In the spirit of calculated aggression, many advisors moved toward premium pricing following the financial crisis. (Illustration: Phil Foster/© theispot.com)

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.

Lead advisors were able to increase time spent with clients to 75% of their work day, compared to 52% for the average firm. This increased capacity allowed them to take in even more clients without impacting the experience. Revenue per professional in the Leading Firms was $150,000 greater than in the average firm.

It is no coincidence that these fast-growing firms also added professional management, which freed the advisors to focus on new business opportunities and existing clients while still executing their business plan.

Professional management helped the Leading Firms maximize their technology. Realizing that it isn’t the number of tools but rather the way you deploy technology, these professional managers introduced disciplined selection processes, emphasized training and focused on improving work flow efficiencies. Interestingly, the Leading Firms showed better profitability and productivity numbers, but spent less of their revenues on technology than the average firm in the study.

In addition to leveraging technology to improve their business-to-client processes, the Leading Firms tended to use technology more effectively to monitor and trouble-shoot service delivery. Nearly 70% of the Leading Firms use time tracking, CRM and project management software in their business today.

Competing on Value, Not Price

Professional managers in Leading Firms also emphasized disciplined pricing strategies. The 2008-2009 crisis tested the mettle of all advisors, particularly with respect to their client relationships. Many firms discounted their fees, waived minimums or avoided fee hikes because they were unsure of how their clients would react. Many were humbled by the market cataclysm and, to a degree, lost belief that what they were doing added value.

Once again demonstrating a contrarian’s courage, the Leading Firms decided not to compete on price but on value, recognizing that they truly earn their keep in the most difficult of times. In the spirit of calculated aggression, many moved toward premium pricing.

By commanding a fair price for value, they not only showed confidence to their clients, but they were able to cull those clients who did not perceive the advisory relationship as worth the price.

Leading Firms were most aggressive with larger clients, raising fees on $5 million portfolios by 10 basis points on average, while the other firms in the study reduced their fees by 10 basis points on average for comparable clients. A roughly similar trend occurred on assets above $10 million.

In addition to raising fees on their largest clients, the Leading Firms also imposed strict fee minimums. This helped avoid the perception that large clients were subsidizing smaller clients and ensured that the smaller clients were paying fair value for the advice they were getting. It also ensured that firms were able to cover their costs of serving lower-value clients. 

Business owners, like investors, make calculated guesses every day with the hope of a better payoff. In the case of the Leading Advisory firms, they made decisions informed by the facts and were not swayed by emotions. They positioned themselves well for a strong market upswing, and were able to capitalize on the new business opportunities that came their way.

The Leading Firms blazed the path for others who may be more timid about their growth strategies. They made good choices when the chips were down. Much has changed since the Great Recession began, but the argument for hiring ahead of the curve, deploying technology more intelligently and maintaining pricing discipline still makes sense for growth-minded advisory firms.