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):
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Operators ($100,000 to $500,000)
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Cultivators ($500,000 to $1.5 million)
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Accelerators ($1.5 million to $4 million)
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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.
