Financial planning practices will need to look at new ways to manage growth, including overcoming the pain points associated with rapid development, as the profession continues to evolve, according to Virtual Business Partners.
David Carney, CEO of VBP, says in a statement that the constantly changing landscape in recent years means new opportunities and challenges have been created that financial planning practices may be unprepared for.
He says that one of the main issues for practices at the moment is how to maintain “…a sustainable and comfortable level of growth.”
Noting that it may seem strange to talk about growth as a concern “…but nonetheless, it is a real challenge for many practices.“
Carney says the times have been favourable for growth.
“Many practitioners have seen an extremely high level of demand for their services – in many cases, more demand than they can meet. There has also been a high level of private equity and merger and acquisitions activity in the … industry.”
He adds however that during a growth phase “… expenses can rise faster than revenue, and this can be a major challenge for financial planning practice owners.”
Carney says that advisory firms face different issues at different stages of their development, and the challenges vary depending on the size of the practice.
“A start-up, for example, is primarily concerned with attracting clients, and the owner usually feels a combination of both excitement and panic as they struggle to achieve growth and manage cashflow,” he says.
…As the business matures, it hits what is known as a ‘capacity wall’…
As the business matures, it hits what is known as a ‘capacity wall’ that it must break through in order to reach a new stage, with different revenue levels and different staffing needs.
Depending on the stage of the business, Carney says it may require investment in people and systems to break through this wall, or investment in both internal and external capabilities.
“As the business reaches the capacity wall this investment requirement may reduce profitability. This can be a scary time for business owners but it is necessary to reach the next phase of growth.”
He adds that in the next phase, the challenges for a practice change.
Managing Key Person Risk
“Owners may feel more comfortable and confident, but they now face the challenge of managing key person risk, with the business usually heavily reliant on the founder and their skills and contacts.”
And this is the time when practices “…need to find ways of attracting the right staff, and then, once they have found them, developing their talent.”
Carney says the next ‘capacity wall’ comes when practices have around 10 staff.
“The big challenge now is to do with the complexity of the business – managing the needs of staff, owners, clients and other stakeholders.”
He says overcoming this challenge requires investment in technology and systems. “Again, profitability may drop, but the investment is crucial to ensure ongoing growth.”
The next wall businesses reach is the ‘complexity wall’ which is when owners need to start thinking about a different structure…
Carney notes that the next wall businesses reach is the ‘complexity wall’ which is when owners need to start thinking about a different structure for their business.
“Up to this point, practices have focussed on the front office – client acquisition, client engagement, and with principals acting as advisers. They may also have built up the back office – operations, research and investment…”
The Middle Office
However now they need to start thinking about the middle office.
“Broadly, this means having people in the business who are focussed on running the business, such as a general manager and human resources manager. It’s about having the right systems, culture, career development processes, and the like, in place.”
Carney notes that this is an area “…where outsourcing can become invaluable, as it allows practices to achieve economies of scale much quicker, and access the right level of additional resourcing and support without over-committing too soon.”
