Meet the next wave of $1B advisory firms

Exclusive InvestmentNews Research reveals the growth landscape for independent advisory firms

Sep 10, 2014 @ 7:00 am

By InvestmentNews Research & The Ensemble Practice

This is an excerpt from the 2014 InvestmentNews Financial Performance Study of Advisory Firms. To order the full study (available now), click here.

Rapid growth has created a new type of advisory firm — a large, sophisticated, aggressive, multioffice enterprise with a clear strategy for even more growth.

Philip Palaveev's firm, The Ensemble Practice first started using the term “Super Ensemble” in an article in 2010 to describe the largest firms in the industry. At the time, the term referred to those firms with at least $1 billion in AUM. Today, and throughout this survey, we classify Super Ensembles as those firms with at least $10 billion in AUM. The average size of the Super Ensembles in the survey was $17 million in revenue, and growing rapidly. In fact, they are among the fastest-growing firms in the industry and voracious acquirers.

Behind the Super Ensembles is a group of firms between $5 million and $10 million in revenue that we refer to as “Enterprise Ensembles.” This is a group of highly successful firms that will be the future billion-dollar firms, and many will compete with — and perhaps become — Super Ensembles themselves.

That is not to say that Solo firms or smaller Ensemble firms have been unsuccessful. They continue to grow rapidly and achieve high levels of owner income and growth.

On average, the typical Super Ensemble had $1,450,000 in owner income compared to $640,000 for Enterprise Ensembles, $430,000 for Ensembles and $305,000 for Solo firms.

The fastest growing firms were Super Ensembles with 18.6% growth, followed by Enterprise Ensembles with 17.5% growth and Ensembles with 17.1% growth. Solo firms grew the slowest with an average growth rate of 15.4%. As shown, larger firms enjoy a high level of profitability and income. However, being large is not in itself a guarantee of success. In fact, we find top performers in each of these firm categories.

Enterprise Ensembles

There is a phenomenon every hiker or mountaineer experiences: every time he or she climbs a peak, what they see is other taller peaks on the horizon. Firms that have grown to over $5 million in revenue certainly can enjoy the view from the top of the profession, but they can also see the imposing mountains of the Super Ensembles.

The Enterprise Ensembles are a strong group of competitors who are profitable, productive and growing. Many are headed toward the $1 billion AUM mark. Firms rarely get to this size without some ambition. Many are the dominant firms, just in a smaller market, but all are looking to capitalize on their success. They are ambitious, successful and on the verge of becoming the next generation of Super Ensembles – the largest and most influential firms in the business.

It is natural to ask questions such as: What is the biggest difference between the Super Ensembles and those in Enterprise Ensembles? Why are these firms large but not larger? Will they continue to grow and reach a billion or stagnate? We believe the answer is just that they started later, i.e., they are just as capable but have had a little less time than their larger competitors. The typical Super Ensemble started in 1987, while the typical Enterprise Ensemble firm started in 1990.

There are a number of characteristics that are unique to the Enterprise Ensembles. Explicitly, these firms are in the middle of an organizational transformation, preparing for a larger size. They are changing the way they are growing, achieving great profitability, looking to reinvest in growth and productivity, and most importantly, making many changes to their equity. Ahead, we examine each characteristic in turn.

To learn more about Enterprise Ensembles and advisory firms of all stripes, as well as what the hallmarks of the most successful firms are, download the 2014 Financial Performance Study of Advisory Firms here.

The study was developed in partnership with The Ensemble Practice LLC, a strategic partner to InvestmentNews Research, and sponsored by Pershing LLC. Go here to register for our Best Practices Awards and Workshop Event.

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