According to Virtual Business Partners (VBP), rapid development in the industry is giving rise to new obstacles, with financial planning practices required to seek new ways to manage growth pains.
David Carney, chief executive officer of VBP, said that while business expansion may not seem like a concern, it is in fact a real challenge when trying to maintain a level of growth that is realistic and sustainable.
“Certainly, 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,” Mr Carney said.
“However, during a growth phase, expenses can rise faster than revenue, and this can be a major challenge for financial planning practice owners.”
The specifics of these challenges, he noted, are dependent on the size of the practice and the stage of its development. Mr Carney pointed to start-ups as an example, and explained that attracting clients may be met with a combination of both excitement and panic from owners as they struggle to manage cashflow.
A business may change yet again as it matures, thereafter hitting what Mr Carney called a “capacity wall”.
Namely, practices may need to invest in people and internal and external capabilities to reach a new stage in their growth, surpassing new revenue levels and different staffing needs.
“As the business reaches the capacity wall, this investment requirement may reduce profitability,” he warned. “This can be a scary time for business owners but it is necessary to reach the next phase of growth.
“In the next phase, the challenges for a practice change. 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.”
To this point, he added, practices need to find ways to attract the right staff, and then, once they have found them, to develop their talent.
The next capacity wall emerges when the practice reaches around 10 employees and, with it, new barriers, the CEO said. Specifically, managing the needs of staff, owners, clients, and other stakeholders may add another level of complexity to a business.
“Overcoming this challenge requires investment in technology and systems. Again, profitability may drop, but the investment is crucial to ensure ongoing growth.”
Termed the “complexity wall”, Mr Carney said practices will typically mature to a point where advisers need to start thinking about a new structure for their business.
“Up to this point, practices have focused 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, with staffing including paraplanner, assistants and analysts,” Mr Carney said.
“However, now they need to start thinking about the middle office.”
Broadly, he explained, this means having people in the business who are focused 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,” Mr Carney said.
“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 overcommitting too soon,” he concluded.
