabilities, because not only are you deepening the expertise, you're also increasing capacity.

You know, in all likelihood, the firm founder is still going to be involved in some relationships and dealing with issues that are not necessarily CEO-level responsibilities. It's very hard to kind of pull away entirely from that. So you can imagine the impact of somebody who has that really deep skillset, but also is dedicated 100% with great enthusiasm to the success of the firm.

Michael: And where did these people come from? Where are you finding these? Do I need to go higher a recruiting firm who's also going to charge me tens of thousands of dollars to help find this person? Am I just listing this on LinkedIn and indeed.com and getting CEOs who apply? Like just how do you even try to find a person like this?

Eliza: Yeah, it certainly, again, there's nothing easy about recruiting senior talent – executive-level talent. It always comes with a greater risk, relative to two other positions. I think you've got to look at all of your networks that you have available to you.

Oftentimes the businesses that do best at recruiting, whether it be CEO or COO level positions, are those that have, over the course of time, developed extensive networks within the industry and even built friendly competitors within the industry, that they work with from time to time to share ideas and so forth.

It may very well be that this individual is leading another business and doesn't want to be the one to keep seeing clients loves the leadership of the firm and wants to keep, you know, wants to 100% focused on that work. It could certainly be a driver for a potential merger or acquisition, as an example. You don't want to take that possibility off the table,

Michael: So you could merge with another firm that has someone that's more promising in their capability to do this and then have them run the joint.

Eliza: Quite possibly. There was a piece of research that I wrote for TD Ameritrade, going back a couple of years ago, called “The Six Dimensions of Standout Performance” And we examined the characteristics of those, the billion dollar firms in the industry - the best performing, I should say the top top 25% by way of revenue growth and operating profit margin.

We looked across these six dimensions and one of the dimensions where they absolutely stood out was this dimension of connectivity. ‘Connectivity’ means their ability to build growth-producing partnerships within the industry and outside of the industry - to be able to kind of plant seeds, build relationships that over time that tend to . . . they don't necessarily know where they're going to, what they're going to result in.

They might end up being a strategic partner, or a great center of influence, or they might be a future CEO or COO. And I think there's a lot to be said for that kind of proactive outreach in the community and to keep doing that consistently, year over year. It's usually the founders that are really great at that stuff. That can be a wonderful source of brand-new talent. In fact, when I look back at the years of consulting, oftentimes those firms that are growing most aggressively and consistently are those that have a founder that just loves that element of connectivity, that outreach, that active building of relationships across the industry.

Michael: In which case, I guess the sort of the point in the end is that the driver here is simply if you're that founder that has the drive that has the energy for the building, and you're just feeling stuck in mire down with all the business, with things that have to get run because the business is getting big because you're at $5 to 10+ million dollars of revenue, imagine what it would be like if you actually had someone that you could trust and have confidence in where you could just hand this stuff to them, and they would deal with it and it would get done at the level and quality that you want.

Eliza: Yeah.

Michael: And just thinking yourself, like, what what's that worth to you? What's that worth to the business?

Eliza: What does that mean in terms of the future valuation of the firm? What is the ultimate performance indicator for most shareholders? Sure, they look at revenue growth, they look at operating profit margin, but valuation is, for many, the ultimate indicator.

And what is the trade-off? Are we prepared to perhaps go through some discomfort now and think very differently about the future leadership of the firm in order to drive the growth consistently to avoid a situation where we have a capacity crisis or a skills crisis, and to be able to progress along that developmental spectrum year on year, continuing to build revenue and to continuing to operate in a profitable way?

If you don't have the skills to do that, what is the cost to you of not looking to bring in a professional dedicated management? And every firm's going to ask that question at some point.

Michael: And in that context of cost, help me anchor my expectations again. Like what, what is this cost? What should I be expecting here?

Eliza: Well, it could be anywhere if I'm looking at the data, it could be anywhere from the median of $267,000 up to almost $500,000 at the upper end - again, dramatically impacted by your location. You know, if you're in areas like Connecticut or you're in San Francisco, it's a very expensive position, obviously, to recruit for, which you would expect. Right?

Michael: Right.

Eliza: They're never easy decisions to make, right? And that's the point of business. Like, none of it's easy. And I think anyone who tells you it's easy is just lying to you. It's tough. At every step of development, there are a new set of challenges that present themselves and there is discomfort that owners will have to work through in order to continue to grow. It's just a case of whether or not they're prepared to put themselves through that.

Michael: Well, and I'm struck as well, just particularly when you're talking about this at the size that we've been suggesting here. Like, when you're hiring at $5 million of revenue for this role, I mean, you're literally talking about 5–10% of total revenue, just into this position.

Eliza: Potentially. But again, it will come down to the individual candidate, and it may very well be if you haven't appointed a CEO previously . . . it may very well be that you continue to manage that position part time for a while, or have part time resources committed to that position, until you feel more confident. Maybe the number for a given business is $7 million before it becomes truly a full-time role. Every firm has to make that decision based on what is financially responsible, what is the need, what is the cost of delaying for us, and so forth. With any expensive hire, there is that period of time where we are less profitable until we gain traction, they are fully productive, and they are delivering an increased rate of revenue growth to the firm, and increased profit margins as a result. But it's that seesaw effect again, right? We hire, our expenses look worse this year. But next year, we should be hopefully looking great again.

Eliza’s Path Through Advisory Firm Research And Consulting [1:22:44]

Michael: Share with us for a few moments your journey. We haven't really talked yet about, like, “What does Eliza do and how to Eliza and out at the point with all of this background and expertise in advising firms on all of these issues?”

Eliza: Well, it's been a longer journey than I care to acknowledge in terms of the number of years consulting. I really grew up in the industry. I started originally in Australia working as a paraplanner. That was my first job out of university. And a few years later, I had an opportunity to join a very small consulting team in Western Australia here, that did very similar work to what the practice management consulting team research team we're doing at Moss Adams in the U.S. And as it happened, I had an opportunity through the course of my work to meet Mark. This is several years ago - I'm talking 2005 now. And Mark offered me a job to move out to Seattle as a senior consultant with the Moss Group. So, you know, that was a huge leap of faith, if you like, to relocate to a different country. But the motivating...

Michael: Mark is very persuasive, though. I understand.

Eliza: Well, it was primarily because, you know, what an opportunity to be able to work alongside Mark. And I was fortunate enough to accompany him on all of his engagements. And, you know, I got that wonderful opportunity to sit there and listen to him and hear his advice to clients. And I remember thinking at the time, “Gosh, he's so eloquent and comprehensive in every response. I felt very much like, I just have to sit there and listen right now, because he's got this covered well and truly.” But, you know, it was a wonderful learning experience. And, you know, working in that Moss Adams Consulting Group, between the research capabilities and the consulting skills, it was an excellent learning ground. I was continuing to build new skills myself. And then of course, the financial crisis hit at the end of '08. And Moss Adams...

Michael: That was a good time to travel to another continent on the other side of the world.

Eliza: Well, Moss decided at that point, of course, that they were bringing an end to their consulting for financial services. And at that stage, Dan Inveen and I were the two seniors on the team. He was the senior researcher, and I was, at that time, the senior person in consulting. And we were asked to round out the engagements and close out the work there. And we kind of looked at each other and we thought, “Hey, you know what, this is an opportunity.” What about if we think about starting our own research and consulting firm? Which, again, in hindsight, you know, in the darkest days of the financial crisis, to start a business was a big call to make. But we were kind of enthusiastic and excited about the whole thing. And so Dan and I decided to join forces. We co-founded together, FA Insight, which was just a wonderful, wonderful experience where we conducted a wealth of research. Many of your listeners would be familiar with the FA Insight Annual Study of Advisory Firms, and all of the research and white papers and guidebooks that were kind of written off the back of all of that wealth of data.

And then of course, we utilize that data for consulting engagements, and of course speaking engagements, which I always love doing. And we built a business that over time, a database that was highly valued. And we had built enough of a brand in the market that our largest client at the time, which was TD Ameritrade in 2016, ultimately acquired FA Insight, and we were folded into the great team at TD Ameritrade back in 2016. That was a large part of the journey, and I stayed on with TD. They had Dan and I play a role in continuing to develop the research on their behalf, and consult to their clients, and deliver workshops and programs. And it was a wonderful, wonderful experience with the team at TD Ameritrade, just a fantastic group of people. And since then, of course, with changes that have taken place at TD Ameritrade through the Schwab acquisition, I'm now De Pardo Consulting and back doing independent work as a consultant, and research as well. So really, it's been an incredible journey.

Michael: And so, like, in practice today, what does De Pardo Consulting do, and what kinds of firms do you work with? Because I know we've literally covered the gamut from, like, I'm getting started as a solo, and I should probably be hiring my first admin staff member by $250,000 in revenue up to firms with many, many, many millions of dollars of revenue, who are hiring COOs, and CEOs, and the like. What kinds of firms are you consulting with now? And what are the areas that you're getting into in practice with them?

Eliza: It's kind of, I want to say, a 70-30 split in terms of work with institutional clients, relative to individual advisory firms. I'll take on a small number of advisory firm clients each year, and they typically are firms that are managing over a billion dollars in assets. And, you know, their challenges are not all that different, in some ways, relative to smaller firms. But of course, they have more people, and perhaps, things look and feel more complex. But at the root of it all, some of the themes are very similar. There's always a lot of work to do in human capital management, helping them to build organizational structures that will carry them from say, $2 billion in assets to $4 billion in assets, and so on. How do those structures need to evolve to become more efficient, more productive, as well as aligned to their own unique culture? How do we compensate our talent as we start to evolve our organizational structure? What does the compensation plan need to look like? Career path planning, and business succession is kind of all tied up in that work. I also do a lot of work in strategic growth planning.

And I love working with shareholder groups who are, you know, wanting to reassess their growth plans. Maybe they had a plan, and perhaps they've done really well in accomplishing it, but now they need to kind of stretch again for another three to five years, and helping them to figure out what's that really going to look like? That's always really fun work for me. And then of course, there's the institutional work, which is also really great work to be doing. I love it. It's building programs that reach . . . it's a one-to-many way of reaching advisors, because obviously, you can only have so much impact, dealing one-on-one with firms. And I love the ability to write research and white papers, and build analytical tools, and then talk about those things and present at conferences, and run workshops, and so forth. I like to maintain that mixture of projects. And I find very much that you've got to be really entrenched in individual firm work, in order to really continually kind of have that source of great ideas that will feed into your research and your writing. And vice versa - the two of them just work together so beautifully. I think that it really pays to be able to do all of these different types of work that together provide you with more to draw upon.

The Value Of Human Capital In Recruiting To And Growing A Firm [01:30:31]

Michael: So, having done this over the years, what do you find is the biggest gap that advisors just don't understand as they're building and scaling their own advisory businesses? What is it that tends to blindside advisors the most in that process?

Eliza: What blindsides them? Well, you know, I keep coming back to human capital, but I really do believe that those businesses that don't pay adequate attention to their people, and the development of their talent, and equity opportunities, will ultimately keep stalling out as it relates to their growth. And again, if we go back to the race for talent that we're experiencing at the moment, those firms that have always paid attention to their employee value proposition. And I'm not just talking about kind of coming up with a bunch of ideas and talking about it. It's really truly about executing on and delivering value to team members. I think that those firms that put themselves in an amazing position now to be able to take advantage of what is a more difficult recruitment market, but also an ability to kind of headhunt from other firms.

You're either going to - in my view, when it comes to talent in our industry - you're either going to eat, or you're going to get eaten, as an advisory firm. You're going to have your talent picked off one by one, if you're not paying close attention to the delivery of value to your team members. So what does that look like? Well, it looks like professional development opportunities, and internal mentoring opportunities, and equity plan participation, for example. These are the things that have to be taking place, as we continue to see such a crunch on the supply of great talent.

Michael: So, what was the low point in your own journey of navigating through the industry?

Eliza: Oh, gosh. Well, happily, I haven't had too many low points over the course of the years. Maybe I've been really fortunate in that respect. I will say that, I think, you know, as you're building a firm, as Dan and I were working together to build FA Insight, it's a really super exciting time when you're a startup, but it also comes with a lot of stress. And you're dealing with issues for the very first time that you haven't had to have responsibility for dealing with before. I can think of one instance, in particular, as we were in the early years of building FA Insight, where we had been asked to pitch on a particular piece of work with what was a very large Wall Street institution. It was a lengthy process, as oftentimes these things are, when you're dealing with financial institutions. You know, there's kind of a process, but this was particularly lengthy. And we had proposal after proposal, and discussion after discussion, and, you know, providing a range of possibilities. And it was like a six-month journey to get to that point where we went to the offices in downtown Manhattan and had, you know, a meeting with the heads. Making a long story short, it was an incredibly important piece of work for us to try and win.

And we were very quickly dismissed during that meeting and treated with somewhat … I hate to use the word, but somewhat disrespectful way. And in a way that I think was, you know, very unfortunate, given the amount of effort that you put forth as a small business owner, building a business. You really put your heart and soul into every engagement and every possible prospect opportunity. And so I remember that distinct feeling, after putting in so much effort and having not won that piece of business. As it turns out, you know, nobody won that piece of business. They ended up figuring out a way to try and piece together something themselves. But Dan and I left that meeting, and we were so demoralized. And, you know, we grabbed ourselves a cup of coffee, and went and sat by the water in downtown Manhattan. I feel like that was a very tough experience to be treated in such a way after putting forth so much effort. And that was truly a lesson. That's a lesson in, don't ever take this stuff personally.

And you've got to move on quickly from these types of experiences. You cannot afford to dwell in any way. You've got to believe entirely in your abilities, and continue to push forward and continue to do great work. And never ever take it personally, because you really can't afford to. It's business, and everybody's taking care of their own business at the end of the day. So, you know, that was a particularly low point. But I'm grateful to say that, you know, over the course of the years, I've had a wonderful journey and I don't really feel like there have been that many moments I can point to where I would characterize it as a low point.

Michael: So what do you know now that you wish you could go back and tell you from, like, 15 years ago, as you were getting going as a consultant and working with advisors on practice management issues?

Eliza: Ah, that whole concept of never taking things personally, I think, is incredibly important. And advisors - business owners - struggle with this also. And I see it all the time with clients, where they might lose talent that they really thought was going to be around for a long time. And they're absolutely heartbroken when a key member of the team leaves. And it's very, very hard not to take it personally. But we have to expect that people are going to want to grow and move on and experience other things. I think this whole concept of really understanding that it's not about you, and there are often so many other factors that come into individual's decisions that you can't really afford to take things too seriously. I think the other thing that I've learned is that, you know, when a new prospect opportunity comes to you, and they're very quick to move into an engagement and to hurry up and sign up and get things moving, sometimes that brings about a whole bunch of challenges down the track, because those are the business owners that haven't really thought through, “What is my role here? What am I getting myself into in terms of the implementation that has to take place off the back of this? What are some of the bigger, harder decisions I'm going to be asked to make and some of the change I'm going to have to make and drive within the firm?”

You know, they're the businesses that will more likely struggle to see the full benefit of working with a consultant. I think where businesses are really thoughtful, and they ask a lot of questions through the process, and they think things through in a very methodical way - they're the ones that absolutely know what they're getting into. And they have thought about, “What is the resourcing required on our end, to make sure we make the very most of the advice that you give us, and that we implement in a really timely way?” That was kind of an interesting observation over the years that sometimes it's a great thing, contrary to the story I told you earlier, where clients or prospects are taking some time to really think through the details of it, that's a really healthy thing, because you want them to make the most of the advice that you give them and actually be very successful in implementing the change.

Michael: So what advice would you give to newer advisors, maybe get getting started in the industry today, and, you know, have the whole career still in front of them?

Eliza: Oh, gosh. It's probably a pretty long list. You know, I would say that, be super careful around who you recruit. Because when you're in a really small business, every individual within that team has the ability to have a huge impact. And there's no way to hide in a small business. So, you need to be laser focused in what your hiring needs are. But also make sure that you are taking your time to really recruit the very best that you can at that stage in your development. You don't want to make mistakes that are going to kind of trip you up. You're going to rely so heavily on those early days in those couple of people that might be around you, that you've got to make very smart choices as it relates to your human capital. And, I think, be really deliberate. There's nothing to say... You know, I always get asked this question around, “Well, what is the right time to start thinking about developing a business strategy, or the right time to think about what my organizational structure needs to look like?” And I don't think it's ever too soon. I think go into it with the end game in mind, know what it is you're trying to accomplish for yourself, how you want your own role to evolve, and the scale of the business which you're trying to build.

And even think about, you know, what is that exit plan, even? You want to know what's really driving you to start the business and to build the business. So I would say, don't think you're ever too small to start thinking about things in a more strategic way and to be planning for the future. Because you can avoid a number of pitfalls by paying close attention to the data in the industry and planning ahead. So that you're not making some of the mistakes that so many firms do as they grow and they move through the kind of startup phase, and we beyond kind of $500,000 and $1 million in revenue.

What Success Means To Eliza [1:40:27]

Michael: So as we wrap up, this is a podcast about success. And just one of the themes is that, even the word success means different things to different people. And so, you've had this wonderful successful career journey yourself as a consultant. But I'm wondering, how do you define success for yourself, at this point?

Eliza: It's a really good question. Professionally, I can answer that question in terms of what success would look like to me or what I believe the success is for me. You know, I truly do really love the work that I do. And it's important for me that I continue to work on engagements that do ensure that I'm growing as I'm working. And, you know, continuing to have that professional growth. But I have to say, when I get on projects, that I can completely immerse myself in and work in a very focused manner without distraction. I guess it's kind of what you call a state of flow, where you have this truly energized focus, and you get to work on something that's so interesting. You know, I really just get such a kick out of it. So when I can do work like that, where it's challenging and interesting, and you come up with something that combines data with creativity, and bring those things together to produce something for a client that they're really happy with… you know, that's incredibly important for me. You know, it's about doing great work and making sure my clients are hopefully delighted with the outcome. When I get those comments from clients, from time to time, they stick with me. They're meaningful to me, because really, it does make me feel like I am accomplishing a level of success when my clients are saying things to recognize that they're better off for the work that we've done together. You know, that's super important to me. So I don't know if that gives you a clear answer, but that's what I can give you today. That's definitely the things that are important to me.

Michael: And does it differ at a personal level? I mean, you kind of framed that professionally.

Eliza: Yeah. Well, personally, it's all about getting the balance right. Because I do think there's a tendency when you love what you do, and you focus on it to have a bit of tunnel vision at times. And that's not always a healthy place to be at. So, making sure that I maintain that wonderful balance of family time and time with friends. And in particular, you know, I love to focus on and am very dedicated to my exercise regime and keeping physically and mentally healthy. That's kind of the best that I can hope for in life, to be frank with you. You know, if those things are all in balance, I'm a pretty happy lady at that stage.

Michael: I love it. I love it. Well, thank you so much, Eliza, for joining us on the "Financial Advisor Success" podcast.

Eliza: Thank you for having me. It's been such a pleasure to talk to you.

Michael: Absolutely. Thank you.

Eliza: Thanks, Michael.