The great majority of advisory firm owners fixate on growing their businesses. It is a fundamental characteristic of their DNA. And why not? Multiple positive outcomes can be achieved as a firm grows and achieves greater scale. These aspirations, however, frequently overlook the very real risks that rumble beneath the growth trajectory and threaten to derail firms when growth goes wild.
Both in terms of recent history and objectives for the future, independent advisory firms are clearly in growth mode. In each of the last three years, the typical firm achieved double-digit percentage increases in revenue. As of this writing, client growth was expected to finish out 2012 at an annual rate greater than any year since before the onset of the recession.
In sum, 85% of firms report recently experiencing significant growth. Firms are far from satiated, however, as nearly as many (80%) hold strong aspirations for continued growth. About two-thirds of these firms are serious enough about growth to have defined growth targets and be actively managing initiatives for achieving these targets.
In 2012, FA Insight released “Growth by Design,” our firm’s fourth annual industry study and the source of data for this article. The 2012 effort takes a deep and objective examination of growth, with a particular emphasis on identifying a right way for firms to grow in order to realize economies of scale and build firm value. The study highlights growth’s virtues but recognizes the potential pitfalls associated with growth and provides considerations for overcoming them.
In this article, the second in the 2012 “Growth by Design” series for Investment Advisor, we examine the effects of growth, both positive and negative, in order to inspire firms that desire growth and better prepare them for taking full advantage of the growth that they achieve.
Caring for Clients Provides the Motivation
So what is it that typically motivates firm owners to put capital at risk, reinvest in their businesses and navigate the sometimes painful challenges that can result from growth? The answer may surprise many.
Those firms that indicated a strong desire to grow also shared their motivations to pursue growth (see Figure 1, left). Topping the list was the desire to better meet the advice and service needs of clients, with 27% of firms indicating this as their primary motivation for achieving growth. Taking care of clients ranked ahead of financial gains for shareholders, saving costs and realizing efficiencies.
Putting clients first is consistent with fiduciary obligations, but we suspect advisors also understand that the ability to better meet client needs is also good business. These firm owners understand that client sophistication is increasing and that deeper and broader advice needs are required to both attract and retain clients. Achieving greater size is a way to broaden capabilities, develop more specialized expertise and generally achieve a scale that can offer deeper and more customized advice and service delivery.
Benefits of Growth Are Widespread
Despite just a few factors surfacing as primary motivators, better meeting client needs chief among them, the actual ways in which growth can benefit a firm are widespread. The results in Figure 2 provide an interesting complement to what was revealed in Figure 1. Those advisory firms that reported experiencing significant growth cited a variety of positive changes as a result.
The three most cited benefits—increased efficiency, profitability and productivity—all relate to improved operating performance and are typical of firms realizing economies of scale. Improved quality of client service falls to a rank just below these three. Many other reported benefits are personnel related: greater career opportunity, reduced dependency on key individuals, improved management capabilities, greater succession choices and an improved ability to attract talent.