Bouncing back from the Great Recession, advisory firms have returned to growth mode. While the turnabout is a welcome one, few firms are growing in a manner that is sustainable. Of those firms that participated in our fourth annual industry study, “The 2012 FA Insight Study of Advisory Firms: Growth by Design,” the vast majority (85%) reported achieving significant growth in recent years. About three-quarters of these growing firms, however, also reported some type of negative impact as a result of growth.
As noted in our previous article (see “Growth Gone Wild,” Investment Advisor, January 2013), common side effects associated with growth tend to be related to people. Providing clear career paths becomes more challenging, dependency on key individuals increases and staff become overworked and stressed. Additionally, growth frequently stresses a firm’s technology and operational infrastructure.
The remaining one-quarter of firms with significant growth somehow escaped any negative consequences. A deeper analysis of these firms reveals that their ability to grow in a sustainable manner was hardly by chance. In the 2012 FA Insight study, we separated this group of “sustainable-growth” firms from those that had experienced challenges with growth. This latter group was deemed “growth-at-risk.”
The differences between the two groups were striking and offer important lessons for firms seeking higher quality growth and thereby greater enterprise value. In this article, the third in the 2012 “Growth by Design” series, we explore these differences and highlight the best practices that they reveal.
The fact that managed growth clearly pays is perhaps the most important revelation from comparing how firms grow. Intuitively this finding makes sense as the ability to sustain growth in income is a hallmark of a valuable firm. In contrast, value is put at risk for those firms that achieve growth at the expense of weakening their operational infrastructure, failing to fully deliver client service or burning out team members.
Study data also demonstrate clear economic advantages. In terms of annual revenue, service offerings and number of staff and clients, the typical sustainable-growth firm was roughly identical to its growth-at-risk peer. Even growth rates were about the same. Despite these similarities, sustainable-growth firms achieved significantly better financial results. As Figure 1 illustrates, the typical sustainable-growth firm was better able to convert revenue to owner income and manage overhead expenses, which resulted in a substantially higher operating profit margin.
Distinguishing Business Practices
Sustainable growth clearly has its rewards, but how is it achieved? Why is one firm able to grow trouble-free while the other faces challenges? As is frequently the case any time we have examined a group of better-performing firms, the answer lies in how resources are deployed—not how much.
At the highest level, sustainable-growth firms are distinguished by their discipline in business planning and management. In particular, sustainable-growth firms outshine their peers in three key areas: target client focus, workflow processes and the application of technology.
Client-Centric Focus is Key
Better firms understand the type of client they are best suited to serve and tailor the client experience in a way that resonates with this target client. This is true of the sustainable-growth firm as well. This client-centric approach supports greater marketing success, more operational efficiency, better productivity, more satisfied clients and ultimately greater profitability.
Relative to their peers, the sustainable-growth firm is far more likely to have a defined target market and is also more likely to implement a minimum fee in order to cover the fixed costs related to onboarding and ongoing service (Figure 2).
A clear focus on the target client forms a foundation for firms to develop a client value proposition, which is critical for effectively attracting and retaining clients. Here again, sustainable-growth firms not only have a greater tendency to develop a client value proposition, but chances are greater that all staff members understand the value proposition and that it is consistently implemented with all clients. Nearly every sustainable-growth firm (97%) reports its client value proposition is consistently implemented with clients, compared with 80% of growth-at-risk firms.