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Growth Leaders: How to Learn from the Best

As an advisor, there are many demands on your time, and figuring out how to grow your practice profitably can seem daunting. How do you plan for growth, make sure your organization is scalable and devote appropriate resources to marketing and business development?

What are the best practices of the advisory industry’s fastest-growing firms, and how can you implement them?

To help identify the challenges and ways to overcome them, Schwab Institutional conducted the RIA Benchmarking: Growth Trends Study. This annual study has surveyed a total of more than 1,500 independent advisory firms of different sizes and business models, together managing more than $425 billion in assets. First, the study looks at what’s fueling the growth in the industry and the biggest challenges to profitable growth. Then digging deeper, the study examines how fast different types of firms are growing, whether this growth is hitting the bottom line and just how the top performers are achieving their rapid, profitable growth.

Obstacles to profitable growth

While barriers to growth differ from firm to firm, the 2006 study identified a full 58% of firms with at least one significant or very significant barrier. The most common barriers to growth identified in the study included:

Planning for growth– How do you decide how aggressively you want to grow, and how do you formulate a game plan for achieving that growth?
Optimizing staffing, capacity and scalability - When do you add staff versus improve productivity in your firm as it grows so growth doesn’t end up sapping profits?
Efficiently investing in marketing and business development – Are you leveraging the most efficient paths for growing your firm?

Strategies of the top performers

How do the top firms confront these barriers? To answer that question, we first identified the fastest-growing firms. These “Growth Leaders” represent the top 20% of $100 million+ firms in AUM growth excluding investment performance. Over the three years from 2002 to 2005, the median compound annual growth rate for these Growth Leaders was a remarkable 48% in assets under management (AUM), 42% in annual revenues and 27% in the number of clients. All other firms, by comparison, had average AUM growth of 24% in AUM, revenue growth of 18%, and 9% growth in number of clients between 2002 and 2005.

What is even more impressive is that these growth leaders were able to post these sharp growth figures while maintaining a high level of profitability—a 23% median standard operating performance margin.

To learn what’s behind their impressive growth rates, Schwab interviewed 40 of these Growth Leaders. Although there’s no single formula to achieving rapid growth, a few common characteristics emerged:

1.) A clear strategy and vision:

· A good balance of the strategic and the tactical. Most fast-growing firms had a clear strategy for achieving that growth, and routinely revisited that strategy to make sure it was on track, and still valid. “It’s extremely important to take concentrated time outside of your business to strategically think about your business and your day,” says a principal at Friedman & Associates in Novato, Calif. “Most advisors who have trouble with time management claim that they are too busy to do the very things necessary to solve the problem.”

· Focus on targeting “ideal” clients. Many firms focused on a well-defined target set of clients vs. trying to serve multiple segments. Many had also increased account minimums and maintained clear client acceptance standards in an effort to avoid engaging clients and prospects that did not fit their profile. In addition, only services that are valued by clients were offered.

2.) Strong management of organization

Keep organization (scale & structure) efficient. Principals spend less time on operations and portfolio management and more time on client service and business development.
Align key firm personnel. Fast-growing firms invest in building key staff functions and clarifying roles and responsibilities, and also hire more support and managerial staff per professional than principals at other firms.
Institutionalize firm processes. Service delivery is standardized when appropriate, and routine tasks are automated or outsourced.
Plan and measure results. The principals of these firms possess a solid understanding of firm capacity, workflow, and drivers of costs, as well as revenue, enabling them to identify time management issues and find solutions.

3.) A disciplined approach to marketing and business development

Promote competitive advantage. These firms understand their capabilities and what sets them apart from other firms.

Create a well-developed marketing plan. Marketing must be part of a holistic process that takes place consistently—not just an isolated event.
Implement and measure marketing efforts. Once a marketing plan is implemented, results are tracked and marketing efforts are refined as needed.

There’s an old expression: a rising tide lifts all boats. That may be true to some extent in the financial advisory industry: growth in the capital markets and in the RIA industry as a whole is likely to give a lift to all advisors. But implementing industry best practices that capitalize on that growth are more likely to enable your firm to be among the Growth Leaders, and to better survive the downturns in the industry as well.

Friedman & Associates is not affiliated with or an employee of Schwab.

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