Numbers Game

Advisory firms have grown larger than ever, leading to a decrease in professional productivity

Research from IN's new study shows how a decline in productivity can be turned into future growth

Oct 26, 2016 @ 12:01 am

By AnnMarie Pino and Ellie Zhu

For the second year in a row, professional productivity has declined at the typical advisory firm: it is down 21% from a 2013 high, and lower than it was in 2011. In the 2016 InvestmentNews Financial Performance Study, conducted in partnership with the Ensemble Practice and sponsored by Pershing Advisor Solutions, the relationship between advisory firm growth and client relationships was explored.

Productivity measures the utilization of your most valuable resources: your employees. Adviser and total staff productivity are measured in terms of the amount of revenue managed by the number of people you employ.

In 2015, revenue per professional was $442,000, an 8% decrease since 2011. At the same time, revenue growth continues, albeit at a slower rate. So how are firms continuing to grow if their productivity has taken a hit in recent years?

Productivity per professional and staff, 2011-2015

As client expectations continue their long-term shift toward more services and deeper relationships with advisers, firms are adapting their service models in response. Seventy-eight percent of firms in this year's study fall under the wealth management model and focus on holistic and integrated solutions, compared with 46% in 2008.

At the same time, firms have grown at a rapid pace. The average firm doubled in size over the past five years and the typical size of their clients has grown large with them. As asset levels rise, and fees with them, firms are hiring additional professionals to keep up with service demand, as well as dedicating more time to their client relationships.

Firms that utilize this model have a median 47 clients per professional while self-described advisory firms have 75 clients per professional. This alone can account for some of the dip in professional productivity. In order to grow and gain efficiency at the firm level, more support associates and service advisers are utilized. At lower compensation levels, these employees enable firms to leverage deeper client relationships. Over the past five years, staff productivity has increased by 32%.

As firms near $5 million in revenue, they also begin bringing professional managers aboard — between those employees, and the associates who service clients, there is a lot of new professional headcount whose primary job descriptions hinge on maintaining the capacity of the firm, but not necessarily actively expanding it — leading to a flat-lining of professional productivity.

Revenue per professional by firm size

It is difficult to manage productivity and capacity simultaneously. While firms need to be more efficient as they grow, they first need to grow. While it may be difficult, especially for smaller firms, to see productivity ratios drop with new hires, growth cannot happen without this increased capacity. Highly productive owners will initially be diluted by more employees.

Those who can truly implement their most successful practices to scale garner the rewards. It is important to develop business generators within the firm, so as management structures are built out around expanded client service teams, leveraging them depends on firms' ability to win new business to contribute to its growth.

While productivity is an easy measure of efficiency, comparisons must be taken with the understanding that firms are evolving in the fundamental way they serve clients. These fundamental changes can be the drivers for your firm's future growth.

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