Thinking beyond $1 billion

Many new RIAs dream of reaching $1 billion in managed assets. But the $1 billion mark isn’t the end goal. For an advisory maturing from a practice to a business, it’s just the beginning.

A firm growing toward $1 billion in AUM is doing a lot of things right. They’re providing a knockout experience for clients and nurturing their financial life goals. But the firm is also getting serious about building a business. They’re taking a hard look at what kind of clients will drive their growth and the infrastructure they need to sustain their success.

That’s not to say the $1 billion milestone is easy or inevitable. Many RIAs falter as they grow, caught off guard when the client-facing work they’ve always done seems to show diminishing returns. A Cerulli Associates study found the cost of building and maintaining firm infrastructure spikes dramatically as a business nears the $1 billion mark, undercutting the firm’s revenue.

This is a problem fairly unique to our industry. A skilled family doctor in a small town cannot accidentally transform his or her practice into a hospital. But advisers who are good at their job but lack a strategic plan for growth can wake up one day with $600 million in assets and not enough infrastructure to support their success.

It’s a familiar story in our industry, and for good reason: Most folks don’t become advisers because of their passion for building executive management teams or managing staff in multiple offices. They get into the game to help people live their best financial lives.

But a growing RIA demands infrastructure investments — increased head count, scalable technology, a robust investment platform and solutions for the burgeoning middle and back-office needs that would otherwise drag advisers away from what they do best.

Firms that want to surpass $1 billion and build a foundation for more growth will look for ways to optimize everything they do. They make intelligent investments in back-office technology and staff, but they also take a long, hard look at their books. It’s hard to say, “Just make more money!” to advisers who have run out of hours in the day to take on more clients — especially if they’re tied up serving clients who don’t meet the firm’s minimums. You can staff up to solve the capacity problem, but every new hire drives up your operating costs, which can push growth objectives even farther out of reach.

(More: Outsourcing is route to greater growth, Fidelity study finds)​

If you’re serious about getting back on the road to growth, and serving clients at the quality you’ve built a legacy delivering, you need to focus your time and resources on profitable clients. They pay for the investments in your RIA necessary to graduate from a lifestyle practice to an enduring business. We know this because we’ve helped several RIAs win back the time they need to reach their next milestones.

Firms with an eye for growth will segment their client base to find households that can be responsibly transitioned to a high-touch, high-quality planning solution. The road to building a business and surpassing $1 billion AUM doesn’t have to come at the expense of the client experience.

(More: All robo, no advice)

Anders Jones is CEO of Facet Wealth. Follow him @AndersJones.