Building Economies of Scale in Your Financial Advisory Firm



What’s the Story?

  • Comparing your advisors’ productivity level with that of your peers can help you set realistic growth objectives.

  • Three critical actions are needed to deliver a consistently great client experience: organizing, delegating, and automating.

  • A sound business infrastructure helps overcome growing pains by increasing advisor capacity and streamlining efficiency.

  • Next: A Plan for Success(ion) I Previous: Recruit the Right Advisor

It may seem ironic, but an advisory firm’s success, especially if it has surpassed $1 million in revenue per lead advisor, can present its own set of challenges. Chief among them is the need to manage a growing client base while still delivering the personalized level of service that each client deserves.

When you are approaching this critical point, short-term solutions often rule the day while activities like strategic planning and business development tend to fall by the wayside. Yet neglect of these core disciplines can cause a firm to sacrifice future potential just to meet current demands.

The best way to stay on track and maximize the resources you have is to conduct an in-depth
audit of productivity drivers. By identifying areas for improvement, and then acting upon them, you’ll work toward building economies of scale that can help ensure your firm will be well positioned to grow for years to come.

Measure Productivity with a Valuable Metric

First, you’ll want to measure your firm’s overall productivity compared with that of your peers. A great metric for doing so is revenue per head count, which reveals the performance of your business in its entirety. Following industry standards (as defined by the 2020 InvestmentNews Adviser Compensation & Staffing Study), it takes your firm’s total net revenue across all affiliated advisors divided by the total number of advisors and staff working at the firm. For independent firms, the median is $275,500 per head count. In other words, each person at the firm, regardless of role, can support $275,500 in revenue.

Lay the Foundation to Support Your Next Level

Once you determine this baseline, you’ll have a better idea of where you currently stand. Next, it’s time to lay the foundation for your advisory firm’s next level—starting with strategic focus and alignment.

Focus. By developing strategic objectives for growth, you can ensure that your whole firm will be focused on the same priorities. A word of warning: if you chase too many initiatives or constantly pivot to embrace the latest idea, your firm may struggle to gain traction. Your best approach is to create a hierarchy. That way, you’ll identify which strategies your firm should pursue—and determine those that will not be priorities in the immediate future.

Align. When advisors or staff within a firm take different approaches (i.e., the firm operates with exception processing), efforts to increase scale can be derailed. A balance between scale and autonomy can be hard to strike, as we’ve all faced the challenge of relinquishing “my way” for the “firm way.” Methodologies are one of the most challenging aspects of alignment. Here, it might be useful to evaluate whether there is a consistent investment philosophy and process for making trading decisions. If not, establish one and make sure everyone within
the firm is aware of it.

Create a Business Infrastructure That’s Built to Last

A sound business infrastructure is self-sustaining and operates without overreliance on lead advisors. Plus, it helps amplify your own impact and productivity by ensuring that you’re maximizing the time spent with ideal clients. But where do you start?

There are three critical actions at the heart of building scale: organizing, delegating, and automating. They can help institutionalize how your business operates, allowing you to increase advisory capacity and streamline efficiency. Perhaps more important, they also ensure that your firm delivers a consistently great client experience—every single time, for every single client.

Organize. It can be all too easy to let processes evolve organically over time. But taking a proactive approach to evaluate your firm’s core processes will identify opportunities to be more efficient, offer a better client experience, and operate with greater consistency. Fine-tuning a core process requires time and commitment across all owners, advisors, and staff who are involved with and affected by the respective process. Here, conducting a process-mapping exercise can be especially beneficial to visually analyze and improve a process from start to finish.

Creating a consistent and organized approach to client segmentation and your service model also falls under the organize umbrella. Average revenue per client is highly correlated with firm productivity. Given this, it’s an especially valuable exercise to segment your clients based on revenue generated and qualitative factors. You can then prioritize the highest-impact (but time-consuming) services for your ideal clients and emphasize more scalable options for nonideal clients. For example, you could offer to meet one-on-one with the children of your A clients but provide educational content only for other segments.

Delegate. As a firm grows, lead advisors need to shift their focus to client interactions, business development, strategic oversight, and leadership. To do so, you’ll need to become adept at delegating responsibilities. Here, three key actions come into play:

  1. Determine which capabilities can be outsourced: Some firms outsource the management of model portfolio implementation. For example, Commonwealth offers our affiliated advisors access to our fee-based Preferred Portfolio Services® platform and our new custom trading solution, both of which provide investment selection, model portfolio construction, and trading services.

  2. Design an organizational structure that maximizes delegation of activities across the firm: As firms evolve, roles and responsibilities often become ambiguous and can cause confusion for employees. This is especially true when firms experience growth spurts or there is unexpected turnover with tenured staff.

  3. Consider the addition of senior-level positions: Large firms with sizable resources often add management positions and highly skilled professionals, allowing lead advisors to focus more time on clients. For example, hiring a chief operations officer could allow you to delegate operations functions and management responsibilities.

Automate. Technology is a critical lever for building efficiency. It is especially powerful when it has been thoughtfully integrated with your firm’s core processes (organize) and fully adopted by the people in the organization (delegate). Training the relevant staff and advisors on both the process and the integrated technology can elevate the odds of successful adoption.

Overcome Growing Pains to Reach Your Peak

The framework discussed here can be a powerful tool to help you assess opportunities when building economies of scale in your financial advisory firm. Even as you evolve and work through your growing pains, make a point to monitor and adjust your business practices to operate at maximum efficiency. Developing a strong and scalable infrastructure will help you achieve that extra dimension of performance that can turn a successful firm into an exceptional one.

Of course, there are other growing pains that firms of every size will experience as they add to their client base. And be sure to check out this post, where one of our Commonwealth advisors discusses how he overcame some common obstacles and shares his secrets to success.

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Editor’s note: This post was originally published in March 2020, but we’ve updated it to bring you more relevant and timely information.