Every business owner struggles with the profit vs. growth conundrum: When it is better to prioritize lean operations to maximize profits and cash flow, and when it is necessary to prioritize heavy investment in infrastructure to support future growth, even if it means sacrificing profits immediate? RIA owners seem to struggle with this concept more than others because many grew up in the wire world as W2 employees. The traditional compensation model for employee-advisors in office firms, structured around a pay grid, fosters a mentality where top-line revenue reigns supreme, with little regard for profitability. The more income and commissions you can produce for your employer, the more compensation you will enjoy. When office advisors branch out on their own and start RIAs, it's no surprise that they often carry this “revenue only” mentality.

These advisors get stuck in the short-sighted game of “more. They operate under the assumption that having more advisors in the firm will lead to a larger pool of clients, resulting in increased revenue. They also believe that a larger workforce will enable them to serve more customers, thus generating more revenue. Moreover, they equate an increase in assets under management – regardless of the fees charged – with an increase in income. Then they wake up a decade later and realize they have a small profit margin and lack the funds needed to reinvest in core aspects of their business, such as technology, marketing and employee benefits. At this point, many RIA owners are shocked to find that their business is shrinking, instead of growing. Despite their relentless efforts to increase revenue, they find themselves struggling.

A singular focus on growth has led them to overlook the importance of profitability. They need to understand that their job as a business owner is to define when to prioritize one over the other; after all, a business cannot save and invest simultaneously. The key is to avoid casually navigating between these two extremes, but to be very aware of which decision you've made and to manage very deliberately towards that goal.

Profit maximization

If you are focused on reducing costs to increase profits, you will:

1. Focus on efficiency and finding the best way to stretch every penny;
2. Stop any further investment in your infrastructure; AND
3. Place a hiring freeze, hoping your existing staff can adequately serve customers and onboard more.

It's healthy to occasionally take your foot off the growth pedal and focus on cash flow. As industry icons Warren Buffet, Ray Dalio and Jack Welch have all famously proclaimed, “Cash is king.” Having cash on hand allows businesses to weather any financial storm and make strategic purchases when opportunities present themselves.

Growth Strategies

If, on the other hand, you decide to focus on growth and forgo profits, you will:

1. Recruit new employees who can support the growth of new customers;
2. Invest in technology infrastructure to better support the business and allow employees to serve more and more customers; AND
3. Increase your office space to accommodate all these new employees you're hiring.

Beyond pursuing a “growth at all costs” strategy, prudent RIA owners should focus on healthy growth. In the early days of business, the mantra is simply, “We need revenue, so let's take every client who's willing to hire us!” But as the business continues to evolve, it is imperative that the focus returns to “Let's bring the right customers to our business!” Advisors must determine who they are best suited to serve and continue to grow with those specific clients, tailoring their service offering to meet the unique needs of that particular client base. This will require advisers to weed out clients who do not fit the client personality the firm is trying to work with. Additionally, owners need to start asking, “Do we have the right employees in the right places to serve our customers and support the business more efficiently?” Identifying qualified candidates that fit your firm's needs will be much easier with a specific client and service offering in mind.

For many business owners, this balancing act can be exhausting. This is especially true for professionals running RIAs who see themselves primarily as advisors rather than business owners. They tend to focus their energy on landing the next customer and not establishing efficient and scalable processes. While some may not prioritize profitability, it is essential that they understand its importance in building a sustainable firm. By navigating the delicate balance between profit and growth, RIA owners can chart a sustainable path for their businesses and ensure long-term success.

Matt Sonnen is Chief Operating Officer at Coldstream Wealth Managementas well as the creator of the digital consulting platform COO Society, which educates RIA owners and operations professionals on how to build more impactful and profitable enterprises. He is also the host of the popular The COO Roundtable Podcast.