Delve into the crucial strategies for effectively expanding your wealth advisory practice, and why focusing on efficiency may be the most effective method of ensuring sustainable growth.
In the fast-paced world of wealth management, the mantra “grow or die” often rings true. But how do you ensure your practice is expanding in a healthy, sustainable way? Let’s dive into the art of scaling your advisory practice, balancing growth with efficiency, and avoiding common pitfalls.
This piece was inspired by a conversation Joe Millott, Founder & Principal had with Advisor.ca for a recent article entitled How to determine if it’s time to staff up.
The Growth Dilemma: Organic vs. Acquisition
When considering expansion, the first question is whether to grow your wealth advisory practice organically or through acquisition. Organic growth, akin to “same store sales” in retail, focuses on expanding your existing client base and services. This method is often more sustainable, as it builds on a solid foundation of satisfied clients and proven processes.
On the other hand, acquisitions can be tempting but risky. Without fixing underlying issues in your practice, you might end up with a “leaky boat”—investing in growth while losing clients due to poor service. Before diving into acquisitions, ensure your practice is running smoothly and efficiently.
The Power of EBITDA
Advisors often prioritize using multiples of revenue as a valuation method over EBITDA due to its simplicity and direct reflection of top-line growth, albeit this approach overlooks the operational efficiency and profitability aspects captured by EBITDA
However, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a crucial metric that is becoming the leading measure of wealth advisory valuation and efficiency. It provides a clearer picture of your practice’s profitability by focusing on operational efficiency. Mature practices should aim for an EBITDA margin of 30% or more. However, if you’re growing rapidly, expect lower margins as you invest in talent and infrastructure.
Right-Sizing Your Practice
Being “right-sized” means having the optimal balance of resources to support your growth. The key characteristic? Organic growth. Practices demonstrating 5-8% organic growth per year are typically well-balanced. Clear processes, systems, and responsibilities are the bedrock of a lean, efficient practice.
The Lean Machine: Advantages and Drawbacks
Operating lean has its perks. With well-defined processes and responsibilities, your practice can achieve high productivity and client satisfaction. However, being too lean can lead to burnout and service issues. It’s crucial to find the sweet spot where your team is efficient but not overburdened.
Preparing for Expansion: Key Considerations
- Vision and Strategy: What is your long-term vision? Ensure your expansion aligns with your overall strategy.
- Talent Acquisition: Building a new office or entering a new market requires the right talent. Plan for the time and resources needed to hire and train new team members.
- Financial Modeling: Create a 3-5 year financial model to understand the cash flow implications of your expansion.
- Market Size and Opportunity: Assess the potential market size and opportunities in your target region.
- Operational Leverage: Can your practice gain operational leverage as it grows? Aim to add revenue without proportionally increasing costs.
Succession Planning: The Overlooked Essential
Many advisors overlook succession planning, but it’s crucial for long-term success. Whether it’s finding the next generation advisor or hiring a CEO/COO, having a clear succession plan ensures continuity and stability.
Conclusion
Scaling your wealth advisory practice is an art that requires balancing growth with efficiency. Focus on organic growth, leverage EBITDA to measure profitability, and ensure your practice is right-sized. With clear processes, a solid financial model, and a succession plan in place, you’ll be well on your way to sustainable expansion.
Remember, growth isn’t just about adding more clients or revenue—it’s about building a robust, efficient practice that can thrive in the long run. Happy scaling!
