The Virtues of Growing by Design: 2014 FA Insight Study

A big difference exists between simply growing and growing well. Growth was fairly commonplace among the record number of participants in this year’s FA Insight study. Nearly three-quarters of firms characterized their recent growth as “significant.” Just one-third of all firms, however, managed to achieve sustainable growth and avoid any related negative side effects.

Mastering sustainable growth requires growth by design, where purposeful growth takes precedent over growth at any cost. Unmanaged growth can be potentially detrimental to firm value, while growth by design builds firm value. In addition to maximizing future owner liquidity, firms that grow by design realize immediate rewards as well. As proof, the sustainable-growth firms identified in the study not only achieved higher rates of growth, but they did so while generating greater productivity, more revenue and higher profitability.

Sponsored by TD Ameritrade Institutional, “The 2014 FA Insight Study of Advisory Firms: Growth by Design” aims to guide the many firm owners who struggle with growth, whether it is in terms of how to achieve it, how to manage it or how to sustain it. To better understand these challenges and identify solutions, FA Insight analyzed detailed survey results submitted from approximately 350 advisory firms.

This article provides an introduction to the 2014 study, the sixth annual effort from FA Insight. It is the first of a four-part series featuring “Growth by Design” highlights that will be made available in the months ahead through collaboration with Investment Advisor, our media partner. The complete study is available for purchase at FAInsight.com.

New Levels of Success—But Will It Last?

On aggregate, advisory firms enjoyed a stellar year in 2013, and the typical firm owner is optimistic that prosperity will continue through 2014. Market conditions provided tailwinds for pushing firms to new levels of success. Although many firms continue to fall short of completely adapting growth by design principles, the research findings indicate improving business practices aided firms as well.

By any key business indicator, 2013 was the best on record for the six-year tenure of FA Insight studies. Whether growth is measured in terms of clients, assets under management (AUM) or revenue, most firms had no problem expanding business in 2013 (see Figure 1, left). The typical firm grew its client base at a best-ever rate of 6.7%. Annual increases in AUM and revenues in 2013 ranked second best over the past six years. Expectations are for growth to continue through 2014, albeit at more moderate rates.

Rapidly appreciating portfolios and the fees linked to them no doubt contributed to record levels of productivity as well. Productivity, in terms of revenue per professional, has risen steadily since the recession. The $479,500 in median revenue per professional earned during 2013 represents a 32% increase relative to when this indicator last hit bottom in 2009 (see Figure 2, next page).

Undoubtedly, appreciating security markets, an improving economy and growing demand for financial advice are working in favor of advisory firms. Improved management practices, including more effective deployment of people and technology, are also likely contributors.

Rapid growth, especially in terms of an expanding client base, often is accompanied by stressing the capacity of personnel and “blowing out” costs as firms reactively scramble to accommodate the influx in clients. In 2013, however, capacity levels for professionals were largely unchanged, and costs, in the form of median overhead expenses as a share of revenue, were the lowest of any study year (see Figure 3, below).

Growth, rising productivity and lower costs combined to fuel additional record highs in profitability and income generation. Four years after hitting lows in 2009, likely one of the most challenging years ever for advisory firms, medians for operating profit margin and income per owner both reached record highs for any study year (see Figure 4, below). The typical profit margin in 2013, at 22.1%, was nearly double what was achieved in 2009. Since falling precipitously in 2009, income per owner has increased consistently. The nearly $345,000 the typical owner took home in the form of salary or profit in 2013 was more than 50% greater than in 2009.

Despite the current industry success, firm owners cannot afford to be complacent. A wide disparity exists in the performance levels of study participants, with some firms clearly struggling. Even today’s best firms must remain vigilant in deploying sound management practices, given the level of competitiveness and rapidly evolving nature of the financial advice market.

Sharpening Your Competitive Edge

Always a useful barometer of industry health and a robust resource for performance benchmarking data, the FA Insight study also strives to provide valued lessons for advisory firms intent on enhancing their competitiveness.

For insight and comparisons, the study data was organized into a few key groupings. Similar to past studies, Standout firms represent the top-performing firms at each stage of firm development based on their ability to grow revenue and generate income for their owners. In addition, sustainable-growth firms (those reporting significant growth without side effects) are compared to “growth-at-risk” firms—those firms that struggled as a result of significant growth.

Several key lessons surface based on analysis of these groupings and the study data at large. A few of these are summarized here with additional select study highlights to be shared in future articles.

Strategy Guides Purposeful Growth

Growth by design begins with a well-defined strategic vision. An effective strategic plan moves the firm forward in a controlled fashion, discourages pursuit of opportunities that are not in alignment with long-term objectives and serves as a source of inspiration for team members. Strategic focus becomes especially important as firms grow in size and complexity.

Most study participants (85%) maintain a strategic plan. The planning process for a typical firm, however, appears less than effective. While a clearer strategic focus was expected to play an important role in future growth for 40% of firms, just 17% of firms could claim that strategic focus was a key growth driver in their recent past. Further, about three-fifths of plans lack the implementation detail needed for ensuring these plans best meet their objectives. Firms are weaker still in motivating team members to promote firm objectives.

The tendency of firms to overlook the interim steps required for growth and financial success is also evident in the comparatively fewer plan objectives that are tied to leading performance indicators. The three most popular objectives all relate to achieving some measure of growth. These are lagging indicators that depend on other activities or improvements taking place in the firm. In contrast, leading indicators focus on what drives growth and profitability.

A planning approach is a key distinction for sustainable-growth firms. Plans more frequently include implementation detail, and team members are more typically aware of the activities that must be completed in order to achieve plan objectives.