For the typical advisory firm, revenue and profitability stabilized in 2010 and, in many cases, returned to familiar and very comfortable pre-2008 levels. Stronger financial markets are no doubt making life easier for firm owners, but will these market improvements lure advisors back into a state of complacency?

The defining moment has arrived for firm owners. You can be pulled along with recovering financial markets and risk being dragged backward during the next inevitable market downturn. Alternatively, you can learn from the recent tough times, shore up business vulnerabilities and drive growth strategically to achieve more sustainable business performance. In the recently released 2010 FA Insight Study of Advisory Firms: Growth by Design, FA Insight is unequivocal. Prioritizing the strategic pursuit of growth will diffuse the impact of future market downturns on firm performance, as well as help to maximize firm value.

We realize not all firm owners wish to make growth a priority. These owners may perceive growth as a threat to a comfortable lifestyle that will disrupt work/life balance, escalate unpleasant management issues, reduce their control over the firm and compromise personalized client service. In addition to the obvious financial rewards, however, growth can help owners overcome many challenges relating to the care of clients, retention of staff and ownership succession.
The Growth by Design study, committed to supporting advisors achieve sustainable firm growth, includes “10 Top Reasons to Pursue Strategic Growth.” We share three key reasons to pursue growth below:

• Satisfy growing needs of clients. Contrary to the fears of some owners, growth offers firms the ability to improve service delivery for clients. A larger firm has the scale to create more specialized positions with more specialized skills. The broader technical capabilities that result better position the firm to meet increasingly complex advice needs. A firm’s ability to evolve its advice offering in step with clients promises positive effects on client retention and profitability.

• Attract the best talent. Talented and motivated individuals want to be part of a successful team that offers advancement opportunity and financial benefits. A growing firm can best demonstrate these opportunities in order to attract and retain talented individuals.

• Facilitate distribution and succession of ownership. The promise of growth will stimulate share demand from a new generation of firm owners and can help finance the buy-in of shares as well. Further, a demonstrated record of growth raises the value of the firm, enabling founding owners to relinquish shares while giving up little of their initial investment in terms of value.

Understanding Firm Development
Irrespective of where a business is in its life cycle, growth is a necessity for owners to realize full value. To achieve truly sustainable business growth, firms must understand the critical drivers for growth and focus on the indicators that are most capable of driving growth at a given stage of firm development. In Growth by Design we draw particular attention to two interdependent and critical catalysts for organic growth: marketing and operations.

For shareholders with growth aspirations, examining how operating characteristics change as a business grows provides a foundation for understanding and achieving growth. A firm with $1 million in revenue will not become a $5 million revenue firm by doing more of the same thing. Different practices must be emphasized and deployed to move beyond each development stage.

Below we provide an overview of the distinguishing characteristics of firms as they change with size. By way of background, the FA Insight study distinguishes four firm stages: Operators ($75,000–$500,000 in annual revenue), Cultivators ($500,000–$1.5 million), Accelerators ($1.5 million–$3 million), and Innovators (more than $3 million in revenue).

As revealed in Figure 1, (left), a number of key changes are observed as firms grow. For example:

• Client size increases dramatically with firm size. Assets under management per client more than doubles as firms progress from Operator to Cultivator and increases by more than 60% as firms move from the Accelerator to Innovator stage.

• As firms increase in size, they leverage proportionately higher levels of non-professionals, boosting professional productivity. While the typical Operator employs one non-professional per professional, this ratio jumps to 1.7:1.0 for Innovators. The increase correlates with substantially stronger revenue per professional as they are able to dedicate more time to revenue-generating activity and more effectively serve increasingly complex client needs.

• As a firm grows in size, serves larger clients and improves productivity, increases in total owner income outpace growth in number of clients. The typical Innovator serves approximately seven times as many clients as a typical Operator, but generates 17 times the level of total owner income.

As a firm develops, it expands its capability to serve bigger and more demanding clients by bringing on technical specialists and other non-professionals, allowing professionals to better focus on client relationships. Concurrently, the firm establishes more delineated career paths that serve to better attract and develop talent. All of which contribute to rapidly expanding owner income that is capable of supporting a larger base of owners.

Standout Firms Reveal Best Practices
As demonstrated by their unwavering commitment to achieving sustainable growth, it is the industry’s “Standout” firms, as defined by FA Insight, that perhaps best understand growth’s rewards. Standout firms are distinguished at each of our four stages of development. We define these firms according to two key criteria related to building firm value:

  • The ability to generate income for owners
  • The ability to grow (as measured by revenue)

The top one-third of firms ranking highest across both factors in each of the four stages of firm development were distinguished as Standouts. Both the owner income and growth criteria received equal weight. By definition, our Standouts achieve sustainable growth—they simultaneously demonstrate strengths in growing revenue, as well as converting revenue to income.

This performance advantage stems from Standout firms having a solid understanding of the clients they are best suited to serve and the valued outcomes they are best positioned to provide these clients. This understanding, in turn, leads to other best practices of Standout firms that support a variety of operating advantages.

Rigorous Retention
Standouts demonstrate a keen ability to attract new clients across most aspects of marketing. Their ability to market to existing clients in order to strengthen retention and limit turnover is also a notable differentiator, however.

This superior ability to retain clients correlates with an actively managed and rigorous retention strategy. In particular, Standout Innovators pay special attention to a wider breadth of retention activities relative to all other Innovator firms. Leading retention-related activities include implementing client appreciation events and ensuring staff are compensated for client retention via incentive pay.

Charging for Value Delivered
Pricing decisions are an important component of any solid marketing plan, with the ability to effectively implement a premium pricing policy increasing with firm size. Protecting profitability via pricing, particularly during a market downturn, is a practice more effectively executed with firm scale. This is largely a result of the confidence that comes with being perceived as dominant within the industry. Additionally, larger firms are less likely to feel compelled to work with prospects that are not suitable, particularly where there is an inability to pay.

The industry’s smallest firms are clearly challenged to implement an effective pricing strategy. Value-based pricing refers to a firm’s ability to determine and charge clients based on the outcomes achieved. Not only are smaller firms less likely to charge based on the value delivered, they also struggle to implement a minimum fee—only 48% of Operator firms use a minimum fee compared with 65% of Innovator firms. Value-based pricing is a practice most comfortably deployed by the Standout Innovators, with 70% of this group using a value-based pricing structure. This compares with 63% of all other Innovator firms.

Timely Service Delivery
A firm’s operational capabilities place a heavy impact on both direct and operating expenses. One way in which Standout firms demonstrate an operational edge is in their ability to more quickly and efficiently service clients, demonstrating operational excellence from the prospecting phase through to the implementation of the recommendations. As illustrated in Figure 4, Standout Accelerators and Standout Innovators are the most efficient in delivering advice to clients.

The speed of client service of these larger firms is no doubt attributable to a range of operational practices including deploying staff in a more coordinated manner and ensuring greater planning around the use and implementation of technology.

Optimizing Productive Capacity
The productive capacity of support staff can be gauged through an assessment of a firm’s operating expenses and revenue per head count. Innovators, the largest firms within the study, experience less idle capacity of their support staff. Moreover, 22% of the Standout Innovators reported that support staff is “under capacity,” compared with 30% of all other Innovators.  

Habitual Growth
Many firm owners naturally inclined to pursue growth do so to enjoy the financial spoils of increased revenue and owner income. For others, business growth provides a sense of achievement and is a motivating driver for delivering personal satisfaction. These are valued owner outcomes, but are just the beginning of what can be achieved through a strategic growth plan. Whether you are an owner who is just starting out, considering your business succession, or somewhere in between, growth is a necessity, yielding valuable outcomes that extend to clients and team members, as well as owners.    

Eliza De Pardo is the principal who oversees FA Insight’s consulting services. Dan Inveen is the principal who oversees FA Insight’s research services. They can be reached at and