Much has been written about how to grow books of business, but comparatively little attention has been paid to how to prepare for and support that growth. This is not a small consideration given the challenges of achieving economies of scale at wealth management firms.
Before we turn to why it’s difficult, it’s helpful to define what scaling means. Often, scale is used as a synonym for growth, but that misses a key nuance. While growth is an intrinsic component, scale is really about increasing revenues faster than expenses. The desired end result is a firm that’s not only larger, but also more profitable.
This distinction is essential because it’s the key to sustainable growth, growth that fuels rather than depletes capacity for further growth, and ultimately increasing the value of an enterprise. The largest value driver for a book of business is the type of client revenue – recurring fee-based versus transactional brokerage. When buying and selling a business, the largest value driver is the firm’s profitability.
If we know what we need to do and why it’s important, why is scale so difficult to achieve in practice? The biggest reason is that as a professional services industry, wealth management firms rely heavily on people. What we see in the data is that people costs – compensation, payroll taxes, and benefits – are the largest source of expense on the average wealth management firm profit and loss (P&L) statement. Growth often necessitates adding headcount, which in turn increases expenses.
Even if firms are diligent about moving upmarket, working with larger clients instead of simply adding more clients, we’re also seeing an expansion of service offerings. In fact, larger clients often prefer to work with larger firms for just this reason. As service complexity increases, firms often need more time and specialized expertise to support clients – an investment in people whose knowledge ultimately enhances the firm’s value, while adding complexity to current resource planning.
And compounding those factors? As an industry, we have tended to focus on top line production rather than bottom line profitability. “Growth cures all things” is a popular refrain. But if growth is coming from unprofitable client relationships, then it’s possible for profitability to erode over time.
“The firms that get the most value from outsourcing aren’t trying to replace people or chase the lowest cost,” according to Kimberly Sanders, senior vice president and head of business solutions, LPL Financial. “They’re being deliberate about where outside expertise creates leverage. When outsourcing is treated as a true partnership, it gives leaders flexibility to scale thoughtfully without locking themselves into fixed decisions before the business is ready.”
The power of outsourcing comes from its ability to help solve for the biggest challenges of achieving scale. Hiring ideally needs to come in advance of growth, but it’s rarely possible to get exactly the amount of capacity needed at exactly the right time. Too little and your team is scrambling, and you might find you don’t have time to train. Too much and you’re taking a hit on your profitability and potentially your value. Outsourced solutions, like virtual admins and virtual paraplanners, allow firms to supplement their in-house teams with fractional support, smoothing out expenses and ensuring that they have the right level of capacity at the right time to meet their needs.
Second, growing firms often need expertise in advance of having the economic wherewithal to hire someone full-time. A firm expanding a service might want to bring in technical expertise to work with clients with more complex needs but not have sufficient demand to justify a new hire. A firm focused on increasing profitability might need more financial guidance than a bookkeeper can provide, but it might not be ready to bring the role in-house on a full-time basis. Being able to outsource expertise, such as a fractional CFO, can enable the leadership team to leverage the needed knowledge while lessening the economic impact.
And finally, outsourcing can make it easier for firm owners to focus on what’s most important. By easing the burden of finding, hiring, and training, qualified talent – a challenge many owners cite as one of their biggest time drains – outsourcing frees leaders to focus on the work only they can do, such as working on the business, meeting with top clients, or business development. Outsourcing gives business owners the power to make better choices about how to spend their most precious resource – time.
Two steps can help you identify where there might be opportunities to leverage outsourcing for your firm. The first is getting a handle on your financials to gain clarity about your own economics. A clean P&L statement will not only help you see the impacts of your decisions on your profitability, but it will also help you determine key productivity ratios such as average revenue per advisor/staff/total headcount and average households per advisor/staff/total headcount.
Second, look closely at your book of clients to see the number of households the team is managing and align it with your growth goals. If the goal is to add 10 new households in the coming year, how much time will that take, and does your team currently have the capacity to take on that additional work? Where is everyone in terms of their capacity? Adding outsourcing as an option in your annual planning process can help you identify areas where it might be the right solution in either the short or long term.
If your vision is to create a large, enterprise firm or if you’re already there, focusing on well-managed growth is essential. Incorporating outsourcing can be a valuable way to achieve it, by allowing you to add capacity in a more controlled, profitable way. It can enable the firm to smooth out the expense required to support growth, add valuable expertise, and free up time to focus on what matters most to you and your business.
With Commonwealth since 2020, Dina Sonenshein helps ensemble and enterprise firms build enduring and scalable businesses. As manager, business solutions at the firm, her areas of expertise include business models, ownership structures, compensation systems, partner pathways and exits, organization design, and financial management.
Commonwealth and LPL Financial are each a registered investment adviser and member of FINRA/SIPC. Commonwealth and LPL Financial are affiliates under control of a common parent company.
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