From the August 2013 issue of Investment Advisor • Subscribe!

Growing Strong: The 2012 Growth by Design Study

Prescriptions for sustaining firm growth at every stage

The daily vitamins that are best for a child to take in order to achieve healthy growth are different from what a young adult or senior citizen requires. As the years progress, so do our dietary needs—Flintstones vitamins make way for Centrum Silver.

Advisory firms follow a similar logic. As firms reach different stages in their development, the focus for what will best sustain growth and longevity shifts. While many operational best practices remain relevant across the development spectrum, certain practices return a greater benefit at certain stages.

This is our fourth and final feature article related to “The 2012 FA Insight Study of Advisory Firms: Growth by Design.” Past articles explored the industry’s success in achieving growth as well as growth’s benefits and challenges. Most recently we summarized the general firm operating characteristics that are most closely associated with achieving high-quality sustainable growth (Visit ThinkAdvisor.com/tag/Growth-by-Design for past articles).

In this article, we emphasize that one size does not fit all when it comes to prescriptive advice. Our general observations about growth raised previously are distilled to the strategies that are most relevant during particular stages of firm development.

Four Stages of Development: Operators, Cultivators, Accelerators and Innovators

From the outset, recognition of the changing nuances and needs of firms as they progress in their development has always been an important component of FA Insight’s industry research. Our annual studies divide and examine firms according to four stages. In ascending order of size according to annual firm revenue, these stages are: Operators, Cultivators, Accelerators and Innovators.

Figure 1 provides an introduction of the four firm stages defined by FA Insight, including brief summaries of the key factors that distinguish the typical firm within the stage.

Figure 2 provides a quantitative summary of the typical firm in each stage based on research results from the 2012 FA Insight study. A quick review confirms the descriptive points listed in Figure 1. As a firm evolves from Operator to Innovator, the firm does not just get bigger. A firm grows in complexity both in terms of its organizational structure and the more complicated needs of the higher-net-worth clients it serves. These changes represent new challenges but also higher returns for owners in the form of compensation or profits they derive from their firms.

Ideally, the growth trajectory achieves not just greater levels of owner income but also assurance that the firm will continue to grow and generate further income. As we’ve reminded readers in the past, the ability of a firm to consistently grow and generate income, currently and into the future, is the core component of firm value.

Thus sustainable growth results from the quality as opposed to the quantity or rate of a firm’s growth. While there are no easy shortcuts to sustainable growth, the path becomes smoother when owners understand the business practices that deserve the most attention given a firm’s current stage of development. What follows are growth recommendations from FA Insight, emphasizing the most important consideration for firm owners at each stage.

Operators: Know Your Client and Build Your Firm Accordingly

Early in its development a firm is hungry to establish a client base. Fixed costs must be covered and owners can struggle to generate adequate income. As a consequence, the temptation is high for Operator firms to take on clients that may not be the most appropriate long-term fit for the firm.

Invariably (and understandably) client acceptance exceptions can become commonplace in these early days. Unless these exceptions are minimized, however, it will be difficult for a firm to progress forward on the right path toward sustainable growth. A host of opportunities open up by defining a target client and tailoring the firm’s marketing, operations and servicing capabilities toward profitably delivering the maximum value to the target client type.

Establishing and pursuing a target market enables the Operator firm to make the most of its scarce resources, driving efficiencies and greater productivity while improving its ability to consistently deliver the desired client experience. These are opportunities a firm can benefit from throughout its life cycle by better positioning the firm to accommodate future growth.

Cultivators: Create an Organizational Blueprint

At the Cultivator stage, the firm forms a team that extends beyond just an advisor and an administrative assistant for the first time. Increasing layers of organizational complexity accompany firm growth. Positions evolve from generalists to specialists in terms of focus. An expanding cadre of non-professionals is added to better support and leverage the increasingly scarce capacity of firm professionals. While the typical Cultivator employs one non-professional for every professional, this ratio expands to 1.7 for every professional by the time a firm grows to Accelerator size.

If mismanaged, additions to staff will threaten to derail the firm by increasing costs without a commensurate contribution to revenue. For Cultivators on the brink of accelerated growth, every hire must directly or indirectly support profit growth by enhancing either efficiency or productivity.

A plan for organizational structure is critical at this stage for dictating the positions that best suit the firm at present while preparing for future positions the firm will need to develop or recruit in order to sustain growth. Additionally, this work will support the progression and retention of top talent that can further strengthen growth prospects. A comprehensive blueprint will include clear job descriptions that specify accountabilities and reporting lines, as well as direct future organizational changes that will most smoothly accommodate growth.

Accelerators: Make Management a Full-Time Job

Given growing business complexity beyond $1.5 million in annual revenues, dedicated management becomes an imperative ingredient for sustainable growth. The addition of a full-time manager for Accelerator firms is an important milestone in the transition from practice to business.

The new manager, typically an operations manager or a chief operating officer for a bigger firm, further releases professional capacity for revenue generation. A management “specialist” provides the Accelerators with greater management expertise and accountability. The following areas are examples of where a dedicated manager can provide important contributions:

  • Refining and implementing the business strategy of the firm
  • Developing and enhancing firm workflow
  • Benchmarking and structuring compensation
  • Overseeing a performance management process for team members
  • Planning and implementing technology solutions
  • Planning and implementing marketing strategies

Innovators: Engineer Scale to Best Realize Economies

With typical annual revenues of $6.2 million and 27 full-time team members, Innovators are sizable businesses relative to the rest of the advisory industry. As they work to sustain growth, the key challenge for these firms is to realize the full advantages of the scale that they have already achieved.

Overhead expenses as a share of revenue are a good proxy for a firm’s ability to utilize scale and achieve economy. Without exception, in each of our past four annual FA Insight studies the overhead expense margin for the typical Innovator firm was actually greater than the typical margin for smaller Accelerator firms. While reaching the size of an Innovator has its rewards, firms of this size clearly begin to experience new issues in terms of managing costs.

Continued investment in full-time management can help Innovators turn these results around. Additional work on organizational structure is important as well. Accelerators can benefit in particular by forming clear career paths for team members to progress and advance through the firm. These career paths should accommodate professional as well as non-professional positions. Career paths create important benefits in terms of retaining and improving valued talent and ensuring a new generation of firm leaders and owners to sustain the firm over time.

Use of technology can be another important contributor to operational efficiency and cost savings. The area grows in importance for Innovators that tend to serve more complex clients with a wider spectrum of investment products, reporting and billing needs. Standout Innovators, or the top 25% of firms within the stage according to a blended rank of recent revenue growth and current income, invest slightly more in technology than other Innovators, but the more compelling distinction is technology deployment. For example, while 27% of Standout Innovators report achieving full integration of their technologies, just 18% of other Innovators make this claim. In general, important technology practices for this stage include the following:

  • Set annual budgets for new investments in technology
  • Apply a consistent process in evaluating technology investments in ROI analysis
  • Integrate technology components to fully support business-to-client processes
  • Provide team members with both initial technology training as well as ongoing training resources

It is no coincidence that these technology practices, according to study results, are also characteristic of sustainable-growth firms in general.

Honing Your Focus

Taking time out from working in the business in order to work on the business is never easy for firm owners. Further, any regular reader of the trade press is fully aware of the vast array of business management issues that advisory firms must address. To make business improvement less daunting, recognize where your firm resides along the development spectrum and focus on mastering the lessons that will provide the most value for your firm.

In the months ahead, please look forward to our introductory feature on “The 2013 FA Insight Study of Advisory Firms: People and Pay.” The study will be our fifth annual industry review, offering a special focus on human capital issues and, in particular, giving special attention to how firms organize and progress their people in order to best facilitate and accommodate growth.

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