From the October 2007 issue of Wealth Manager Web • Subscribe!

October 1, 2007

The Holy Growth Grail

It's no great secret that the independent advisory industry is booming. Driven by a resurgent market and a burgeoning number of near-retirees with a growing appetite for objective advice, independent advisors continue to win market share. But will that growth continue? And how will independent advisors capitalize on the many opportunities in front of them? It's clear that the asset growth of the industry is just the tip of the iceberg. The real story of growth is much deeper and more complex. To fully understand it, we should look at what some of the best managed and fastest growing firms in the industry are doing to excel today and position themselves for future growth.

The growth of the independent advisor industry is a classic David and Goliath story. Independent advisors are competing with the biggest firms on Wall Street, and more often than not, David wins hands down.

The 2006 Schwab Institutional RIA Benchmarking: Growth Trends Study, which polled 1,200 RIA firms that custody with Schwab and collectively manage more than $320 billion in assets, showed that the median growth from 2002 to 2005 was 24 percent in assets and over 18 percent in revenues. That's more than twice the 9.8 percent growth in assets posted by major wirehouses during the same period, as polled by Cerulli Associates.

And the success is everywhere. Firms of different sizes and business models were growing at relatively similar rates, ranging from 22 percent to 28 percent in median compound annual growth in assets under management, and from 16 percent to 24 percent in revenue growth, according to the Schwab study.

But that doesn't mean that all advisors are experiencing the same rates of growth--far from it. The Growth Leaders--the top 20 percent fastest growing firms in terms of assets excluding growth from investment performance--grew at a remarkable 48 percent in AUM, 42 percent in annual revenues and 27 percent in number of clients. What's even more impressive is that these firms were able to post these rates while maintaining a high level of profitability--a 23 percent median standard operating profit margin (see chart on page 62).

When I share these results with advisors, I generally get two reactions: "How can I grow that fast?" or "That's crazy; I don't want to grow that fast." Then there's a third group that usually stays silent because they are already in the top 20 percent. Regardless of which camp you're in, know that the real question isn't about the speed of growth, but how to grow.

Most advisors don't want growth for the sake of growth. They want growth with a purpose, such as additional profits, scale, more opportunities for employees and more established positions in their communities. And they certainly don't want to bypass their primary focus on providing exceptional service to existing clients. With more than 80 percent of new business coming from referrals, it turns out that serving existing clients is the core foundation of growth. These are all reasons why it's equally important to also look at firms that are achieving exceptionally high levels of profitability and productivity--those we often refer to as best managed firms.

The real story of growth--how to achieve it, how to manage it and how to position your firm for the future--lies in understanding how fast growing and other best managed firms run their businesses. Here are three common themes:

o Make Time to Plan for Growth - Set a clear vision and strategy for where you are headed.

o Optimize People and Process - Define staffing needs, anticipate capacity needs and build scalability through standardizing processes.

o Have a Disciplined Approach to Marketing - Define the set of the few activities that will drive future growth. Ask yourself: How are you tapping referrals? Is it clear who is accountable?

When advisors start a new client relationship, they begin by getting to know the client's current situation and goals, and then create a detailed plan for how to get there. Yet many advisors don't take the time to do the very same thing for their own businesses. One clear distinction between fast growing and best managed firms is the time they dedicate to defining a clear growth strategy and vision. Most plans focus on the three classic questions of business planning: Where are you now? Where do you want to be? [and] How are you going to get there?

While the plans need not be overly detailed, they should be specific, focused and measurable. As an example, many growth leaders and best managed firms focus on a well defined target set of clients as opposed to trying to serve multiple segments. They also tend to have clear client acceptance standards. Sand Hill Advisors in Palo Alto, Calif., uses a matrix to evaluate all client relationships. Each client is assigned a cost rating based on effort to serve, cost to serve and resources consumed. Those factors are then balanced against benefits to the firm such as revenue, strategic fit, referral quality, future asset potential and longevity.

When firms are well managed, the productivity advantage can be staggering. The best managed firms generate 50 percent to 80 percent higher revenue per professional and 30 percent to 35 percent higher revenue per staff member than other firms. Even more compelling, however, is that productivity for many [less well managed] advisory firms doesn't improve significantly as they grow, as the chart below shows.

It's clear that the quest for the grail of scaleable, profitable growth requires not only a clear plan to grow, but also a clear plan to improve efficiency and productivity. Principals of best managed firms spend 40 percent less time on operations and 15 percent less time on portfolio management, but in contrast spend 8 percent more time on client service and 16 percent more time on business development than those in other firms. In other words, they focus more on client-facing activities and delegate the other functions to their staff.

Best managed firms have also built scale by continuing to automate and standardize functions and processes. While this is typically done through operating technology, these firms have also standardized processes such as client relationship management, financial planning and portfolio management.

Legacy Wealth Management of Memphis, for example, implemented a team-based organizational structure in which 10 of the firm's 20 individuals work in three service teams handling all client-facing activity. Roles are clearly defined within those teams, and team capacity helps determine where a new client is assigned. The structure has resulted in improved client retention and has given higher priority to client service.

Interestingly, while the growth leaders are growing two- to three-times faster than the average, they are tapping into exactly the same sources for new clients: client referrals, business partner referrals and new assets from existing clients. What's different is that they are able to optimize these sources by having a proactive approach. The results? Growth leaders get two-times the amount of client and business partner referrals and eight-times the new assets from existing clients.

For most advisory firms (including growth leaders), new clients come mainly from client referrals (52 percent) and business partner referrals (36 percent). Other sources include salespeople (5 percent) and PR, radio and articles (3 percent).

But here's the good news: A 2005 survey of 6,000 clients of advisory firms, conducted for Schwab by Moss Adams and Advisor Impact, found that 90 percent of clients of independent advisors would recommend their advisor to a friend or family member. That's a potential goldmine! Surprisingly, however, most advisory firms have no clear process in place for seeking client referrals. Here are the best practices of some top firms:

o Create a referral culture by explaining to employees why referrals are important and training them on your firm's ideal client profile and unique value proposition.

o Zero in on clients who are most likely to refer the kind of prospects you seek, and have a plan to develop these natural advocates.

o Standardize the process of initiating, tracking and following up on referrals.

o Build a library of support materials and communications templates, such as letters to thank clients for their referrals.

o Set goals and measure progress by tracking where referrals came from, who followed up and what happened.

Business development, of course, doesn't stop there. In a relationship business it comes down to the people, and while most firms start with one or more of the key principals performing this function, as they grow they must determine how to add scale by either adding dedicated business development specialists or enlisting the support of firm professionals. Our studies, as illustrated in the chart above, have shown that advisory firms tend to choose one of three types of business development structures:

While there is no clear choice for the best structure--and size of firm and budget can have a lot to do with which model works best--what is clear is that larger firms often need to adopt either the dedicated or fully shared models in order to sustain growth rates. What's also clear is that structures like the fully shared model that enlist the support of those closest to the client are more effective at tapping client referrals.

Advisors who have clear marketing plans bring all of this together. They recognize that marketing must be part of a holistic process that takes place consistently--not just an isolated event that occurs when firms desire new clients. Once a marketing plan is implemented, results are tracked, and marketing efforts are refined as needed.

The search for your own growth grail begins with investing the time to step back from the day-to-day and think about where you want to be in two to three years. Having a clear plan that is communicated to the entire team creates focus and efficiency and helps firms anticipate future barriers.

David Welling is vice president of marketing & advisor business management at Schwab Institutional. NOTE: Any reference above to consulting firms is not--and should not be construed as--a recommendation, endorsement or sponsorship by Schwab. These firms are not affiliated with or employed by Schwab.

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