While it is generally true that bull markets camouflage a myriad of sins, it is also true that bear markets expose lax business practices. The market crisis of 2008–2009 revealed a new class of manager within the advisory profession, however. These executives defied the typical pattern, demonstrating discipline and focus, and as a result have effectively positioned their firms to prosper.
The just-published 2010 Moss Adams/Investment News Financial Performance Study of Financial Advisory Firms, sponsored by Pershing Advisor Solutions, provides some insight into this new breed of managers:
• While the average advisory firm saw their overhead expense ratio increase to 44.9% of revenue, the top performing firms kept their operating expenses to 29.3%.
• Top performing firms generated more revenue per professional staff member, at $540,000 compared to $353,000 at the average firm.
• As further evidence of greater productivity, the top performing firms generated on average $9,027 per client versus $7,657 per client at the average advisory firm.
The combination of greater operating leverage and expense control allowed the top performing firms to spend more on the client service experience as well. The top performing firms spent $4,309 per client compared to $3,735 per client expended by the average firm. The top performing firms also spent more of their total expense dollars on their own people at a ratio of 70.3% of total expenses compared to 61.2% at the average advisory firm.
It doesn’t take a CFA to deduce that a greater investment in clients and the people who serve them yields a higher probability of retaining both—and attracting others. The big takeaway from these numbers: The top performing advisory firms not only have the right discipline in managing their businesses, but also the right people to execute their management plan.
Oftentimes advisors and firm rainmakers are oblivious (at best) or dismissive (at worst) of the people not working directly with clients, those responsible for running the business and managing operations. Many mistakenly perceive them as overhead, not seeing the value they contribute to the brand and client experience. The data from this study seems to refute this thinking.
In fact, the study showed that those firms with multiple owners and a commitment to professional management were growing faster than the average advisory business. This makes intuitive sense. With multiple owners, an advisory firm has multiple points of contact, multiple centers of influence and multiple clients to drive more revenue. A multi-owner firm also allows for specialization among the partners, freeing each up to take on specific management responsibilities to oversee critical areas like human capital, operations, the client experience, investment policy, financial planning, or other disciplines that are core to the firm’s success.
The Business as Client
One thing I like about the results of this year’s study is that it shows what happens when advisors view their own business as a client rather than an afterthought. This means they plan, they execute, they monitor and they adjust as needs dictate.