The stress testing endured by advisory firms over the last 18 months yielded an uncomfortable, and at times overwhelming, level of pressure for advisory firm shareholders and management. For an exclusive group of firms that we call “Standouts,” however, performance improved as the heat was applied. With revenue growth running five to eight times higher than other firms and overhead expenses managed with discipline at 13 to 17 percentage points lower than their peers as a share of revenue, this elite group deserves close attention.
In November 2009 FA Insight released The 2009 FA Insight Study of Advisory Firms: People and Pay, a comprehensive human capital study conducted in the summer of 2009 that included highlights of the exceptional performance of this Standout group and how they leverage talent to outperform their peers. Sponsored by TD Ameritrade Institutional, the study provides firms of all sizes with extensive benchmarking data that is combined with prescriptive insight to ensure that firms make best use of their human capital investment.
What characterizes a Standout firm? The People and Pay study considered two leading characteristics to identify the Standouts from the 200 respondents whose surveys met our requirements–the ability to grow (firms were first ranked using revenue growth achieved between 2007 and 2008), and the ability to generate income for owners (annual owner income for 2008 was measured as the sum of owner compensation and firm operating income divided by firm revenue).
This combination of both growth and owner income provided a simple yet effective measure for gauging firm health and long-term sustainability. For purposes of analysis we grouped firms according to annual revenues:
o Operators–Firms with $75,000 to $500,000 in annual revenues
o Cultivators–Firms with $500,000 to $1.5 million in annual revenues
o Accelerators–Firms with $1.5 million to $3.0 million in annual revenues
o Innovators–Firms with more than $3.0 million in annual revenues
With equal weight given to both criteria, the top 33% of firms in each of our four stages of firm development were identified as Standouts–their results were nothing short of exceptional.
First, Control Overhead
In addition to greater revenue growth and owner income, Standout firms also performed markedly better in terms of AUM and client growth. Despite workloads peaking as clients demanded more of their advisors’ time and attention, perhaps the most staggering achievement for Standouts was their ability to contain overhead expenses (See Chart 1: The Overhead Edge). By tightly controlling operating expenses, Standout firms achieved average operating profit margins that were 5% to 23% higher than other surveyed firms.
Having built a strong constitution during prior years, these firms withstood recent economic pressures and preserved performance through solid human capital practices. The results of the People and Pay study revealed the specific human capital practices distinguishing these Standout firms. In this article we highlight a few of their market-leading practices. Containing the cost of non-professional labor is at the core of Standout firm success. Let’s be clear–it is unlikely that Standout firms are simply “cheap” when it comes to compensating their valuable talent. Instead these costs are managed in these three major ways:
Organizing People to Optimize Growth
Within any growing advisory firm, professionals must spend the bulk of their time in front of clients. To increase client-facing time, professionals must have confidence in delegating activities to their support team, which may include more junior advisors, technical specialists, client services staff, or administrators. Delegation frees advisor capacity to generate new relationships and better retain existing clients. Having a structure that enables delegation and leverages non-professionals is fundamental to maximize profit per client and new client growth.
The largest firms within the People and Pay study are a group aptly titled Innovators. Within this group of advanced firms, those identified as Standouts exhibited a median of 1.9 non-professionals per professional compared with 1.3 for other Innovator firms. In other words, the Standouts indicated a greater propensity to shift non-revenue-related tasks to a support team.
Dedicated management plays a key role in releasing capacity to grow, freeing in particular the time of professionals who previously managed the firm on a part-time basis. Furthermore, by providing greater supervision and support for non-professionals as well as professionals, dedicated management enhances individual performance management and, in turn, increases the efficiency and productivity of the firm. Dedicated operations management can streamline internal processes to drive efficiency and ensure each team member is effectively following policies and procedures to deliver the desired client experience.
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