The Adviser's Consultant

Chief operating officers lift advisory firms to the next level

While a COO is often seen as an added expense, having someone in the role can free up the CEO and help the firm grow

Nov 2, 2018 @ 1:19 pm

By Jeff Benjamin

If you're not sure whether your advisory firm is ready to hire a chief operating officer, it probably is.

While COOs are often dismissed as simply an added expense, adding one can be a key ingredient in helping a firm grow to the next level, according to Matt Sonnen, president and chief executive of PFI Advisors.

As the former COO at Luminous Capital from 2008 to 2012, Mr. Sonnen can relate to the way the position is sometimes viewed inside firms.

"I think advisers will often see themselves as the hot shots and the rainmakers, and they just pat the chief operating officer on the head as the little operations guy or girl," he said.

Mr. Sonnen believes it takes a special type of personality to embrace the often-eclectic responsibilities of a COO, and he said advisory firms are stunting their potential by leaving that C-suite position vacant.

While adding a COO doesn't need to be the first order of business after launching an advisory firm, Mr. Sonnen said it should be part of the business plan "once you have some employees and need a scalable technology stack."

Firms might reach that level when they have anywhere from $500 million to $800 million under management, "but definitely before you get to a billion dollars," he said. "I don't believe there is a magical AUM number that automatically qualifies the firm for a COO. But whenever the owners of the firm are feeling overwhelmed with running the business, they should look to bringing in professional management."

Leon LaBrecque, who recently agreed to sell his $776 million firm, LJPR Financial Advisors, to Sequoia Financial Group, which manages more than $4 billion, said seeing the work of Sequoia's COO has opened his eyes to the position.

"In my prior life, I wish I had a COO, because it would have increased my productivity massively," Mr. LaBrecque said. "Having the CEO or founder be the head adviser, the COO, the compliance officer and the administrative officer is just wasting time on things they aren't necessarily best at."

Fidelity Investments counts 697 advisory firms with at least $1 billion under management, up from 360 firms at that level five years ago.

"As firms become larger, they confront new, often unexpected and always more complex challenges which could threaten their momentum," said Scott Slater, vice president of practice management and consulting at Fidelity. "A great COO is often the difference-maker between a good firm and a great firm, ensuring execution of the business plan, anticipating and preparing for issues before they become a roadblock and shaping a strong performance-oriented culture."

The industry continues to consolidate and advisory firms get larger, but Mr. Sonnen estimates that only about half the firms with at least $500 million currently employ a chief operating officer.

"I think a lot of advisers, especially breakaways, are doing themselves a disservice by not getting out of the weeds of running the business, which is what a chief operating officer does," he said. "Having a COO enables advisers to get back to working with clients and prospecting for new business."

Depending on where a firm is based, Mr. Sonnen said that a chief operating officer's salary could hover around $200,000, but argued that it is an expense worth paying if firms plan to continue growing.

"You need somebody who is detail-oriented and able to juggle a million different things," he said. "And they have to be humble because sometimes they will be the chief picture hanger and they will be under desks drilling holes or duct-taping cables together, and they also have to take on an HR role."

In a recent white paper on the benefits of professional management for RIAs, PFI Advisors highlighted three key areas of functional expertise that are often overlooked in the absence of a COO. They include managing the daily administration of the firm, driving workflow improvements and managing human resources.

Once the decision is made to hire a COO, the real work begins. Mr. Sonnen said it is rare to find a skilled manager who is also familiar with financial services.

"I've seen advisory firms hire former franchise restaurant managers, who were good at managing restaurants, but didn't understand what financial advisers do," he said.

The more popular option, according to Mr. Sonnen, is hiring and grooming a junior operations associate to eventually take on the role of chief operations officer.


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