To move from a practice to a business… focus on building capacity for growth

As 2016 rolls to a close, industry watchers are hoping that this year will mark a return to the heady annual revenue growth rates of 15% or 18% enjoyed by advisory firms in 2014 and 2013, respectively. More specifically, they hope that 2015’s less-impressive 8% growth rate, as reported in the InvestmentNews 2016 Financial Performance Study of Advisory Firms,was a mere bump in the road.

2015’s lower growth rate was influenced by many factors, including markets, demographics and business goals. But, the InvestmentNews study also illuminated many underlying factors within firms that contributed to more than half of them (54%) missing their stated 2015 revenue growth goals. In previous articles, I have explored some of these factors, including sub-optimal processes for attracting the right clients and underinvestment in marketing and branding.

However, if we step back a bit, an important macro issue comes into focus. Many firms continue to evolve from a practice to a business, reflecting a legacy of advisor-led and advisor-centered business models. This evolution is marked by a shift in focus, from efficiency to scalability, from individual performance to teamwork, and from increasing the number of clients to attracting the right clients.

The importance of this evolution is aptly demonstrated by another InvestmentNews study finding, regarding the strategic emphasis of firms of different sizes. A glance at the chart below tells this story. For reference, the study defines “Ensemble firms” as those with more than one professional; such firms are subdivided into three groups based on annual revenue: Ensembles generate up to $5 million; Enterprise Ensembles generate $5–$10 million; and Super Ensembles generate more than $10 million. As you’ll note, the larger the ensemble, the greater its emphasis on growing revenue. And, despite perceptions to the contrary, growth does not slow as firms get larger.

Change in Strategic Emphasis, by Firm Category

https://www.investmentnews.com/assets/docs src=”/wp-content/uploads2016/12/CI108240129.PNG”

Chart &Copy;2016 InvestmentNews Research

Building Capacity to Grow

At firms of any size, your revenue growth depends on your capacity to grow. Capacity, in turn, is driven by day-to-day operations – how you use technology, for instance – and strategic factors, such as how you staff and the clients you seek. Any firm can significantly expand its capacity to grow by focusing on just a few business priorities. Here are three that come to mind, based on my work with firms across the nation.

1. Staff Strategically – It’s tempting to pursue added capacity simply by hiring another lead advisor. But, this route comes with significant expense and risk. What we see in the marketplace is that the top-performing firms have a higher ratio of support and service advisors per professional. Specifically, at the typical advisory firm, each lead adviser or practicing partner is supported by 0.67 support and/or service advisers. For the top firms, however, this ratio is 0.81, indicating that these firms have 21% more capacity to grow and serve clients more effectively and cost efficiently.
2. Reap Technology’s Advantages – How do you free your talent to focus on growth-related activities? Technology must play a role. Firms benefit greatly by their use of Order Management Systems, Performance Reporting Software, or Customer Relationship Management systems to manage client relationships throughout their lifecycle. Although this has become standard in our industry, firms that own such systems may not use them to their fullest. What’s required is an integrated approach, where workflows are optimized for technology and are standardized to minimize risk and maximize productivity. Investing in adoption and full implementation of the systems already in place can have a meaningful impact to firms.
3. Pursue Your Ideal Client – Evolving from being a practice to being a business demands intense focus. It’s impossible to build the capacity to serve every type of client in the marketplace. Firms thus must define their optimal client – in terms of assets, complexity of needs, expectations for service – and then align their staff, operations and brand to better find, win and retain that client.

Insights and Action

In any given year, conducting a thorough business assessment has the potential to uncover several opportunities for quick-hit improvements and longer-term strategic initiatives. In 2017, as we look for ways to raise revenue growth rates back into the double-digits, such assessments – and subsequent actions to boost capacity – must become an essential part of how we run our businesses.

Pershing provides a comprehensive array of practice management resources, programs and personalized support to help advisory firms manage and grow their business. You can engage with our consultants in multiple ways—receive guidance for implementing one of our advisor programs, attend a Pershing event or practice management forum, or take part online through our webcasts. You can learn more at pershing.com.

About the author

Gabriel Garcia is a Managing Director for Pershing Advisor Solutions, a BNY Mellon company, in the Relationship Management group. Mr. Garcia has over 20 years of experience in the financial services industry. Mr. Garcia had previously spent 15 years with Charles Schwab & Co., where he held several leadership positions in sales, training and consulting. Over the last six years, he has worked at Pershing Advisor Solutions, working exclusively with Registered Investment Advisors (RIAs) interested in developing and growing their practices, and helping them to manage business challenges they face. Mr. Garcia engages advisors to aid them in making informed decisions while maximizing Pershing’s resources and evolving their firms to become more scalable, profitable and productive. Mr. Garcia has consulted with more than 100 firms that have AUM ranging from $50M to $3B. He also is a key note speaker at industry and national conferences. Mr. Garcia earned a Bachelor of Science degree in Finance and Business Administration from Radford University.