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The Virtues of Growing by Design: 2014 FA Insight Study

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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

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.

Median Growth Rates, 2012-2014: 2014 Growth by DesignBy 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).

Revenue per professional 2008-2013: 2014 Growth by DesignUndoubtedly, 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).

Overhead expense margin, 2008-2013: 2014 Growth by Design

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.

Income per owner and profitability, 2008-2013: 2014 Growth by DesignSharpening 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.

Placing Priority on Pleasing Clients

FA Insight has long emphasized the importance of building an advisory firm around the client experience. Good things happen when firms put priority on pleasing clients. When asked to list the practices that most contributed to recent growth, providing a superior client experience received more mentions than any other factor.

Standout firms, relative to their peers, are particularly likely to claim “superior client experience” as a top growth contributor. Consistent with their client-first approach, Standouts across all development stages are also more likely to consistently implement their client value proposition with clients.

Proactive Approach to Marketing and Business Development

Good firms focus on clients, but the best apply marketing and business development initiative to take growth to a new level. For most firms, however, marketing is the most underdeveloped of all business capabilities. Just 43% of study participants attributed business development activities as a primary factor driving their recent growth. All too often, firms passively rely on client referrals and market tailwinds to mask marketing deficiencies.

Among study participants, sustainable-growth firms place greatest emphasis on marketing and business development and invest the most effort into ensuring this function is effective. To maximize return on their marketing investment, sustainable-growth firms are more apt to have an individual dedicated to marketing or new client growth, develop a marketing plan and report that their marketing plan is effective in attracting new clients.

Consistent with their more structured business development approach, sustainable-growth firms depend least on traditional client referrals for growth. Instead, sustainable-growth firms proactively work to tap referrals from centers of influence, professional organizations and the referral networks of strategic partners.

Operational Emphasis Efficiently Accommodates Growth

While strong marketing capabilities are essential for firms to attract new clients, operational efficiency is critical for retaining them. Sound operations are also critical for maximizing a firm’s scarce resources without compromising the quality of the client experience.

Both Standout and sustainable-growth firms show a disciplined approach to operations that keeps costs in check as the firm expands. This approach is rooted in a clear understanding of who the firm is best suited to serve and how it will provide value. The business is then structured accordingly.

These better-performing firms are more likely to document workflow processes and have staff that understands these processes and implements them consistently. Their technology is more likely to support workflow and to be integrated in order to further drive efficiencies.

As a result, Standout overhead costs are lower per dollar of revenue at every stage of development relative to their peers. In comparison to growth-at-risk firms, sustainable-growth firms also maintain lower overhead costs.

Tactics Must Evolve as Firms Develop

Standout firms across the development spectrum share many common practices. For firms to truly grow by design, however, owners must be aware of where their firm resides on the development spectrum, and how best to evolve their strategies and tactics in order to accelerate their transition to the next development phase.

The drivers of past success may not necessarily correlate with what the firm will need to emphasize for future success. For example, study findings reveal that for the smallest as well as the largest Standout firms, marketing and business development rises in importance. Operational efficiency is a more important factor for driving growth in the middle range of the development spectrum.

Growth by Design Encourages Sustainable, Valuable Growth

Buoyed by surging security markets and improving management practices, advisory firms are achieving record growth, productivity and profit. The market for financial advice is rife with opportunity, but the industry is intensely competitive and quickly evolving as well.

New modes of service delivery, cooling security markets and human capital constraints represent just a few of the many potentially threatening factors poised to test advisory firms. Complacency is not an option for any firm. Owners must remain vigilant in continually improving the effectiveness of their firms or risk being left behind as others capture greater market share.

For these reasons, growth by design has never been more relevant. Many firms may be able to achieve growth, but a “growth at any cost” mentality is a recipe for disappointment. Growth is a necessary but insufficient requirement for maintaining competitiveness. Only growth by design will produce managed sustainable growth that minimizes stress on firm infrastructure and builds lasting enterprise value.

Correction: The print version of this article incorrectly reported the percentage of all firms that achieved sustainable growth without negative side effects as 39%; it is 33%. This article has been updated.


For more comprehensive guidance, including financial and operating performance benchmarking data, the complete “Growth by Design” study is available for order through FA Insight. Investment Advisor readers can purchase a specially priced copy of the study by visiting, clicking on “Order,” and then entering the discount code IAREADER when prompted to receive a 30% discount off the $250 price of the study.