Building excellence in a difficult year

Even though the stock market staged a recovery through most of 2009, the investment advisory industry struggled. The lower overall value of assets under management buffeted most firms, pulling per-client AUM down to 2005 levels, slicing profit margins and owner income.

The findings of the 2010 Moss Adams/InvestmentNews Financial Performance Study of Advisory Firms, being released today, reveal, however, that some firms are managing to excel despite the more-difficult operating environment.

These top-performing firms scored highest in terms of earnings before owners’ compensation, revenue per staff member and compound annual revenue growth.

“Advisory firms that outperform do so in two key areas: They have positive asset flows and their net new assets outpace market losses,” said Kelli Cruz, director of custom research at InvestmentNews.

“These firms also have higher efficiency because they keep expenses under control,” she said. “By contrast, firms that trail in asset gathering have higher expenses and struggle to cover their costs. If things don’t change, they will continue to see their margins being squeezed.”

Central to top performance is the quality of an advisory firm’s management, said Mark Tibergien, chief executive of Pershing Advisor Solutions LLC, which sponsors the Moss Adams/InvestmentNews study, and a former partner at Moss Adams LLP, where he led the advisory firm practice.

“This year’s study validated what we saw as emerging concerns several years ago,” he said. “Firms that are committed to managing their business professionally, just as they are to serving clients professionally, tend to perform better.”

What’s new this year, Mr. Tibergien said, is that the down market has re-vealed inadequate business development efforts and a lack of management discipline at many advisory firms.

“Both of these areas will require intense heat and light for the next several years, because we will be operating in a low-organic-growth environment,” he said.

Mr. Tibergien noted that advisory firms that expand ownership are better prepared for business continuity and are realizing far better growth in revenue, income and clients.

Of the more than 600 firms that participated in this year’s study, those in the highest quartile pulled away from the pack in the way they think about and manage four key areas: technology, staffing, business development and the core services they offer clients.

In the technology area, top-performing firms tend not to be trendsetters or to go overboard on their technology investments, but instead get the most out of the systems they do have and use technology to the fullest extent possible.

MAXIMIZING TECHNOLOGY

Fox Joss & Yankee LLC, a Reston, Va.-based registered investment advisory firm, is an example of how top-performing firms concentrate on maximizing their technology infrastructure.

“From the start, we were determined to use technology wisely,” said Jon Yankee, one of three partners and four employees at the firm, which manages $275 million for 225 clients.

Created after the partners left another firm in 2006, Fox Joss & Yankee hired a technology consultant who designed a paperless office with a scanner and two monitors on each desk. The chief software packages used are MoneyGuidePro for financial planning and Junxure for customer relationship management.

“We spend a lot of time in meetings each week discussing how we use our technology, and document all that on paper,” Mr. Yankee said. “You can do anything with Junxure, but the issue is using it well. It’s a matter of identifying how to streamline processes and then making sure that nothing falls between the cracks and gets forgotten. That’s why we spend so much time on documenting processes — so that someone new can come in and pick it up.”

“We provide two internships every summer and because of our technology documentation, when those financial planning interns from Virginia Tech or Texas Tech come in, the learning curve is very small,” Mr. Yankee said. “In a month they’re using our technology efficiently and add value in terms of productivity.”

The emphasis Mr. Yankee and his partners place on the productive use of people and technology is another characteristic of high-performing firms: They are better at selecting and utilizing personnel than are other firms. Despite a difficult operating environment in 2008 and 2009, most top performers did not cut back on personnel, but rather worked hard to ensure that all staff members were fully engaged.

Top-performing Highline Wealth Management LLC in Bethesda, Md., for instance, places the credit for its status squarely on its 10 staff members.

“We strive to hire the very best people we can find,” said Bill Schwartz, one of three partners at the firm, which manages $1 billion for 130 clients.

“We look for detail-oriented, client-focused people who don’t consider what they do to be a 9-to-5 job,” he said.

“And, frankly, we treat them the best we can, paying them at the higher end of the pay scale. In 2008, when business wasn’t so good, we gave them raises. They were working hard and weren’t the ones causing the business problems, so the partners took less — which we were open about.”

At Highline, Mr. Schwartz acts as the chief operating officer while founder, chief executive and majority owner Neal Simon serves as the primary rainmaker, spending more than half his time in that area. Most top-performing firms distinguish themselves by being organized and managed so that business development — whether an activity of one firm principal or several — is a priority.

The Roof Advisory Group LLC in Harrisburg, Pa., is an example of a smaller organization where business development is a prime focus. E. Jeffrey Roof, founder of the firm, which manages $164 million for about 100 clients, devotes most of his time to that activity.

Mr. Roof has a specific client profile and seeks out prospects with characteristics that are similar to his existing base, which consists of moderately affluent families with $1.5 million in assets.

“Our typical client demographic is a business owner, corporate executive or professional in a two-income household,” he said. “They’re in their mid- to upper 40s and perhaps looking to transition out of business. They’re dealing with kids getting ready for college or in college, and with elder care for their parents. Some are evaluating their housing needs and perhaps considering a second home.”

The Roof firm’s focus on a core client base is reflected in its array of services. Like other top-performing firms, it does not stray from its principal business offerings — predominantly asset management plus some financial planning.

STICKING TO ITS KNITTING

Although much larger, Manchester (Vt.) Capital Management LLC, a multifamily office with 24 employees managing $1.4 billion in assets, also concentrates on its asset management strengths.

“We stick to our core competencies, and investment management is a pillar of what we are,” said Ted Cronin, the president and chief investment officer, who attributes his firm’s top-performing status, in part, to its investment approach.

“We survived the 2008-09 equity market decline better than most firms because we were diversified,” he said.

In addition to managing traditional investments, the firm, which also has an office in Montecito, Calif., helps its wealthy clients acquire and manage office buildings in cities including San Francisco, Seattle and Denver.

“Since we get a flat fee on the value of a property, real estate is not lucrative for us in the way that it is for developers, who are in a transaction business,” Mr. Cronin explained. “But if we buy good properties and they appreciate, we’re doing the right thing long term for our clients, and that’s good in the long term for us.”

Like other top-performing firms, Manchester Capital Management is anything but complacent.

“We’re always engaged in self-examination, “ Mr. Cronin said.

Mr. Schwartz of Highline Wealth Management said his firm struggles with billing.

“The time we spend on it is ridiculous,” he admits, noting that the firm is working to make improvements in the process.

Mr. Yankee wants to develop a business-development mind-set in more of the associates at Fox Joss & Yankee.

And Mr. Roof, who is 54, realizes that succession planning is an issue he will soon have to deal with.

The study emphasizes that the top-performing firms thrived during the recession by doing what all good businesses do, said Mr. Tibergien.

“They operated from a plan, or from a framework for how they make decisions, commit resources and manage costs,” he said. “This may be intuitive, but so is not smoking.”

E-mail deputy editor Evan Cooper at [email protected].