Elite advisory firms distinguish themselves in many nuanced ways. Recent research reveals the three key areas where Leading Firms made the right decisions over the past five years—decisions that helped them to truly stand out.
“Mission Possible IV,” a study prepared in partnership by FA Insight and Pershing, outlines these important findings. FA Insight tracked the individual performance of advisory firms between 2008 and 2012, and then segmented the Leading Firms based on growth rate, profitability and owner’s income as a percentage of revenue. The top-performing firms grew revenue at twice the rate of their peers!
Each of the Leading Firms demonstrated a level of courage and confidence that was not apparent in the rest of the advisory population.
Consider where we were as an economy and an industry in 2008 and how far so many firms fell in terms of assets under management, revenue and profitability. While many advisors believed this downswing was an aberration and the markets would turn, the Leading Firms in this study went a step further by actually investing ahead of the curve. At the same time they adopted better discipline around technology selection, people recruiting and retention, and profitability management.
Taking Charge of Expenses
One data point shows that the Leading Firms in this study decreased their overhead costs (expense ratio excluding professional compensation) to 36% of revenue. Meanwhile, the overhead expense ratio for all other independent advisory firms rose to 45% of revenue in 2012. A 9% variance is huge. For example, an average business generating $2 million in annual revenue spent $180,000 more on overhead than a comparable Leading Firm.
As a consequence of better expense control, the Leading Firms produced an operating profit of 29% in 2012 compared to 13% for the rest of the industry on average. For a $2 million practice, that variance means the Leading Firms had an operating profit of $580,000, compared to $260,000. This statistic validates the argument that people are an asset on which to get a return and not just a cost to be managed. Clearly, the human capital investment these firms made paid off.
When surveyed in 2009, almost half of the advisory firms that emerged as Leaders said they intended to add head count and were not planning to lay off anybody. For the most part, they made good on this commitment; the median firm added two heads for every half a head added by the average firm.
Leading Firms understand what drives growth in the advisory business. Most advisors suffer from limited capacity, which makes it difficult to pursue or even take in more clients without materially altering the client experience or terminating existing clients.
By investing in capacity before their growth occurred, the Leading Firms were in a better position to take advantage of market movements and to add new clients who left their previous financial advisor during the downturn.
Exploiting Human Capital and Technology
These firms also made a subtle shift in the type of employee they hired. Instead of hiring other advisors or rainmakers, who may or may not work out, these firms added so-called non-professional staff with superior administrative skills. These lower-cost employees enabled their current team of business developers and advisors to become more productive and effective.