Professional management of your firm pays off

There is much to learn from the “best of the best” in the industry and this year’s IN/Moss Adams Financial Performance Study of Advisory Firms provides much insight. So we are dedicating the October issue of the Adviser’s Consultant to unlocking the key practices of these highly successful firms.

Top performers versus all others

In this year’s study, there were 436 respondents who met the criteria for a complete and valid survey submission, and they were divided into two groups — top-performing firms and all others. The top-performing firms are the top 25% of all firms (109 in total) based on a composite ranking of the following criteria:
• 2011 earnings before owners’ compensation as a percentage of revenue. This indicates the overall profitability of the business, regardless of how its owners choose to compensate themselves — whether through salary, commissions, incentive/bonus or distributions from firm income.
• 2010-11 annual growth rate of revenue. This indicates the overall success of the business during the past year in attracting and retaining clients and staff.
• 2011 revenue per staff (total head count). This indicates the degree to which the business structure, processes and procedures are in alignment with client selection, value proposition and pricing.

Each firm was compared and ranked against the other firms on each of the criteria. A firm’s three individual rankings were then aggregated to form a composite ranking, and the top 25% were segmented into the top-performing group.

These top performers offer specific insights into achieving better operational and financial results.

First, success requires focus, and firms that don’t have it or are currently feeling stretched should revisit their strategic plans and test for focus. Try to match up your service model with your firm’s identity and the needs of your ideal client: Does the service model deliver on who you say you are? Does it deliver on what your clients expect? Are you overserving or underserving in any areas? Can you quantify how much you are losing by lack of focus — i.e., specific capabilities that are not generating sufficient revenue to cover the cost of offering them? Top-performing firms indicated that they have resolved many of these issues, and in doing so, they provide a road map for others to do the same.

Secondly, top performers are also more disciplined in managing operations. Repeatable processes are leveraged across a larger group of clients, and by focusing on fewer process steps overall, the service model can be refined, integrated and automated more easily. Having clear definitions of processes and functions can enhance the consistency of service that drives retention, and the added capacity can be used to support advisers in bringing on and managing new clients.
Finally, the financials of top-performing firms speak for themselves. It’s how they got there that matters most. Their leaner staffing structure and lower overhead expenses reduce overall costs, which supports margins. This leaner infrastructure is directed specifically at supporting adviser productivity and enhancing revenue. It is a powerful combination that flows right to the firm’s bottom line, and to adviser income.

Key findings from the study

Margins significantly higher for top performers
In this year’s study, top-performing firms maintained significantly higher margins, compared with other firms, and even managed to expand their leadership in operating margin. Comparing this year’s data with 2011’s, we see that EBOC margins remained stable for top performers at 64%, versus 63.5% in our last study. For all other firms, EBOC margins were also nearly identical at 44.1% this year, compared with 38.6%.
Where we saw a dramatic shift was in operating margins. Both groups significantly raised operating margins since our last study, but here again, top-performing firms grew faster. This year, top performers reported an op¬erating margin of 32.5%, versus 13.2% for all other firms. In the last study, it was 13.9% for top performers, versus 7.2% for all other firms. Though both groups improved, top performers outpaced all other firms, with 146% higher margins this year, versus 100% higher margins in the last study — a substan¬tial jump in leadership.
Top performers hiring to increase profitability
Staffing for growth is yet another top-performer practice that remained con¬sistent from the last study. Top performers are more likely than other firms to hire new staff as a driver of operating margin. It is important to note that this question did not refer to revenue or asset growth; it specifically addressed profitability.
It may seem counterintuitive to some readers that hiring more people can improve profitability. But top-performing firms, with their sharp focus on efficiency, maintain a leaner staffing structure in terms of clients per total staff and clients per professional. We believe it is a fair inference that when hiring, such firms are not looking merely to increase sheer capacity. They are much more focused than other firms on scalability, through which they directly connect staffing levels to operating margins.
Top Performers are more likely to pursue mergers and acquisitions
Consolidation continues to play a role in the evolution of the advisory busi¬ness, as firms face a wide range of challenges, from succession to growth to capacity and scale. In this context, it is interesting to note that top per¬formers are nearly four times more likely to turn to M&A as a potential solution. Though the overall incidence of strategic M&A is low, it is markedly higher among top performers — sug¬gesting that they are actively pursuing more and different strategies as they attempt to navigate the industry’s growth and profitability challenges.

Kelli Cruz is the director of research and consulting for IN Adviser Solutions.

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