Staffing evolution of a firm: The key is leverage

In my consulting work, I am continually asked by firm principals about hiring strategies. Questions such as: “Should I make my next hire before I reach capacity, or after? Should I hire an experienced adviser with a book of clients, or invest in a junior person that I can train in our way of doing things?”

In these conversations, I always re-direct the conversation to first focus 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 thoughtfully, with strategic intent beginning with a clear articulation of the firm’s identity, mission and strategic vision. So when I answer questions about hiring strategy, my first answer is that human capital is so connected to your firm’s identity that the answers to such questions will be different for different firms.

That said, however, study data point to one concept that could be considered a guidepost to successful hiring: leverage. Staff additions are most effective when they contribute to greater leverage at the adviser level, freeing up a professional’s time to work directly with clients and prospects. Depending on where a firm is in its evolutionary stage and chosen practice model, among other factors, “leverage” will look different for different firms, but the overall concept holds true for the industry.

Leverage yields scale and supports growth

Creating leverage within the business ensures that advisers are not bogged down with administrative tasks and instead can spend more time on high-value tasks, like bringing in new clients and assets. Thus, the ratio of support staff to professionals grows in a predictable fashion as the firm grows. We begin to see the initial stages of leverage as firms reach $500,000 in revenue, at which point they begin to add administrative and support staff members.

We don’t typically see additional leverage from new advisers (e.g., service level adviser) until firms reach about $1 million in revenue, which is also when dedicated management positions (chief operating officer, chief financial officer, operations manager, human-resources director, etc.) become more common and the 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 managers with specific skills to organize and structure the business. Above $5 million in revenue, firms tend to adopt a traditional corporate structure with departments, hierarchy of roles and tiers of management.

Creating leverage within the adviser structure
Creating leverage within the adviser structure, adds greater capacity. At the $1 million revenue mark, we see the first nearly full-time head count in the service adviser category. With two or more lead advisers in the firm, this new role is focused on helping them manage existing relationships. When firms grow to about $2 million in revenue and more than three lead advisers, we see firms create leverage for the service adviser by adding a third level of support advisers. This third level in the adviser structure is focused on data gathering, modeling, case design, scenario building, plan development and presentation development.
With this kind of leverage in place, each task gets managed (or 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.

Hiring is a strategic decision
The ultimate goal of adding staff is to enhance professional productivity (leverage). If adviser productivity has stalled, then it may be time to consider adding resources. The answer to what kind of resource will depend on the firm’s strategic goals.
If a firm has made rapid growth or expansion into a new market its top priority, then acquiring a new adviser with a book of business might be appropriate. For a firm that values culture over growth and is content to grow slowly, hiring and training a junior adviser might be the right choice. For an investment management firm where advisers are bogged down with portfolio management tasks, the solution might not be hiring at all, but instead might be purchasing new trading software. (As discussed in a previous article, technology is an important consideration in leverage. Improving productivity can lead to success across the board in efficiency, client retention, client service quality, revenue growth and profitability.)

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 for you — no matter what stage of development you are in — is holding fast to the firm’s strategic goals, and leveraging your staff to deliver most efficiently on the firm’s vision, mission and the “value promise” your firm has made to its clients.

Kelli Cruz is the Director of Research & Consulting at IN Adviser Solutions, a division of InvestmentNews.

Related Topics: IN Research, The Adviser's Consultant