Growth in the wrong areas is a sign of a troubled firm.

At the end of April, we launched our Kaleido Scope advisory firm business assessment, a free online valuation that enables us to give firm owners an overview of how their firm compares to a well-run firm in each of six key business areas: management, human capital, finance, client service, operations, and sales and marketing. As of early July, we had a total of over 300 assessments.

Initially, we created the Kaleido Scope to give firm owners a quick snapshot of where their business is today and the areas in which it can be improved. Even in the short time it’s been active (we’ve had advisors taking the assessment since last October in beta testing), we’ve realized the assessment is a much more powerful tool than we expected. Not only do the results give us insight into individual firms, they also provide a gauge for the independent advisory industry as a whole. What’s more, because we’re seeing a steady, ongoing stream of results (rather than just a snapshot in time), we’re seeing industry trends as they develop.

Unfortunately, the trend we’re currently seeing is that, for the first time in our experience, firm revenues are growing at a healthy pace but profitability is declining—a disturbing trend, especially considering that we’re well into a bull market with the prospect of a market downturn looming.

The Kaleido Scope assessments consist of a series of 163 statements about an advisory business to which a participant can offer one of six responses: strongly agree, agree, neutral, disagree, strongly disagree or don’t know/not sure. The responses are graded on a point system and totaled into an overall assessment score, ranging from 0 (bad) to 100 (excellent). Results so far range from a low of 39 to a high of 82, for an average score of 69, which we’d rate as very weak.

To test how accurately firm owners gauge the status of their own firms, we had our advisor clients take the assessment and compared the results to what we already knew about their firms. The firm owners were surprisingly accurate about where their firms were in all areas.

Here are the trends we’re seeing so far that are contributing to the industry’s dwindling bottom line:

Client service. We currently see two trends that signal problems in the client service area. First, firms are scoring very high in client retention, losing less than 5% of clients per year. While you might think this is a good thing (and sometimes it is), when combined with the fact that 79% of those same firms scored very low in attracting new clients, it’s actually an indication of a problem.

The low acquisition rate results from not getting as many new client referrals as one would expect. So one has to ask: What is the perspective of the clients who are not referring their friends? The inordinately high retention rates suggest that many of today’s firms are underpricing their services, not overpricing like many trade publications and past industry studies have shown. At the same time, many of these firms overservice their clients.

Why is this a problem? Although it may keep clients in the fold, too low pricing for too much service can actually create a negative image, as if your services are not as valuable as higher-priced alternatives. And over-servicing can be annoying to clients. Consequently, clients don’t feel good about making referrals.

Continuity planning. Our data shows that despite all the attention on succession planning and advisory M&A these days, 80% of owner-advisors still haven’t taken any steps to ensure that their clients will be cared for after their retirement or in the event of their untimely death or disability. We believe there are two reasons for this: Many advisors still don’t want to face the fact that they won’t be around forever; and there is no easy solution for succession planning—every circumstance is different, so every firm owner must create a unique plan that fits their needs.

Not only does a lack of succession planning put a firm’s clients at financial risk, it also puts junior advisors at career risk. Without a clear future with their current firms, the turnover rate among junior advisors remains high, increasing the costs of recruiting and training for many firms, as well as the costs of lost productivity during these employee transitions.

Employee recruiting. The previously mentioned high turnover rate among junior advisors has increased the demand for, and the difficulty of, finding good advisory talent. To solve this problem, more firms are acquiring smaller firms to both add advisors and grow their client bases. But buying another firm is an investment: Firms are trading their current financial resources in hopes of greater returns in the future.

Vision. As we said earlier, today’s advisory firms are growing at a nice pace, but profit margins are falling. This is the result of the aforementioned trends. Many firm owners today are sensing client dissatisfaction with the services they are providing. That combined with fear of the media-hyped online digital advisory platforms, and they are starting to panic, throwing money at new technology, marketing, recruiting, M&A and increasing revenues—all without regard to the effects on the bottom line. Our data shows that 87% of owners are making these changes without any clear plan or vision for what the resulting business will look like.

Major transitions are nothing new to independent advisory businesses. Over the years, their business model has morphed from mutual fund sales to tax shelter sales to annuities to assets under management, all the while supported by changes in technology, from the HP-12C, the desktop computer and Lotus 1-2-3 to Excel, the Internet and now social media—every step along the way increasing firms’ capabilities and independence.

Online advisory platforms are just another technology advancement that will take independent advice to another level. Just as with the other technologies, it will take a while to find its best use—remember, the Internet was originally an email platform. The automation of portfolio monitoring and management is already making independent advice more efficient, and the new online platforms will increase investor access and enable independents to cost-effectively work with larger groups of smaller clients, and those legacy clients and friends and relatives of larger clients who have always posed problems.

For now, owner-advisors need to take a page out of “The Hitchhiker’s Guide to the Galaxy” and “don’t panic.” With the stock markets nearing the inevitable end of their bull market run, this is a time for advisory firms to be circling their financial wagons, not investing for the future. It’s a time to be maximizing—and stockpiling—profits, not depleting financial resources. It’s a time to be streamlining operations, not adding expensive new services. We believe it’s also time for firms to increase their brand awareness and presence in their local markets, while preparing client portfolios, and clients themselves, for a market downturn.

One thing we know about market downturns is that in their aftermath, many brokerage and advisory clients will be looking for new advisors. That makes this an ideal time to grow an advisory firm. We also believe that this time will be different in at least one respect: With many so-called robo-advisors offering little more than low-cost index funds without much risk protection, their investors will have a very rude awakening when the markets go south. When that happens, a whole new class of investors will be looking for human advisors. To be positioned to take advantage of this opportunity, many of today’s firms need to move their overall business assessments out of the “very weak” category.