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How to Stand Out at Any Size: 2014 Growth by Design Study

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This year, “The 2014 FA Insight Study of Advisory Firms: Growth by Design” attracted more study participants than any other industry-wide benchmarking study. One important factor that we feel drives the study’s success is its unique methodology for identifying key management lessons that speak directly to a firm’s specific stage of development.

Here in the second article of our four-part series on the 2014 “Growth by Design” findings, we provide some background on the benefits of analyzing firm data in the way that we do. A brief overview of each of our four development stages follow, including a variety of examples of why one size doesn’t always fit all when it comes to dispensing advice on the best means for helping an advisory firm progress.

Standout Firms Come in All Sizes

We don’t claim to oversee the only benchmarking study that sets apart top-performing firms for analysis. Our routine differs from other typical industry studies, however. Top performers, labeled as “Standouts” by FA Insight, are represented in equal proportions across the development spectrum. This methodology yields a more fertile climate for uncovering guidance most relevant for a particular size of firm.

Since our first study, firms have been grouped according to four development stages (annual revenue range in parentheses):

  • Operators ($100,000 to $500,000)

  • Cultivators ($500,000 to $1.5 million)

  • Accelerators ($1.5 million to $4 million)

  • Innovators ($4 million or more)

Within each stage, two key performance indicators distinguish our Standout firms—revenue growth and income generation. By excelling in these areas, Standouts demonstrate the ability to build and sustain enterprise value. Firms are measured according to their annual percentage growth in revenue and their ability to convert revenue into owner income. Based on a blended ranking of these two metrics, firms in the top 25% of each development stage are deemed Standouts.

With this methodology, our current study, sponsored by TD Ameritrade Institutional, identified many common practices shared by Standout firms across the development spectrum. Examples included emphasizing a superior client experience to drive growth, achieving a broad distribution of ownership and demonstrating a superior ability to control costs.

Other important lessons emerged that were more specific to a particular development stage. Their existence highlights the importance for firm owners to continually evolve their management tactics in order to progress their firms to new levels of growth. The summaries of the various stages that follow offer the most prominent examples of these stage-specific findings.

Operators: Marketing and Business Development Fuels Standout Growth

Operator firms represent our starting point on the development spectrum. Typically there is one owner, both the firm’s “operator” and sole advisor, who is commonly accompanied by a generalist support employee. These firms tend to be growing rapidly but from a small base of clients. Their nearly 20% increase in revenues during 2013 was almost a 50% greater rate of growth than what was achieved by Innovators, the study’s largest firms.

Where Operators focus to generate this growth is a key distinction between Standout firms and others at this stage. Compared with their peers, Standout Operators more frequently credit their marketing and business development effort as a key contributor to recent growth. Given a more deliberate focus on this function, new business for Standouts, compared with other Operators, is far less reliant on client referrals, which is often a very passive approach to new business generation (see Figure 1).

As an alternative, Standout Operators are more apt to gain new clients from professional referrals, either through formal relationships with centers of influence or informal relations with individual professionals outside the firm. For newly established firms, marketing through professional referrals can be an effective way to more quickly establish a pipeline of target prospects.

Cultivators: Operational Efficiency Rises in Importance

Cultivator firms begin the transition from a sole proprietorship toward a more robust business that extends beyond the capacity of the owner-operator. In advancing to this stage, the firm has typically added a client support position, an additional advisor or both. For the typical Cultivator firm, 1.5 non-professionals are in place for every professional, compared with a ratio of just 1:1 for Operators.

Despite these additions, Cultivator capacity is more constrained relative to Operator firms because of growth in both the number and size of clients. Typical AUM per client doubles and AUM per professional nearly triples relative to Operators. As Cultivator firms grow their teams and handle bigger and more complex clients, efficiency becomes a central priority.

The extent to which Cultivators cite operational efficiency as a key contributor to recent growth is more prevalent than at any other development stage (see Figure 2). This is particularly true for Standout Cultivators, where a stronger emphasis on target clients, a comparatively simpler service offering and a greater tendency to standardize business-to-client processes all contribute to efficiency advantages.

Accelerators: Regrouping for a New Phase of Growth

When an advisory firm reaches the Accelerator stage, its transition from practice to business is nearly complete. With multiple advisors, multiple owners and dedicated full-time management, these firms are repositioned for another round of business growth. The average Accelerator firm has twice the number of team members than the average Cultivator firm and a much broader distribution of position types (see Figure 3).

Unlike Standout Cultivators, Standouts at the Accelerator stage are more likely to position themselves as wealth managers and offer clients more services compared with their peers. Standout Accelerators, relative to their Cultivator counterparts, have the broader capabilities to carry this out more successfully. To support their comparatively broader offering, Standout Accelerators also have a much higher non-professional-to-professional ratio relative to other firms at this stage.

Innovators: Strategic Focus Most Distinguishes Standouts

The expansion of staff size and movement toward specialized positions that gained momentum in the Accelerator stage continues for Innovators. The larger number and greater diversity of personnel challenges Innovators in terms of consistency of service delivery and workflow as communications and management oversight struggle to keep pace with staff growth.

For example, just 55% of Innovators indicated that all team members fully understand the firm’s client value proposition. This percentage declines steadily as firms move across the development spectrum. The trend is even more severe regarding the share of firms claiming that key work flow processes are consistently implemented (see Figure 4). Just 13% of Innovators cite this to be the case, compared with 43% of Operator firms.

Given the challenges of managing a more complex organizational structure, instead of fully capitalizing on scale economies, the typical Innovator firm experiences an upward trend in overhead expenses as a share of revenue relative to Accelerators. Overhead expenses as a share of revenue for Standouts at this stage, however, are a full nine percentage points lower relative to other Accelerators.

Supporting their ability to hold the line on costs is greater attention to strategy. Clear strategic focus is cited by 56% of Standout Innovators as a key driver for their recent growth, compared with just 43% of other Innovators.

What Got You Here Won’t Necessarily Take You Further

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. The drivers of past success may not necessarily correlate with what the firm will need to emphasize for future success. Evolving the firm’s strategic focus will accelerate its transition to the next development phase. The benefits of strategic planning, as well as what constitutes an effective strategic plan, will be explored in more detail in our next “Growth by Design” series article.


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