Executive Summary
The fundamental constraint that every financial advisor eventually faces is that there are only so many hours in the day and week, and therefore only so many clients that can be served, before you hit a wall. At that moment, you reach the maximum capacity of a financial advisory practice, and have to make a decision about whether you will stay that size - with what may be a very good income - or grow into a business, a true business, that goes beyond your individual capacity to serve clients as a financial advisor.
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the dynamics of transitioning from a practice to a business, and the challenges you may encounter along the way, including building a team, letting go of client responsibilities, and most significantly... changing your mindset!
The first change you need to acknowledge is that when making the transition from a practice to a business, you, personally, can no longer spend your time primarily servicing clients. This is partially due to the wall you will naturally hit from trying to service too many clients, but even more importantly, you need to recognize that if you spend all of your time working in the business, you won't have any time to work on the business. You may still keep a small set of clients – if for no other reason than to remember what's it's like to sit across from the client and hear their needs and concerns – but the first step in the transition for most advisors is bringing on an associate advisor who can gradually take over client relationships and work with all new clients going forward. And as you add more clients, you'll simply add more advisors (who aren't you!).
The second thing to recognize is that if you're going to be doing all that hiring over time (from advisors to operations and back-office staff) as the business grows, you're going to need to really focus on developing your people (instead of acquiring new clients). In fact, since the financial advisory business is a service business, finding and developing people will arguably become your number one job as you make the transition from a practice to a business.
But the biggest challenge to transitioning from a practice to a business is that you're also going to have to completely change your mindset. Because you may have started out as a financial advisor giving advice, but going forward you are no longer trying to do financial planning... you're trying to build a business that does financial planning. This will mean an endless set of changes as your business grows and your role changes to reflect the new challenges you face, as well as real financial sacrifices as you hire staff and try to find economies of scale as the firm grows.
Ultimately, the path to being a business owner is not for every advisor. Many are quite happy to continue doing the client work as a solo advisor - and that's okay! - but for those who do wish to build their practice into something bigger than themselves, it will require a complete mindset shift to vision a business that truly goes beyond your individual ability to serve clients and instead is all about getting other great financial advisors to serve the clients in your business!
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Welcome, everyone! Welcome to Office Hours with Michael Kitces!
As you can see, I'm in a different setting here than usual, hanging out after speaking at the AICPA's PFP (Personal Financial Planning) Summit.
One of the themes that we've been talking about here at the Summit today is the idea of building a business – meaning, a "true" business – and how that is distinct from simply building a practice. I did a segment on "Office Hours" about this a couple of months ago and it was really popular.
A practice is something that's built around you as the financial advisor – as the founder or owner. You bring in the clients. You do the work. You earn the income. And that's the deal. Maybe you have a support staff or two, but, the practice is built around you. It generates income for you. And, frankly, it will end either when you do - either because you retire, or pass away.
In comparison, a true financial advisor business is something that transcends you as the founder or owner. It's not just that you're the advisor. You're primarily the advisory firm business owner and most of your time is really spent building and developing the business, including hiring and training other advisors who will serve the clients. Because it's not primarily about you, the financial advisor... it's about you, the financial advisory firm business owner – which means working "on" the business and not "in" the business.
The notable distinction is that the business survives and outlives you as the owner. It can be sold or it can be transferred for a sizable sum because people aren't buying you doing financial advice – they're buying the business that you created.
But that raises the question that I hear a lot from advisors, which is:
"If I'm running a practice now, how do I actually transition into a business? How do I make that shift?"
Transitioning From Client Advisor To Business Owner [Time - 1:56]
The first thing that you need to be prepared for – if you're going to make the transition from running a practice to building a business – is to understand that you personally can't primarily spend your time serving the clients anymore.
In part, that's simply because, if you're the only or the primary advisor servicing clients, eventually you're going to flat out hit a wall, because you can just only service so many clients. Maybe if you get a couple more support staff, you can serve a few more. But you will hit a wall. And so, if you're spending all of your time working in the business as a financial advisor, eventually, you're just going to run out of time. And that becomes the end of the business.
Now, that doesn't necessarily mean if you want to be a long-term business owner, you have to get rid of all of your clients forever. It may still be helpful maybe to keep a few clients, as it helps you remember what it's like to sit across from a client, and hear their needs and concerns. Similarly, there are some founders that continue to be the marketing or the face of the business, because that's their primary skill set.
But understand that if you want to build a business, your primary role isn't serving clients. It's not marketing for new ones. It's being the leader of the business.
Which means the starting point – if you want to make the transition from being in a practice to being in a business – is that you have to let go of your clients, at least most of them. You have to bring on some kind of paraplanner or associate advisor who can support you in serving clients, and have them take over as the primary advisor over time.
Now you don't have to do it all at once. Frankly, it's probably not feasible to do it all at once. It may start with hiring an associate advisor to help out – they'll do the busy work for clients... they'll come to the client meetings... they'll handle those miscellaneous financial planning questions that the client asks (even if the client asks you, the associate advisor responds)... and you can, over time, train and transition clients to let go of you and to work with your associate advisor. Or you may even find the clients start to transition themselves, because, at some point, they figure out who gets their work done anyway!
I find that, for most firms looking to do this, it's a gradual, two to three-year process. In the first year, you hire an associate advisor who comes to all the meetings, but just listens. In the second year, the associate advisor maybe talks up in meetings and answers client questions, but still with your supervision and you leading the meeting. In the third year, the associate advisor leads the meeting, and you sit second-chair. Then after that, it's not really your client anymore. It's the firm's client, that the other advisor is serving.
And it's important to recognize that as the firm continues to grow and brings in more clients, those clients won't work with you, either. Don't transition clients to free up space for more or bigger clients. Transition clients, and when more clients come, hire another advisor to serve them. And the more clients you get, the more advisors you hire, because, remember, the whole point of this is you're not trying to grow your client base – you're trying to grow a business of advisors who serve clients.
Building The Business By Developing Your People [Time - 4:30]
The second thing to recognize is if you're going to build a business (and not a practice), then you're going to need a skilled team to service those clients. Again, building a business is not about you as the primary advisor, but about you hiring advisors to serve clients. And you won't just need to hire advisors. You'll need to hire operations staff, back office staff, and so on. On top of that, you'll have to manage these people. And, eventually, you'll have to hire people to help you manage other people!
In fact, the reality is that, since advising is a service business, finding and developing people will arguably become your number one job, because that staff line item is the biggest expense of an advisory business, and managing it well means finding and developing people. In other words, you have to recognize that if you're going to be building an advisory business where you aren't the primary person serving clients...
<Jill Schlesinger joins on camera>
Wow, and here's Jill Schlesinger coming in joining us here.
Jill: Sorry, Michael...
Michael: Welcome, Jill.
Jill: I think Michael kicked ass today on that panel.
Michael: Thanks! Jill was hosting our panel today as we were talking through these same practice-vs-business dynamics...
Jill: Has anyone ever kissed you on "Office Hours"?
Michael: I don't think anyone's ever kissed me on "Office Hours."
<Jill gives Michael a kiss on the cheek.>
Jill: It's a first, you guys.
Michael: That's a first. That's the first time.
Jill: It's a first. Fantastic.
Michael: Thank you.
Jill: All right, I'm going to let you finish.
Michael: Well, thank you for joining us!
Jill: Okay, bye.
Michael: As you can see, I'm not kidding, we are live here at AICPA's PFP Summit. That was Jill Schlesinger, host of "Jill On Money", who was joining us and moderating the panels today.
In any event... recognize this transition where if you're building an advisory business where you are not the primary one serving clients, your business will live and die by the quality of your people and your ability to attract and retain great people. Which is, again, a total shift from what you do as a financial advisor.
For those of you who listened to this week's "Financial Advisor Success" podcast, our guest, Deb Wetherby, talked about this extensively – how they vet and evaluate new employees and bring them into the firm's culture and teach them to be successful. Because, at that point, their success (your employees' success) is your business' success!
And from your perspective as a founder, it means you're not primarily watching for opportunities to meet prospective new clients. You're watching for opportunities to meet prospective new employees to be part of your growing business.
Changing Your Mindset: From Financial Advisor To Business Owner [Time - 6:43]
Ultimately, the biggest distinction in transitioning from a practice to a business is a mindset shift. It's recognizing that you're not trying to do financial planning anymore. Instead, you're trying to build a business that delivers financial planning.
In "E-Myth", Gerber tells the story of Sarah, who is someone that loves to make pies. So much so, that it's what she enjoys doing in her spare time. And she's so good at making pies that her friends tell her, "You should sell them!" So she opens up a pie shop... and then discovers that making pies is completely different than running a pie-making business. Because, now, it's not actually about making the pies – it's about running the business.
That's the same mindset change that you have to confront as a financial advisor if you want to make a transition from a practice to a business. It means you're not here to do financial planning – just as Sarah wasn't there to make pies anymore – it's your job to build and grow a business that brings financial advice to clients, just as it became Sarah's job to run a pie-making business.
And similarly, the transition from practice to business means your job isn't do to financial planning... it's to build and run a financial planning business.
I know, for some of you, that sounds miserable. That's actually one of the key points in "E-Myth" – that not everyone actually wants to spend their time building a business. Sometimes, you just want to do the work in a business and enjoy it, just as Sarah really just wanted to make pies.
And as an advisor, you may just want to advise clients. That's okay. Because building a business is hard, and it's messy, and it's not the right fit for everyone!
In fact, we know from the industry benchmark data that you might spend 10 or more years making less money than you would by just being a financial advisor running a profitable solo practice, because you have to keep reinvesting to grow, to hire more staff, to get more clients, to then hire even more staff to service more clients, and so on... so that you can feed the machine and try to emerge from the other end as a business with scale (which, by a lot of experts' estimates these days, means clearing a billion dollars of AUM... just to make as much as you can make as a profitable solo practice!).
In other words, building a business takes a lot of sacrifice along the way. That's part of the tradeoff. You don't have to do it, but if you do, be prepared for the reality of it.
Building A Business With Your Name On The Door? [Time - 8:41]
One other common questions I want to touch on about the dynamics of a practice vs a business, because I hear it all the time. It's the statement: "If you want to build a business, does that mean you can't have your name on the door?"
I may be a bit controversial here, but I'm going to say that I actually don't think it matters. Building a business is not about whether it has a generic/neutral name, versus the founder's name on the door.
After all, Schwab is a real business. It's not just Chuck Schwab's personal thing. But it's called Schwab. And similarly, Ford was founded by Ford. Michael Dell founded Dell. Guess who founded Merrill Lynch? Mr. Merrill, and Mr. Lynch. Even the Porsche automobile company, and everything that "Porsche" stands for... it was founded by a dude named Ferdinand Porsche!
The key distinction for all those companies is that they grew far beyond just the founder themselves. Even if his or her name stayed at the top of the letterhead, at some point, it wasn't about the founder, it was about the business – and the founder simply led it. And successor leaders had no problem buying into a company with the founder's name in it... because they weren't actually buying a piece of the founder, they were buying a piece of the business that transcended the founder!
But again, in the context of being a financial adviser, that means recognizing your role as a business owner is not to get and serve clients – it's to attract and retain talented employees and to focus on building a business that does financial planning. And how exactly you do that... the challenge and demands of the business... will change over time. First, you'll hire an associate advisor and transition clients. Then you'll hire another advisor. Then you need more operations staff. Then you have to systematize to stay efficient because there are so many people involved. Then you have to hire more people to help manage the people. Then you have to hire marketing staff to scale up the growth. Then you have to figure out how to retain the long-term advisors and even introduce new partners as co-owners. And, over time, your role will continue to evolve as the needs of the business evolve. That's what it means to be a leader in a business.
But if there's just one thing that you take away from this, it is just to recognize that the biggest key to changing from a practice to a business isn't actually the nuts and bolts of transitioning clients or hiring some staff or changing the name of the firm – it's a mindset shift about whether you're really, truly trying to build a business that transcends just your personal ability to get clients and give them personal financial advice.
So I hope that provides some food for thought on what the transition from a practice to a business looks like. This is "Office Hours" with Michael Kitces, normally 1 p.m. East Coast time on Tuesdays (obviously, we're a little off today because of this AICPA PFP Summit). But thanks again for joining us, everyone, and have a great day!
So what do you think? Have you considered making the transition from a practice to a business? Have you made the transition already? Was the upside worth the challenges of the transition? Please share your thoughts in the comments below!
Michael,
How sure are you of your assertion that a solo practice has no value (vs. a “business”) after the adviser retires or dies? In either event, the main value of such a practice/business is the client relationships and their recurring revenue. Clearly, a “business” that has junior advisors and staff has a built in internal succession plan – assuming that’s in place. But isn’t its value to a third party buyer mostly on account of the clients and the ability to add those revenues to an existing overhead structure without necessarily taking on more staff and advisors? And shouldn’t a solo advisor (or her estate) who has say $100 million in AUM and $500,000 in revenue (assuming the clients are not too old and would stick around) be able to monetize that value with a well thought out and executable succession/continuity plan?
A “business” may have more value than a book of clients. And be much easier to monetize its value – especially to the extent the owner wants to realize that value during her life time, while perhaps working less hard. But it would be nice to know what the actual, practical difference in terminal value is between these two strategies before embarking on such an adventure.
Steve,
Fair point that a solo practice may not have “zero” terminal value. It is a more limited value, though, as valuation multiples trend much lower for smaller firms (due to the transition risk), and in practice the value to sell is so much less than the value to keep practicing (because it’s a high-income low-equity-value practice) that most are never actually sold (see https://www.kitces.com/blog/is-the-financial-planning-succession-crisis-just-a-mirage/).
There are buyers for the terminal value of a practice at a price greater than zero. In point of fact, our firm actually engages in those deals as a buyer (see http://www.pinnacleadvisorsolutions.com/services/prism/). But I’ll be the first to tell the practice owners we contract with that this is not the path to getting maximal value for building a business – it’s a terminal value check we’ll cut that is better than nothing if you’re NOT going to build a business. To each their own. 🙂
– Michael
Thanks, Michael. What would be good to understand is: 1) what are the strategies to implement to maximize the value of a solo? and 2) what is the spread between the maximum value of a solo and the value of a “business” – after subtracting the costs to get from here to there?
I know you can’t do that in a response as part of this conversation. But I wonder if David Grau or the like has written on this.
Thanks again for being this incredible (food for) thought machine.
Great content Michael. I was at my first Strategic Coach meeting recently and was asked to write down the top 3 things I do to make money. It may sound odd but it was difficult. Difficult because I’m in that process of transitioning clients to another lead advisor and focusing more and more on talent development and working on the business. So talent development made the top 3 list. That’s when the realization of the transition really seemed to hit me.
The other part that was somewhat challenging is to see my payroll increase by more than $200K to what is now ~45% of revenue excluding owner’s comp, as we hired additional staff to build capacity and support a faster growth trajectory. This represents a sizable portion of our revenue and will obviously hurt margins for at least awhile.
This won’t affect my family’s lifestyle nor preclude us from making maximum 401k contributions. It did pare back contributing to non-qualified investments for some time. Reinvesting substantially in the business makes rational sense, but this was an emotional hurdle to get over.
Hey, Kevin – I was in Strategic Coach for 6 years and tripled my business revenues during that time, so congratulations on a great decision to join the program.
Two of the core concepts of the program are: Identify and work in an area where you have a Unique Ability; and delegate or outsource stuff that isn’t. Applying these two principles, I came up with a somewhat unconventional approach for building my consulting business. A Unique Ability has two characteristics: you’re better at it than most people, and you love doing it. I realized that my Unique Abilities – creating high-value content, professional speaking and sales – were mostly located IN the business; whereas I had less talent and interest in the essential skills of working ON the business – recruiting, management, systems, projects, etc.
What I did was to hire someone else to run my business, while I remained the primary “product” on which we earned our revenues. I created the expertise, wrote the books, and presented the findings to audiences, while the President of my company found and managed the people who conducted the in-market research, wrote the consulting proposals, and shared with me the day-to-day delivery of our consulting services. We shared an assistant to handle admin and paperwork, schedule meetings and client calls, etc.
It was glorious to realize that for every skill/activity, there is always someone who gets genuine joy out of doing exactly those things that I dislike – and vice versa. The most productive times in my career have been when I’ve had the perfect partner to provide the leadership and management that our staff deserved, and the project oversight that our clients required while I was creating new insights and traipsing around the world on speaking gigs.
It was still my company. I set the strategic direction; the President did the implementation. I worked with clients to define their needs and articulate how we could help them; the President made sure to get the proposals and projects out on time.
There’s no law stating that the founder of the company has to be “the boss” of everyone else. In fact, the perhaps forgotten Peter Principle says that at some point, that’s often a bad idea.
Michael is absolutely right (as usual!) that running a business is really different from running a solo practice. But that doesn’t mean you have spend the rest of your working life doing things you’d rather not be in charge of.
Thanks for sharing Marti. Good to hear how you applied the principles to your life and business.
Michael,
You are right on point about both the need for a change in mindset and the need to attract and develop people when transitioning from a practice to a business. A business that is not dependent on the advisor and therefore is more valuable when you are ready to sell.
In my experience as a Certified E-Myth Consultant helping advisors implement the ideas from Michael Gerber’s book, I have seen advisors struggle with both concepts.
In terms of mindset, logically they understand the advantages of transitioning to a business. But emotionally it is a difficult. Probably because they epitomize the “technician suffering from an entrepreneurial seizure” who starts a business. They go into business for themselves to get rid of the boss…not necessarily to become the boss (of others) but to be in charge and have more control.
This desire for control makes it difficult to give any part of their work to others, especially the client relationships. So, adding people is a difficult decision.
For those who do change their mindset and want help implementing the ideas from the E-Myth to build a business, they often struggle managing people. Most do not feel comfortable or confident in their ability to find, manage and develop people. Typically, they have had very little experience in these areas prior to starting their practice. Since there are very few resources (including all the industry conferences) that offer any type of effective advice on how to lead and manage people we spend a lot of time coaching advisors in these areas.
As you point out, when running a business your #1 job becomes people…for many business owners it also become their #1 frustration.