How to know when hiring makes sense

For good reason, hiring strategies are uppermost on the minds of advisory firm principals. They wonder about making their next hire before they reach capacity or after, about hiring an experienced financial adviser with a book of clients or investing in a junior person who can be trained in the firm's culture.

When I consult with principals about hiring, I always redirect the conversation to focus first on the firm's business strategy and human-capital plan. It is clear from our InvestmentNews/Moss Adams study data that successful firms plan their human-capital programs strategically, beginning with a clear articulation of the firm's identity, mission and vision.

Human capital is so connected to a firm's identity that answers to hiring questions will be different for different firms. That said, study data point to one concept that could be considered a guidepost to successful hiring: leverage.

Essentially, this means that staff additions are most effective when they free up the time of the firm's principal to work directly with clients and prospects.

Depending on where a firm is in its evolutionary stage and its chosen practice model, leverage will look different for different firms. But evidence of its presence can be seen when advisers aren't bogged down with administrative tasks and instead spend more time on high-value tasks, such as bringing in new clients and assets.

Thus, ratios of support staff to professionals grow in a predictable fashion as the firm grows. Our research begins to see the initial stages of leverage as firms reach $500,000 in revenue. It is then when they begin to add administrative and support staff.

We typically don't see the addition of a new service-level adviser until firms reach about $1 million in revenue, which is also when dedicated management positions such as chief operations officer, chief financial officer, operations manager and human resources director become more common. At that point, a firm's profitability can support these dedicated roles.

There is a greater level of role specialization and dedicated functions as firms approach the $2 million to $3 million revenue range, when firms often need dedicated management with specific skills to organize and structure the business. Once above $5 million in revenue, firms tend to adopt a traditional corporate structure with departments, hierarchy of roles and tiers of management.

At the $1 million revenue mark for a firm with two or more lead advisers, a new adviser can help in managing existing relationships. When firms grow to about $2 million in revenue and have more than three lead advisers, we see firms create leverage for the service adviser by adding a third level of support: advisers who focus on data gathering, modeling, case design, scenario building, plan development and presentation development.

By structuring work this way, each task is delegated to the most appropriate level of the firm's cost structure. This is an important point, as successful firms set specific metrics for when and why they need to add these positions.

The ultimate goal of adding staff is to enhance professional productivity. If adviser productivity has stalled, it may be time to consider adding resources.

The answer to what kind of resource depends on a firm's strategic goals. If a firm has prioritized rapid growth or expansion into a new market, then acquiring an adviser with a book of business may be appropriate.

JUNIOR ADVISERS

Firms that prioritize culture over growth, and are content to grow slowly, may want to hire and train a junior adviser.

For an investment management firm where advisers are bogged down with portfolio management tasks, the solution might not be hiring at all, but instead purchasing new trading software.

Growth at advisory firms tends to be systematic and predictable, which in many ways can make human-capital planning and management that much easier.

Hiring data show that firms add staff in specific proportions at specific stages of growth, with the objective of creating maximum leverage for advisers at each stage.

The key to making the right hiring decision at any stage of firm development is to keep an eye firmly fixed on the firm's strategic goals and to leverage staff most efficiently to deliver on the firm's mission.

Kelli Cruz is the director of research and consulting for IN Adviser Solutions. InvestmentNews will present a webcast, “Staffing Evolution — When & How to Make the Next Hire,” on April 3 at 4 p.m. Eastern time.

Related Topics: IN Research, Practice Management, The Adviser's Consultant