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July 29, 2013 at 08:00 PM
The daily vitamins that are best for a child to take in order to achieve healthy growth are different from what a young adult or senior citizen requires. As the years progress, so do our dietary needs—Flintstones vitamins make way for Centrum Silver.
Advisory firms follow a similar logic. As firms reach different stages in their development, the focus for what will best sustain growth and longevity shifts. While many operational best practices remain relevant across the development spectrum, certain practices return a greater benefit at certain stages.
This is our fourth and final feature article related to “The 2012 FA Insight Study of Advisory Firms: Growth by Design.” Past articles explored the industry’s success in achieving growth as well as growth’s benefits and challenges. Most recently we summarized the general firm operating characteristics that are most closely associated with achieving high-quality sustainable growth (Visit ThinkAdvisor.com/tag/Growth-by-Design for past articles).
In this article, we emphasize that one size does not fit all when it comes to prescriptive advice. Our general observations about growth raised previously are distilled to the strategies that are most relevant during particular stages of firm development.
Four Stages of Development: Operators, Cultivators, Accelerators and Innovators
From the outset, recognition of the changing nuances and needs of firms as they progress in their development has always been an important component of FA Insight’s industry research. Our annual studies divide and examine firms according to four stages. In ascending order of size according to annual firm revenue, these stages are: Operators, Cultivators, Accelerators and Innovators.
Figure 1 provides an introduction of the four firm stages defined by FA Insight, including brief summaries of the key factors that distinguish the typical firm within the stage.
Figure 2 provides a quantitative summary of the typical firm in each stage based on research results from the 2012 FA Insight study. A quick review confirms the descriptive points listed in Figure 1. As a firm evolves from Operator to Innovator, the firm does not just get bigger. A firm grows in complexity both in terms of its organizational structure and the more complicated needs of the higher-net-worth clients it serves. These changes represent new challenges but also higher returns for owners in the form of compensation or profits they derive from their firms.
Ideally, the growth trajectory achieves not just greater levels of owner income but also assurance that the firm will continue to grow and generate further income. As we’ve reminded readers in the past, the ability of a firm to consistently grow and generate income, currently and into the future, is the core component of firm value.
Thus sustainable growth results from the quality as opposed to the quantity or rate of a firm’s growth. While there are no easy shortcuts to sustainable growth, the path becomes smoother when owners understand the business practices that deserve the most attention given a firm’s current stage of development. What follows are growth recommendations from FA Insight, emphasizing the most important consideration for firm owners at each stage.
Operators: Know Your Client and Build Your Firm Accordingly
Early in its development a firm is hungry to establish a client base. Fixed costs must be covered and owners can struggle to generate adequate income. As a consequence, the temptation is high for Operator firms to take on clients that may not be the most appropriate long-term fit for the firm.
Invariably (and understandably) client acceptance exceptions can become commonplace in these early days. Unless these exceptions are minimized, however, it will be difficult for a firm to progress forward on the right path toward sustainable growth. A host of opportunities open up by defining a target client and tailoring the firm’s marketing, operations and servicing capabilities toward profitably delivering the maximum value to the target client type.
Establishing and pursuing a target market enables the Operator firm to make the most of its scarce resources, driving efficiencies and greater productivity while improving its ability to consistently deliver the desired client experience. These are opportunities a firm can benefit from throughout its life cycle by better positioning the firm to accommodate future growth.
