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Michael Kitces asks Eliza De Pardo if the $1.5 million RIA revenue threshold is a wall that ends the honeymoon; Short (inconclusive) answer: Yes, but...

The New York City RIA consultant sugarcoats nothing and provides sweetly precise numbers, and stresses that money can't buy enthusiasm.

Tuesday, November 16, 2021 – 6:48 PM by Guest Columnist Michael Kitces
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Eliza De Pardo: There's a tendency when you love what you do, and you focus on it to have a bit of tunnel vision at times.

Brooke's Note: If you're an RIA who doesn't have time to attend Harvard Business School before undertaking to take your mom-and-pop, sub-$2 million in revenue firm to $10 million or more, read this Socratic article. It'll seem long, but I promise I spent a good part of yesterday pruning it down. I still erred on the side of letting Michael Kitces and Eliza De Pardo explicate. De Pardo is one of the orginal diaspora of Moss Adams and Mark Tibergien, and Kitces, well, is Kitces. So the two of them are bursting with knowledge and trying hard on our behalf to put hard numbers on variable business circumstances of RIAs, which are as similar as snowflakes. So there are if, ands and buts, but they realize clearly that too many of those contingencies are annoying, as well, making this Q&A a must read.

Eliza De Pardo is well known in the industry for her roles at Moss Adams and TD Ameritrade and her eponymous advisor consulting firm, which focuses on working with mid- to large-sized independent advisory firms.

What's unique about Eliza is the focus she takes on the human capital issues that arise as advisory firms try to scale up, according to Michael Kitces, a co-founder of the XY Planning firm and author of industry blog "Nerd's Eye View."

Michael Kitces
Michael Kitces: 'Just how does that org chart at least typically evolve?'

She recognizes that a financial advice business is first-and-foremost a service business. Attracting, retaining and developing a firm’s people are the biggest keys to long-term success.

Eliza sat down with Michael for an in-depth Q&A about the unique challenges that advisory firm founders face as they grow and scale their advice businesses, including how the ability to attract and serve clients is fundamental. 

(Editor's Note: The following Q&A first appeared on the podcast "Financial Advisor Success." It's being published here in an edited and condensed form. For the full Q&A check out the Nerd's Eye View blog.)

Michael Kitces: We did a study late last year looking into the wellbeing of advisers; as advisory firms start growing and getting more revenue, our wellbeing improves. We found that peaks somewhere in the range of about $1 million to $1.5 million in revenue, whereas their wellbeing started going down again as revenue got higher.  I feel like this was the empirical evidence that, you know, we're really good at managing clients. And this business gets really hard when suddenly the primary focus is managing the humans in the business, not the humans you're serving with the business.

Eliza DePardo: Yeah, I think that's incredibly interesting research, but I can't say that I'm surprised by the results, having been in human capital management for so many years as a consultant. I do think that once you start to move away from perhaps the work that you love the most, which is for most advisors, why they got into the business, which is sitting in front of clients and having great conversations and delivering advice, then the fun can absolutely come out of the job if that's not something that you love doing.

But I have to say that if I look back over the last 15- to 20-years of consulting, when I think of the firms that I've worked with, which have really created significant levels of scale, the partners are still very enthusiastic about what they do in the business. It's not always the case, but those who are really enthusiastic tend to be those advisors that, over the course of time, have really developed themselves some very deep human capital management capabilities. And they also have a very natural inclination for wanting to work with people, take care of team members, develop team members and really support their growth, and they hold that kind of central to what they do in the firm.

Michael: If you have trouble kind of visualizing or thinking about that systematizing shift, then it gets hard. We ended up hiring advisors who basically do their own thing for their own clients with their own book, which basically means it's their own mini-business. And at some point they decide they don't necessarily need you around, and they go across the street.

Eliza: I don't think that, for the most part, when you're founding an advisory firm many advisors think about what their ultimate end game is in the business. That is, what is the role that they really want to fulfill within the firm? Is it to continue to always see clients, or is it to evolve into something else within the firm to be able to progress towards full-time CEO?  And that's, perhaps, why there is this dissatisfaction that they experienced because, perhaps, the expectations were not necessarily all that realistic.

Michael: Well, and the thing that strikes me, is that this becomes an almost inevitable outcome for so many advisory firms, particularly now that we've kind made this wholesale industry shift from commission-based routes to assets-under-management and not for all the other conflict-of-interest sort of discussions around compensation models, but just the sheer reality that assets-under-management is a recurring revenue model. And, we live in an industry where once clients go onto that model, even struggling firms, the “bad firms,” often still have 90% plus retention rates. Averages are closer to 95%; really good firms get to 97% to 98%, which means as long as you have any level of marketing sales or  business development capabilities, the firm just tends to grow and accumulate over time for a material number of years, because you just don't lose that many clients. And so if you spend enough years doing this, and you accumulate enough clients, it is essentially inevitable that you will outgrow your individual capacity to serve all these clients.

And so if you don't have a vision for words going forward, it can almost guarantee that it's going to happen to you. If you're doing a pretty good job serving clients and they don't leave often and work with you occasionally and you do some things out in the marketplace to make it known that you have an advisory business and work with clients, we - whatever your sales, marketing, networking process is- almost all eventually accumulate past that point. It can take anywhere from probably 7- to 20-years, depending on the advisor and how quick they grow, but everybody eventually compounds past that point.  And that often doesn't really turn out to be the ideal fit for you, which I think is what we see showing up in the wellbeing numbers.

Eliza: Most firms don't think about it. They might just think, three months ahead or six months ahead in terms of, “Well, maybe my next hire is going to be another client services associate or an associate advisor.” But there's a great opportunity to think about, “Well, if I want to double revenue in the next three to four years, what does that look like on an annual basis?”

It’s, again, just a lost opportunity for many businesses and probably a good way of managing expectations within the firm also.

Michael: Can you talk about that a little bit more? Just how does that org chart at least typically evolve? [There's] sort of this like four-to-six person team.  You can manage that. It's a little crazy, but like you can manage that on top of your clients, and then people start hitting a wall, So what comes next? I think about like the firm that's going to go through the next doubling from there; they're going to go from one to one-and-a-half million of revenue all the way, suddenly, up to 2 million to 3 million of revenue. And now there's going to be 10 to 12 people. What comes next? How does that org chart start to change?

Eliza: Well, there are a number of different things that take place. And one of the easiest ways to figure out the evolution is to look at the data and to pay really close attention to things like productivity metrics.

So for example, revenue-per-revenue generator; revenue-per-full-time equivalent; the ratio of revenue-generating roles to non-revenue-generating roles. All of these metrics can give you extremely valuable input into those organizational structure decisions. So for example, we know in the research, once you get to $750,000 in revenue, you've already at that point, ideally, recruited your associate advisor somewhere between $500,000 and $750,000. Your first associate advisor, in all likelihood, comes while progressing towards a million dollars. Adding an operations manager is always a really smart decision progressing towards $3 million.

The COO position generally comes into play progressing towards $5 million. You've got a full-time CEO at that stage. Along the way, the advice team model typically deepens in capability. So we create, with scale, additional levels of advisory positions, and that builds a beautiful internal career path along that advisor ladder, and we start to kind of carve out more distinct accountabilities within the team. The skills that got you to your $1 million firm are not going to be the same set of management skills that will get you to your $5 million firm. It's an art and a science.

And depending on the service model that you have, that will also influence the kind of decisions that you make. But the data is a great thing to have in your back pocket to help you figure out what makes the most sense for your firm based on the revenue size that you're at now and what it is you're trying to accomplish over the next, say three- to five-years. I think organizational transition planning, though, is probably done only up to a three-year period, only because it can become a little bit complicated. And I think you always want to be able to feel like that the planning that you're doing is grounded in some sense of reality, and there aren't too many variables.

Michael: So, you've mentioned a few times about have coming at this from a data-driven perspective. I'd love to hear more of what are the data points that you think are the things we should be paying attention to?

Eliza: So the metrics that I mentioned that relate to organizational design are really productivity metrics. So if we look at revenue per revenue-generator, let's first just sort of clarify. When I say revenue generator, we defined that at FA Insight in the research as every lead advisor, associate advisor, or just generally a servicing advisor, and any pure rainmakers or pure business development positions that you have within the firm.

So think about what is the head count across those positions? Take your total revenue and divide by that head count. Now that number, of course, varies from year-to-year, and it varies by firm stage. So that's important to pay attention to, but as a median, we generally like a really strong, steady year that would be somewhere around $540,000 in revenue per revenue-generator as a median for all firms.

But then if you were to look at the really big firms that we research, perhaps those $8 million in revenue, that number is dramatically higher. Revenue per revenue-generator could be as high as a million. I think it's around the $920,000 per revenue-generator. So the reason that happens with scale is that as you build advice teams, typically, and you create a system where our lead advisors and rainmakers and business developers have the ability to generate the opportunities [and] convert the opportunities. Then [you] move lower value work, typically, down the organizational structure to roles that are more aligned and more appropriate to be doing, for example, servicing of lower of medium complexity clients. That frees up more and more capacity for more and more new client acquisition activity or growing the most valuable relationships of the firm.

Michael: So let me pause there just before you jump into the next one, 'cause I'm just trying to sort of process those numbers, that it's like a median of $540,000 of revenue per revenue generator. I guess, just to make the language easy, I'm just going to call this revenue-per-advisor. With the asterisk that you had, like lead advisor, servicing advisors, biz-dev advisors, I think the point that we're not necessarily including support paraplanners, other support staff. Job titles notwithstanding, this is the “You're-responsible-for-revenue-keeping-it-or-making-it” --those advisors. So $540,000 of revenue per advisor, just to make the math easy. I'll use the proverbial 1% AUM fee rule of thumb. This is essentially like, every $50 million of client assets is another advisor higher. Is that fair to think about if I'm at $60-million or 70-million, and I have not hired a second advisor?  I may be falling behind on this metric, which essentially means I've probably got more clients than I can handle. I'm not going to have as much time; that's going to make it harder for me to grow and do other things. Is that how we should think about that number?

Eliza: That's a helpful way of thinking about it. But it's one of those metrics where you don't ever want that number to get too high for your firm stage in terms of revenue stage, because, to your point, once it gets too high, it means maybe [you] don't have capacity for growth.  We might look like we're shooting the lights out. And according to the benchmarking data, we might look amazing. But, actually perhaps, we're seeing more client errors; maybe, we're seeing a decline in service standards. Maybe, we just can't keep up with the growth of the firm. And oftentimes--what we see is this correlates when it gets too high--you'll find that growth is hindered in that the time available for new client acquisition activity is dramatically impacted on the flip side.

Michael:  I've seen advisors that have struggled with this in more indirect, insidious ways. I have an advisor friend -- we'll just say Rob, for appropriate anonymity. Rob was a very overloaded advisor in this perspective approaching $100 million as a solo. We had no support advisors. He was very, very proud of this, like, “look at how leveraged and profitable the practice is.” But, you know, growth was really kind of slowing to a halt. And, I had said to him, “I know you serve your clients well, and you've grown really heavily through referrals. Are you really telling me that, the referrals stopped after all these years of driving all of these referrals, what's that like, what's going on?” And what it came down to is, as we got deeper into the conversation, was that he realized like he had no hustle to follow up.

When the referrals came along, he had gone from the early stages where it was, like, “I got a referral; I better call them immediately.” He is now on stage of like, “I got a referral. God, I'm gonna have to do another new plan. I have 7 reviews this week and 11 next week, I can't do another plan. This is going to kill me.” He wasn't even thinking about it, consciously, but subconsciously he had gone from, “I'm so excited. I got to another referral” to like “No, another new client to deal with.” Subconsciously, he was basically sandbagging the referrals because he wasn't following up with them enthusiastically anymore, because he was so far past the capacity mark, but hadn't really acknowledged and embraced that yet.

Eliza: It's a common story where you have a team of advisors and all of them feel a complete capacity crunch. And if all of them are either delaying getting in front of prospects--not returning calls--it might be several months before they could see a new prospect. What is the impact on firm growth rates as a result of that kind of activity, that kind of behavior? You wouldn't want to be a shareholder knowing that that is what's taking place.

Michael: I guess it's worth putting an asterisk on that if you're doing this because you serve 200 clients. You're going to probably get a feel differently about $540,000 of revenue than if you've got like a, a super-focused clientele where you've got 20 clients that have 2 to $3 million each, and you're doing $540,000 of revenue off of 20 clients.

Eliza: Right, and on flip side of that metric: if that number for a firm is coming in quite low - below the median, according to the research - then the natural inclination might be to think, “Well, gosh, we've not got capacity. Our advisors are not operating maybe in an efficient way. They're not doing their jobs in a productive way, and that could easily be true. But it could also be that, perhaps, they don't have the capability, the know-how that we would expect.” Perhaps, it's their training and development needs for those advisors. Maybe, they need more support around them if they don't have any support. So there are so many levels of the metrics. It’s not always straightforward to figure out what's going on. You've got to look at your own circumstances and then apply the metrics.

Michael: So one more follow up on this, then I want to hear the next chapter, which I think you said was revenue per full-time employee. But is there like a typical number of clients this $540,000 of revenue tends to represent? I mean, is there a tip? 

Eliza: Again, firm by firm, that’s really going to vary, but somewhere in the ballpark of 60 clients. If you're to look at the research, it's likely to fall around that point. Over the years that's come down some.

Michael: It’s come down? I feel like the classic view would be we're getting all technology productivity enabled. Isn't that supposed to go up?

Eliza: Well, perhaps, but, maybe, as they move more up-market--in terms of dealing with larger clients, more complex clients over time--the size of those relationships requires a greater commitment of time and effort, so it's not always going to be the case. That's kind of a ballpark figure, but from firm to firm. Even within a firm--I’m just working with now in the Midwest--and they have several advisory teams. Between each advisory team, the numbers vary dramatically.  You might have in one team, one advisor taking care of 150-clients, and in another team, they'd be lucky to have 30- or 50-clients. I always encourage businesses to work backwards when it comes to that question around client numbers.

Michael: If your average client is a $300,000 household - lovely middle America, or technically upper-middle class America - that's still a good client for a lot of advisors, particularly in the first 5- to 10-years, But [with] just 60 clients with $300,000, you're talking more like $180,000 to $200,000 of revenue, not $540,000 of revenue. So your ability to get clients that have a higher-revenue-per-client, whether that's assets-per-clients or fees- for-clients,  if you're fee for service, just that revenue-per-client and how big of a client you can attract is still an anchor point for this. If you're working with less affluent clients, you're probably not getting the $540,000 revenue- advisor. And if you're working with really, really affluent clients, you probably should be higher than $540,000 of revenue per advisor. You just don't have that many clients, and you could probably handle a little bit more.

Eliza: Yeah, that's right.

Michael: This is not-clients-per-founder or clients-per-lead-advisor; this is everybody in an advisor business revenue-generation role. This might be 60 clients for an advisor. This might be 120 clients for a two-advisor team. Maybe even a little bit more if they're not growing in their capacity. Two advisors and a support person; I've seen teams like that doing 140- or 150-clients. 

Eliza: Yeah, it's a good number. And again, that organizational transition plan is so important because as you're creating that scale, you're thinking to yourself, “Well, at what stage do we begin to transition relationships? Because we know that we don't want to get to that capacity crisis.

Michael: So what that really means is by 50 clients or $400,000 of revenue, you should already be out there hiring, because you have to stay ahead of the curve. Where should you be thinking about the next advisor hire if you're following this path?

Eliza: Again what is the expectation for any advisory role around the new client acquisition activities? Let's say two days a week have to be allocated. That would be a lot. We know, according to the research, the median--in terms of the amount of time that advisors spend in business development activities--is about 15% to 20% depending on the study year. But other firms will say, well, actually our view is that we don't grow through new client acquisition. We grow through a very formal referral program, which means really serving existing clients really, really well.

Michael: So then tell us about the next number that you had mentioned, which I think was revenue per full-time employee

Eliza: We call it revenue per full-time equivalent in the research, which is very much the same thing.

Michael: So functionally, just revenue divided by my total staff? Adjusting for--if you've got a bunch of part-time contractors that adds up to one, you still count it as one?

Eliza: Exactly, yes.

Michael: So full-time equivalents if you've got some more timers; okay, yes.

Eliza: And so in this scenario, all of your advisors are also included, and any active owners within the business are included in this full-time equivalent calculator. So the median in the research in one of the more recent studies in 2019 was $228,000 in revenue per full-time equivalent. And again, that was a very healthy result in that study year. It's one of those metrics that increases with scales. For the largest firms, that number could be as much as $350,000, but in that study year, it was at $312,000. Again, it's because we are building teams which have that ability to really push work down the structure. So if you're really, really strong in this area--and I come across firms--it might be at $350,000-plus in revenue per full-time equivalent. The question is always going to be: "Are we experiencing some of the pain and strains that come with this kind of lack of capacity?"

Michael: It's a fascinating number to me, this revenue per full-time employee. I'll just say revenue per staff-- just rolls off the tongue a little easier. But mental note for everyone, count all your full-time equivalents, including adding up your part-timers to a full-time equivalent.  When we look at this revenue per staff number, even one of the things that we found in the wellbeing study was that adviser wellbeing tended to dip at $250,000 of revenue, $500,000 of revenue and $750,000 of revenue, which is basically exactly where you are if you're getting over this number, but you haven't done your next hire yet.  If you start thinking just every $250,000 of revenue, I should probably be doing another. And if you divide your revenue by 2$50,000, and that number is higher than the current staff you've got, you're probably behind on your staffing.

Eliza: Yeah, probably behind. And you know, it's very natural for these numbers to change.

Michael: Are these kind of the core two metrics? I mean, are the others that we tend to look at, or is this sort of like revenue per advisor/revenue per staff? 

Eliza: The other metric that speaks to that point, Michael, is non-revenue-role to revenue-role ratio. That's taking a look at the number of positions that you have in the firm - that includes administration or support positions, dedicated managers or technical roles - everybody who's not generating revenue in the business relative to the number of advisory positions or revenue.

Michael: What should that ratio look like?

Eliza: It’s very consistent for smaller firms, but the median is at 1.3-to-1--so its 1.3 non-revenue role to one revenue role for smaller firms. Those under, let's say $4 million in revenue, the ratio is generally around one-to-one. It was that case a couple of years ago in the research. But as you grow beyond that, the ratios consistently year-on-year, look different.  It's two-to-one ratio for the biggest firms in the industry.

Michael: But I'm struck just how not far different that number is. If it's one-to-one, when firms are under $4 million of revenue, and it gets up to 1.3-to-1, when firms get larger, I mean, you're still talking the only difference here is whether you hire four ops for every four advisors, or if you hire five ops for, so...

Eliza: It’s actually two-to-one, sorry. The 1.3-to-1 is the median for all firms. And as you get above $8 million in revenue, [it] changes to a two-to-one ratio.

Michael: Okay. So that's the scalability effect that starts showing up;  as firms get larger and get better at pushing tasks down, they can get more stuff off their advisor plate.  And so now, suddenly, I've got eight staff supporting four advisors instead of four staff supporting four advisors.

Eliza: That's exactly right.

Michael: And so what's shifting in practice is that number just like magically starts working where I can't get better than one-to-one when I'm under $4 million of revenue. But suddenly, I'm at two-to-one when I'm over $8 million of revenue? What happened in that zone in between? That sounds like a magical zone.

Eliza: It’s about the progression towards advice-- team structures. So, when we look at the way that firms are structured and the way that they're delivering advice across the developmental spectrum, in the earliest stages, they're simply just a few people working together and doing our best to deliver to clients. And then as you progress towards the $1.5-million to $4-million band, we start to see the emergence of what we call ad hoc collaboration, where you might start to operate in what kind of looks like a team. But in fact, we might have groups of advisors or teams that are kind of doing things in their own way--in a siloed way--where we're doing our own thing, but actualy, we haven't created efficiencies.

Michael: So then, talk to us about moving towards $3 million of revenue, a full-time COO comes into play; moving towards $5 million, a full-time seat CEO comes into play.

Eliza: That $3 million is really an inflection point for many businesses. And generally, they're a multiple shareholders at that point in time, and they know that something has to change.  You're going to be pretty good at compliance and so on. You're going to have a very broad skillset, but you're going to be really, really clever in a number of areas. At that stage, it's not unusual, like we've talked about in your research, that there is this drop off in dissatisfaction.

Michael: So just help me understand further; can you describe the job description of this person? Because my gut is that when most advisors are thinking about this, they're thinking about their ops manager, but a little more. And I think you're, in practice, talking about something that's a little bit different than that.

Eliza: Yeah, it’s different.

Michael: So can you describe further, it's like what is this person's job description, and how does this simply differ from my ops manager, who I find in most firms is the jack-of-all-trades that handles a lot of different stuff, you know--overseeing some ops stuff and some office stuff and some facility stuff, and probably handles HR and benefits, which means they support on the employee reviews, and often they're helping with billing, and they're already doing so many of these different things. So what's the difference between that and what you're talking about here?

Eliza: It's a pretty big distinction between the two positions, and that ops manager is more likely to come into play, as I mentioned around that $1 million mark - perhaps a bit beyond that for many firms - but the key distinction is that the COO role is a more strategic management position that is doing a lot of the design work [and] at a very senior level contributing to the firm's strategy. Working with the COO, he's accountable for the execution of strategy in support of the CEO.  They are handed tasks; they roll up their sleeves, and they get it done. We're not having, for example, a COO position handling telephone-related issues in the office, or when the printers break down. From a people perspective, they are the ones who are helping to design a compensation plan, building performance objectives that are aligned to the firm's strategy and conducting performance reviews with some of the most seasoned team members within the firm, as an example – it’s a very different level of skill.

Michael: So. I think we're just feeling like I'm like channeling my like inner ‘scaling business owner’ thing. Now it's like, so, so Eliza, where do you find this magical unicorn that does all of these wonderful things?

Eliza: Over the years, it's always really interesting when you get to work with COOs, and they're oftentimes front-and-center in the strategic planning meetings, and, you know, many of them have grown up in the industry and developed skills over time in management, but it is kind of unusual. I have to say again, if I look back at all of the consulting engagements I've done over the years, it is unusual for an operations manager to advance to a COO.

Michael: And What am I vetting? How do I figure out if this is the right COO, especially if I'm hiring outside of the industry? 

Eliza: Well, I think you always start with: Are they culturally aligned with our leadership team? Are they aligned with our growth aspirations and enthusiasm relative to the owners? You've got to remember that partners will be handing over responsibility. Imagine handing over, for the first time, responsibility for the financial performance management of the firm.

Michael: Yeah, it sounds terrifying.

Eliza: Terrifying, right? You may not even hand everything over at once, but you need to know that you're hiring somebody that you have confidence in.

Michael: What strikes me about this, just having seen a lot of advisors go through this transition... actually handing off that much responsibility for the thing that determines your financial future, like your business, this baby you've birthed, created, and raised until this point and, and feel like it's fundamentally kind of terrifying to handle that much responsibility and just the risk and consequences to you. [Yet] if you're going to keep growing, this literally has to happen. And if it doesn't, the business will stop growing. Or, usually, you will break... So it's only, the only real question is whether you're going to try to find the hire to do this, or if you're just going to continuously inflicts the pain on yourself, which I can tell you empirically from the data is worse. You’ve got to see, and you’ve got to believe for yourself – but I can tell you, empirically, it's worse.

Eliza: In business, there are always trade-offs to be made, right? You can make that call to just keep doing what you're doing, even if you're not loving it, but there is a massive trade-off for that. And yes, growth is one of those trade-offs. But the other trade-off, which is maybe even worse than some cases is well, what is the impact on everybody else in the team? Capabilities will deepen with scale, and they have to deepen in order for the firm to continue to evolve. If it's not evolving, what does that mean for our talent? Are they just going to get fed up? Are they going to get sick of a business that's perhaps not growing up, providing more opportunities for the future, or worse still, are they being managed by someone who doesn't really enjoy people management and doesn't put a whole lot of effort into it - when the alternative would be to have somebody professional come in, who loves dealing with people issues or technology issues andand so on and would run your work with enthusiasm.

Michael: Cool. To have someone who is actually excited to deal with the new comp model and the next technology deployment? Because someone out there loves it.

Eliza: And someone who loves, you know, improving on processes and coming up with new ways of doing things and reorganizing the structure.

Michael: So anchor my expectations. I mean, what, what should I be expecting to pay for this position?

Eliza: Hmm...well, that's another one of those questions, which of course varies dramatically by location in particular. And so there's a lot of benchmarking data available in the industry which I encourage firms to tap into. Whenever I share data like this, it's really important just to set the expectation that it changes dramatically based on your location. It might change dramatically based on the competency of any individual that you're trying to recruit, but as a median, total compensation was at $164,000; at the upper quartile $252,000 and at the lower quartile $116,000. Many factors would contribute to those numbers.

Michael: You'd mentioned total compensation;  so just some combination of salary and bonus. Is this typically a position where I need to do equity as well and make them a shareholder? You had mentioned equity at one point, but I'm not sure if that comes here or comes later. Like, what does this comp tend look like?

Eliza: That comp that I just described--that is a combination of base salary and variable pay--varies, like incentive compensation of some sort, whether that be like a performance-based or potentially just a bonus-type incentive structure. The question of equity is entirely separate.

Michael: So now talk to us about the next hire that you had mentioned, which is hiring the CEO at $5 million of revenue. What does this role look like? 

Eliza: Well, if you think hiring the COO is a challenge, hiring an external CEO is next level, of course. And you don't see it very often. I've seen in seveal instances where that does not work. Decision-making authority gets blurred. They're at stalemates on the bigger issues within the business that need to be resolved, which results in kind of protracted decision-making. You're entirely accountable for the financial performance of the business. You're entirely accountable for building the profile of the firm within the community in which you're serving and very much being a presence in the community that will support the continued growth of the firm. It's a role that carries, obviously, all of the final... that's where the buck stops.

Michael: How do I get comfortable with that? I'm the founder and it's still my equity - or primarily my equity. That's an immense portion of my personal net-worth to have someone else run.

Eliza: Yeah, look outside of our industry. It happens frequently where founders will step aside, and they'll bring in brand new capabilities that have very broad and very deep experience. But within our industry of closely held businesses . . . it's just such a tough call to make. And that's why you don't see it. 

Michael: So for the firms that managed to do this, as you noted, I often don't see firms getting to this level until often $10-million or $20-million of revenue, even. There's just a whole other level of complexity or things breaking. If it's not going well for the firms that do this, is there anything unique or any commonalities you see as to who does hire a CEO at this stage and just actually does it, or gets comfortable with it, or gets over the hump of doing it?

Eliza:  I can only talk anecdotally. We are only limited by our aspirations, and we're limited by our capabilities. And I think that if you have an individual that brings about an entirely new skillset, that looks at challenges in a very different way, it ultimately means that the trajectory of the firm could change quite dramatically.

Michael: And where did these people come from? Where are you finding these? Do I need to go higher, a recruiting firm who's also going to charge me tens of thousands of dollars to help find this person? Am I just listing this on LinkedIn and indeed.com and getting CEOs who apply? Just how do you even try to find a person like this?

Eliza: Yeah, there's nothing easy about recruiting senior talent – executive-level talent. It always comes with a greater risk, relative to two other positions. I think you've got to look at all of your networks that you have available to you.  It could certainly be a driver for a potential merger or acquisition, as an example. You don't want to take that possibility off the table.

Michael: So you could merge with another firm that has someone that's more promising in their capability to do this and then have them run the joint?

Eliza: Quite possibly. There was a piece of research that I wrote for TD Ameritrade, going back a couple of years ago, called “The Six Dimensions of Standout Performance.” We examined the characteristics of the billion-dollar firms in the industry--the best performing--I should say the top top 25% by way of revenue growth and operating profit margin. When I look back at the years of consulting, oftentimes, those firms that are growing most aggressively and consistently are those that have a founder that just loves that element of connectivity, that outreach, that active building of relationships across the industry.

Michael: In which case, sort of the point in the end is that the driver here is simply, if you're that founder who has the drive, who has the energy for the building, and you're just feeling stuck in mire with all the business, with things that have to get run because the business is getting big because you're at $5-million to 10-plus-million of revenue, imagine what it would be like if you actually had someone that you could trust and have confidence in where you could just hand this stuff to them, and they would deal with it, and it would get done at the level and quality that you want.  And just thinking yourself, what what's that worth to you? What's that worth to the business?

Eliza: What does that mean in terms of the future valuation of the firm? What is the ultimate performance indicator for most shareholders? Sure, they look at revenue growth, they look at operating profit margin, but valuation is, for many, the ultimate indicator. And what is the trade-off?  Are we prepared to perhaps go through some discomfort, now, and think very differently about the future leadership of the firm in order to drive growth consistently,  to avoid a situation where we have a capacity crisis or a skills crisis, and to be able to progress along that developmental spectrum year-on-year, continuing to build revenue and continuing to operate in a profitable way?  If you don't have the skills to do that, what is the cost to you of not looking to bring in a professional dedicated management? Every firm's going to ask that question at some point.

Michael: And in that context of cost, help me anchor my expectations again. Like, what is this cost? What should I be expecting here?

Eliza: Well, it could be anywhere. If I'm looking at the data, it could be anywhere from the median of $267,000 up to almost $500,000 at the upper end, again, dramatically impacted by your location. You know, if you're in areas like Connecticut or you're in San Francisco, it's a very expensive position, obviously, to recruit, which you would expect. Right?

Michael: Right.

Eliza: They're never easy decisions to make, right? And that's the point of business. None of it's easy. And I think anyone who tells you it's easy is just lying to you. It's tough. At every step of development, there are a new set of challenges that present themselves, and there is discomfort that owners will have to work through in order to continue to grow. It's just a case of whether or not they're prepared to put themselves through that.

Michael: Well, and I'm struck as well, just particularly when you're talking about this at the size that we've been suggesting here. Like, when you're hiring at $5 million of revenue for this role, I mean, you're literally talking about 5% to 10% of total revenue, just into this position.

Eliza: Potentially, but again, it will come down to the individual candidate, and it may very well be if you haven't appointed a CEO previously . . . it may very well be that you continue to manage that position part-time for a while, or have part-time resources committed to that position, until you feel more confident. Maybe the number for a given business is $7 million before it becomes truly a full-time role.

Michael: Share with us for a few moments your journey. We haven't really talked yet about, like, “What does Eliza do and how to Eliza and out at the point with all of this background and expertise in advising firms on all of these issues?”

Eliza: Well, it's been a longer journey than I care to acknowledge in terms of the number of years consulting. I really grew up in the industry. I started originally in Australia working as a paraplanner. That was my first job out of university. And a few years later, I had an opportunity to join a very small consulting team in Western Australia here, that did very similar work to what the practice-management consulting team research team we're doing at Moss Adams in the United States. And as it happened, I had an opportunity through the course of my work to meet Mark [Tibergien]. This is several years ago - I'm talking 2005, now. And Mark offered me a job to move out to Seattle as a senior consultant with the Moss Group. So, you know, that was a huge leap of faith, if you like, to relocate to a different country.  See: Philip Palaveev writes the one RIA book worth reading this year

Michael: Mark is very persuasive, though. I understand.

Eliza: Well, it was primarily because, you know, what an opportunity to be able to work alongside Mark. And I was fortunate enough to accompany him on all of his engagements. And, you know, I got that wonderful opportunity to sit there and listen to him and hear his advice to clients. And I remember thinking at the time, “Gosh, he's so eloquent and comprehensive in every response. I felt very much like I just have to sit there and listen right now, because he's got this covered well and truly.” But, you know, it was a wonderful learning experience. And, you know, working in that Moss Adams Consulting Group, between the research capabilities and the consulting skills, it was an excellent learning ground. I was continuing to build new skills myself. And then of course, the financial crisis hit at the end of '08. And Moss Adams... See: Will the real Moss Adams please stand up?

Michael: That was a good time to travel to another continent on the other side of the world.

Eliza: Well, Moss decided at that point, of course, that they were bringing an end to their consulting for financial services. And at that stage, Dan Inveen and I were the two seniors on the team. Our largest client, at the time, which was TD Ameritrade in 2016, ultimately acquired FA Insight, and we were folded into the great team at TD Ameritrade back in 2016. With changes that have taken place at TD Ameritrade through the Schwab acquisition, I'm now De Pardo Consulting and back doing independent work as a consultant and research, as well. So really, it's been an incredible journey. 

Michael: And does it differ at a personal level? I mean, you kind of framed that professionally.

Eliza: Personally, it's all about getting the balance right. Because I do think there's a tendency when you love what you do, and you focus on it to have a bit of tunnel vision at times. And that's not always a healthy place to be at. So, making sure that I maintain that wonderful balance of family time and time with friends. And in particular, you know, I love to focus on and am very dedicated to my exercise regime and keeping physically and mentally healthy. That's kind of the best that I can hope for in life, to be frank with you. You know, if those things are all in balance, I'm a pretty happy lady at that stage.


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January 12, 2022 – 3:13 AM

March 12, 2020 – 1:45 PM


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