I have a friend with a solo advisory practice who has been struggling with a decision. Should he keep his practice small and comfortable or should he staff up, aggressively market and network, and build his practice into a multi-faceted firm–able to support a much larger client base and provide a wide range of financial services.

To me, this wouldn’t be much of a decision. I love the process of building companies and watching them take on a life of their own. I’d imagine it’s similar to the satisfaction most people feel raising children. In the beginning, they can’t even feed themselves. You have to be there all the time, molding, nurturing, feeding them clients or they’ll quickly wither away.

As time goes on, they start to crawl and won’t starve when you step away, first for a long weekend, then a week-long vacation. As you build a competent team with managers and leaders, they begin to flourish and take on a life of their own. Eventually, you have a huge team of people, each working toward a central goal of providing wonderful services to as may people as they can.

The process is so fun that I can’t imagine not taking steps to kick it off. For me, it’s not a money issue; the possibility of making big bucks is just icing. I’m frankly mystified when somebody has to sit down and think about whether they want to go through this. Yes, it’s hard sometimes and yes, there’s a possibility of failure. But the risks are trivial compared to the joy of the process.

I could go on and on about why it’s better to build a big company than a small company. It’s better for your clients if your company can survive without you. (I used to work at dbCAMS which withered on the vine after the sudden death of it’s founder.) It’s also more fun going to work if you have intelligent dynamic employees with better ideas about how to run the business.

But for my advisor friend who doesn’t like the lifestyle aspects, I usually focus on the financial benefits.

Bob Clark has a new Clark at Large column where he discusses the financial benefits of having a small vs. large advisory practice. He uses the $145 Moss Adams 2006 Study of the Financial Performance of Advisory Practices as his data source:

Very interesting. Bob’s slant on the study is that the numbers are skewed to favor the bigger firms:

I believe the Study data (and data from all similar studies) is skewed against smaller practices because solo practitioners tend to under report their income. Company cars, home computers, cell phones, working vacations, rent in their own office buildings, and even second homes in some cases, are all business expenses that would probably be personal expenses in a larger business. Small practitioners are famous as well for pouring money into pension funds that would have to be taken as income anywhere else. Consider that the top 25% of mature solos average $845,000 in revenue but only show $435,000 in income: with an average of two staffers, do you really believe their overhead is $410,000 a year?

Bob, I disagree. If advisory firms absorb advisor expenses in the overhead, wouldn’t that happen with big firms as well? In fact, wouldn’t large firms absorb even larger advisor expenses into the overhead? If I was an advisor with a large, successful advisory firm, I would probably be driving a nicer company car than back when I had a small firm. Heck, I’d have two cars.

So, percentage-wise, the study may be skewed toward the larger advisor. But in terms of pure dollars, it ends up being skewed in favor of the small advisor. And the study presents dollar amounts, not percentages.

The study also doesn’t factor in the value of the firm itself. Since firms usually sell as a multiple of revenue, large firms are worth orders of magnitude more when the firm is sold. If you really want to talk financial advantages for large advisory firms, how about a final payout in the tens of millions. That’s some incentive to grow.