5 principles that set apart top-performing advisory firms

Effective planning and execution and operational excellence are among the ways

Aug 7, 2018 @ 11:59 am

By Nick Georgis

Independent advisory firms represent $5 trillion in assets under management, and the independent model continues to win considerable market share. According to Schwab Advisor Services' 2018 RIA Benchmarking Study, for firms with over $250 million in assets, total assets under management (AUM) grew 16.2% at the median year over year, revenue growth increased from 3.6% in 2016 to 11.9% in 2017 and, for the first time, average assets per client crossed the $2 million mark. In addition, the median firm recorded a five-year AUM compound annual growth rate of 10.9% — an enviable growth rate for any business.

As remarkable as that growth is, some firms are growing at an even greater rate — the top 20% of firms have a five-year AUM CAGR of 16%, meaning they have more than doubled in size in a five-year period.

The outperformance of these firms is driven by their innovative mindset and ability to effectively prioritize their business needs. As these firms seek new ways to operate their businesses, they focus on five guiding principles.

While all firms demonstrate growth, some firms achieve superior results.
Compound annual growth rate (CAGR) over the five-year period from 2013 - 2017 for all firms with $250 million or more in AUM.
Past performance is not an indicator of future results. 2018 RIA Benchmarking Study from Charles Schwab, fielded January to March 2018. Study contains self-reported data from 1,261 firms. Participant firms represent various sizes and business models categorized into 12 peer groups - 7 wealth management groups and 5 money manager groups - by AUM size.
Source: 2018 Benchmarking Study from Charles Schwab

1. Effective planning and execution are a leading indicator of success

Outperforming firms engage in strategic planning and as they grow, they are more likely to have a written strategic plan — 69% of firms with $1 billion or more in AUM have a written strategic plan compared with 51% of firms with $250 to $500 million in AUM. In addition, outperforming firms focus on and execute their strategic plans. More than simply keeping a list of annual objectives, these firms' leaders articulate a vision for what they want to look like in the future, which allows them to:

• Set direction and gain alignment across the firm.

• Drive action on issues that matter.

• Choose among initiatives that compete for firm resources.

2. Value is defined through your clients' eyes

Outperforming firms understand that the client's perception about his or her interaction with a firm determines whether that experience is valuable. That's why outperforming firms are very clear about who their ideal clients are. They identify what those clients really want and design an experience to meet or exceed those needs. This allows advisers more time to establish trust and build sustaining relationships, which can also lead to referrals.

Firms with a documented ideal client persona and a client value proposition earn significantly more than those without those strategies.
More new clients
More new client assets

In addition, many firms differentiate by offering value-added services for their ideal clients. According to Schwab's Spring 2017 Independent Advisor Outlook Study, 41% of firms see services beyond investment advice and wealth management – such as charitable, tax and health care planning – as key differentiators.

3. Operational excellence creates greater capacity for clients

Efficient advisory firms serve more clients representing greater AUM, yet they spend less time per relationship. These firms leverage technology, workflows and training to create consistent ways of working across the business to achieve operational excellence. According to Schwab's 2018 RIA Benchmarking Study, 83% of these firms integrate one or more data sources or systems with their CRM, and 60% of firms use standardized workflows within their CRM.

Operational excellence also involves a strong culture of compliance, which is critical to protecting client trust. Ninety percent of firms emphasize employee training related to cybersecurity initiatives, and many have programs that increase client awareness and education about cybersecurity.

4. Your reputation is your brand

In 2017, growth in assets from new clients for fastest-growing firms totaled 9.1% – two times more than all other firms.

Fastest-growing firms' key metrics
Fastest-growing firms All other firms Multiple
5-year net organic growth CAGR 15.4% 3.9% 3.9x
Net organic growth in 2017 $67 million $25 million 2.7x
Number of new clients in 2017 36 19 1.9x
Assets from new clients in 2017 $48 million $24 million 2x
Growth in assets from new clients in 2017 9.1% 4.2% 2.2x
Note: Median results for fastest-growing firms (the top 20% of firms with $250 million or more in AUM based on 5-year net organic CAGR) and all other firms (the remaining 80% of firms).

For top growers, existing client referrals and marketing contributed equally to new client asset growth, which indicates a more robust growth strategy that incorporates a broad set of tactics.

These firms extend their brand by word of mouth and other tactics, including networking, community involvement, social media, email, webinars and speaking engagements. They consistently tell their stories through multiple channels and effectively communicate their value propositions in their target markets.

5. People are your most important asset

Virtually nothing of any importance can be accomplished without incredible talent. With 73% of firms planning to hire in the next 12 months, advisers face tough competition. Firms must protect their greatest assets by creating a cycle of opportunity. Top-performing firms effectively incentivize quality talent with attractive compensation packages including salary and benefits. These firms also develop their talent and reward them with long-term opportunities. Often, they create a clear path to equity ownership, encouraging a broader set of individuals to adopt an owner's mentality and influence firm growth.

Nick Georgis is senior vice president at Schwab Advisor Services and leads its Business Consulting and Education organization helping advisers manage strategic and growth-related opportunities.


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