by Joni Youngwirth
As Anthony Robbins and others have said, “If you’re not growing, you’re dying.”
Look around the industry and you’ll see a variety of attitudes toward business growth among financial advisers. Some successful advisers maintain a relentless focus on topline revenue growth, expanding their client base, going upstream to higher net worth clients, providing additional services, acquiring other practices, or recruiting new advisers to increase capacity and scale. Others, having reached a certain level of success, opt to put business growth on the back burner to focus on personal growth—be it time with family, a hobby, or another area of interest. The question is, what is the impact of that decision on the business?
The Five Stages of Business Growth
Neil C. Churchill and Virginia L. Lewis address this choice in their classic article “The Five Stages of Small Business Growth.” Published in the Harvard Business Review in 1983, the article lays the foundation for many of the concepts presented in Michael Gerber’s The E-Myth, which stresses the business owner’s need to work on the business, not merely in the business. Churchill and Lewis describe five stages in the evolution of small businesses, noting two potential routes at the success stage:
Existence: The business owner dedicates himself to getting customers and delivering service to clients.
Survival: After proving that the business is viable, the owner focuses on getting enough cash to break even and then to finance sufficient growth to be competitive in the industry.
Success: At this point, the owner most decide whether to exploit the company’s accomplishment and continue to grow, or keep the business stable and profitable.
Takeoff: If the owner chooses the first approach, he expands the business by delegating more tasks to others and deploying cash to finance additional (typically rapid) growth.
Maturity: The owner’s challenge is to harness financial gains while maintaining an entrepreneurial spirit.
As the authors point out, either of the options at the success stage is feasible as long as the business is generating sufficient cash. If the owner chooses to disengage rather than to grow, the strategy becomes to preserve the status quo. With the right systems and personnel in place, and barring any disruption to cash flow, the business can remain at this stage indefinitely. At some point, it may be sold, merged profitably, or stimulated into the growth mode.
Further, Churchill and Lewis identify eight key factors that determine the ultimate success or failure of a business.
Four factors relate to the business itself: financial resources, personnel resources, systems resources, and business resources (client retention and market share penetration, for example). The other four factors are derived from the business owner: the owner’s goals, operational abilities, managerial abilities, and strategic abilities.
The importance of each factor varies depending on where the firm is in the development process. For instance, the owner’s personal goals and financial resources are essential in the first stage, whereas business systems and the owner’s strategic abilities assume greater importance at business maturity.
Boomers and the Comfort Zone
Many baby boomer advisers have built practices that fall firmly in the success stage described by Churchill and Lewis. In general, they’ve endured the hard times of the existence and survival stages, arriving at a point of economic health where the practice yields at least average profits.
Many of these advisers are solo practitioners, filling the three-pronged role of adviser/owner/rainmaker for their firms. While some boomer advisers view their firms as a platform for ongoing business growth, many others have—consciously or unconsciously—disengaged, shifting their energy to personal interests outside the business. These firms might be called lifestyle practices or personality-based practices; in other words, the business is established and successful, but additional growth is not the owner’s priority.
As long as there is sufficient cash and internal delegation, either option can work. But, for boomer advisers, other considerations may come into play:
Intent to work indefinitely. You can’t pick up a journal or attend a conference these days without being reminded that the industry is dominated by boomers loath to put a succession plan in place. Many boomer advisers openly state their intent to “work forever” or as long as they’re able. But external factors may put some wrinkles in their plans.
Because sustaining the disengagement model depends on steady cash flow, it’s important to forecast future revenue accurately. Think about the combined impact of the attrition of a few clients, a large number of clients in the distribution phase of their financial lives, and the reality that aging clients are passing away—all directly impact revenue, the key factor in remaining in the success stage versus reverting to survival mode.
Attracting new clients. It’s easy to think you’ll simply replace disappearing business with new clients, but this may not be a safe assumption. The oldest baby boomers are approaching 68. Gen X investors are now entering their 50s. Are they more likely to seek an adviser nearing 70 or another Gen X peer in the industry? The hard truth is that attracting new clients may become increasingly challenging over time for boomers.
“I hate all that management stuff.” Most boomer advisers have achieved success in the industry thanks to their excellent professional skills. Yet, as Churchill and Lewis point out, long-term growth and viability require myriad business capabilities that may become as critical to the growing enterprise as one’s professional expertise, if not more so. If they haven’t developed these management skills over time, boomer advisers may default to shunning the very thing most needed to help their business grow.
Leaving a legacy. While many advisers talk about building an enduring firm, the more likely scenario for the solo adviser is selling the practice. Because ensembles tend to sell to other ensembles but not to solos, and solos sell either to solos or ensembles, the scale is tipped in favor of ensembles as buyers. Business owners who truly want to build a legacy firm cannot choose to disengage; instead, they will focus on ongoing growth of the business and advancement to the takeoff and maturity stages.
What’s in Store for the Next Generation?
The next generation of advisers will either buy or inherit practices already at the success stage. In many cases, they will combine the new practice with a firm they have taken through the existence and survival stages. When they reach the success crossroads, which they’re likely to do at an earlier age than the previous generation, they will face the same decision. Will they choose to reinvest their resources in the firm, likely taking on additional risk to finance future growth, or will they redirect their time, energy, and resources elsewhere?
If they choose continued growth, they will need to be armed with a variety of well-honed skills, which may or may not be passed down from the prior generation. For example, they will need to:
- Embrace managerial responsibilities
- Have access not just to financial resources but also to borrowing power
- Take advantage of highly sophisticated technology, which will likely encompass business management functions as well as financial planning and investment management
- Understand the impact of retention and niche-specific growth on expanding market share
- Think strategically to match the needs of the firm with personal goals
Although things might look fairly rosy for the next generation of advisers, they also must be aware of the challenges awaiting a company in the maturity stage, when the owner must take care to preserve the firm’s financial gains and its entrepreneurial spirit. As Churchill and Lewis note, if either is lost, the company ossifies. While that’s not uncommon in large corporate settings, it happens in small businesses, too.
In the future, it seems likely that the industry will be shaped by those who choose to bring already successful firms to the takeoff stage, potentially evolving into a big business. Given the trajectory of other professional industries, including medicine and dentistry, one can imagine a future in which the staff CFP practitioner delivers financial advice to clients while the business owner, who may never have been a financial adviser, manages the firm.
Although your personal vision of the future may differ, it’s essential for adviser/business owners to make strategic decisions regarding the importance of growth to the firm. Continued growth or partial disengagement can both be good choices, as long as the decision is consciously made.
Joni Youngwirth is the managing principal of practice management at Commonwealth Financial Network®, member FINRA/SIPC, a registered investment adviser, in Waltham, Massachusetts. Contact her by clicking HERE.