The 2014 FA Insight Study of Advisory Firms: Growth by Design

Where Financial Advisors Turn for Advice

Tel 206.826.4382answers@fainsight.comPO Box 1955 Tacoma, WA 98401www.fainsight.com Sponsored by TD Ameritrade Institutional

Acknowledgments

The FA Insight team would like to acknowledge the record number of firms that responded to The 2014 FA Insight Study of Advisory Firms: Growth by Design. We appreciate the time and effort that you put forth to share detailed information on your firms and look forward to your participation in the 2015 FA Insight Study. We also thank our media partner, Investment Advisor magazine, for promoting the study to its readers. Finally, we want to thank our sponsor, TD Ameritrade Institutional, for its support of this important research project.

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The FA Insight team is pleased to be able to share with you the industry trends and insights presented within The 2014 FA Insight Study of Advisory Firms: Growth by Design. We believe this study will be a valuable business-building resource for your firm.

Founded in 2008, FA Insight is both a consulting and research firm that works ex-clusively within the financial services industry. We have grown to become a trusted partner for many of the industry’s most successful independent advisory firms as well as major custodians, broker-dealers, banks, fund companies, and trade associa-tions. FA Insight works closely with shareholders of advisory firms and executives of financial services institutions to solve challenging business management issues. Our team brings deep industry knowledge and management expertise to those we serve.

For Advisory Firms: Driving Business Growth, Succession Options, and Shareholder Value

• Strategic Planning: Creating a competitive advantage in an unpredictable operat-ing environment does not happen by chance. Applying industry trends and best practices, FA Insight helps advisory firm shareholders develop strategies that will support their growth aspirations and create sustainable value.

• Human Capital Management: On average, people-related expenses account for approximately 80 cents of every dollar for the typical advisory firm. To optimize this investment, FA Insight’s human capital services support firms in order to best attract, organize, motivate, and retain talent through effective organizational design, compensation planning, performance management, and succession preparedness.

For Financial Services Institutions: Driving Advisor and Institutional Success

• Performance Benchmarking: FA Insight specializes in survey research, data compilation, tool development, and analysis which all enable firms to gauge their performance relative to peers and to identify where to focus for improved per-formance.

• “Best Practices” Research: Drawing upon both our research findings and years of experience consulting in the field, FA Insight offers guidelines, reports, and white papers on how the best advisory firms are approaching special issues and marketplace challenges.

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• Program Development: FA Insight helps our clients deliver impactful business management training to their advisory firm clients, supporting firms across a range of management disciplines.

• Market Research: FA Insight collaborates with clients to better understand their competitive environment and assess appropriate strategic options, including identification of target markets that will drive new client acquisition.

The industry’s leading firms depend on FA Insight for valuable advice and insight on how to address key management issues and business challenges. For more information on how we can help you, please contact the FA Insight team at answers@fainsight.com or 206-826-4382. Further detail is also available on the FA Insight web site at www.fainsight.com.

Since 1980, independent and independent-minded advisors have turned to Investment Advisor for the unbiased news, information, and analysis that they need to grow and run their practices and to provide the best investment advisory and financial planning choices for their clients. Investment Advisor doesn’t stop there, however. Its staff of highly professional journalists, esteemed columnists, and expert industry contributors place that information and analysis into context, allowing advi-sors to meet clients’ needs efficiently, effectively, and proactively. Investment Advisor stays ahead of demographic and social trends that will affect advisors in the future, giving readers an edge over their competitors who are focused on the past.

Whether it’s wealth management, alternative investments, retirement planning, technology, or practice management, and whether the advisor is a broker/dealer rep or an independent RIA, Investment Advisor remains the leading media valued partner in helping that advisor become and remain successful. Investment Advi-sor can be found online at ThinkAdvisor.com, which features all the news, in-depth analysis, market data, tools, and networking opportunities advisors need to transform their business—and their bottom line.

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At TD Ameritrade Institutional, we never forget that it’s your business. We are here to support you in making it thrive. When you work with us, you will get the dedicat-ed commitment of our people, access to a range of resources and a strategic rela-tionship—all designed to increase your potential and help you achieve your business vision.

Our offering is part of what differentiates us. We deliver smart operational solutions, innovative technology, customized practice management and flexible investment solutions, all with one goal in mind—impeccable service. We share your belief that being a fiduciary is one of the best ways to serve your clients. As steadfast advocates for independent advisors, we continually speak out to ensure that your needs and the needs of investors are always considered within the regulatory environment. We consistently place your needs at the foundation of our business decisions. You can count on TD Ameritrade Institutional to put you first, so you can do the same for your clients. When you choose to work with us, you’ll see how deeply we are com-mitted to your success.

TD Ameritrade is separate from and not affiliated with FA Insight and is not respon-sible for its policies or services. TD Ameritrade does not guarantee nor is it respon-sible for the completeness or accuracy of the data provided or for the quality of any third-party product or service. TD Ameritrade makes no warranty or representation with respect to the service as to suitability or fitness for a particular purpose. In no instance should the listing of a third-party be construed as a recommendation or endorsement by TD Ameritrade.

TD Ameritrade Institutional, division of TD Ameritrade, Inc., member FINRA/SIPC/NFA.

TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank.

© 2014 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.

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Executive Summary

The Virtues of Growth by Design

A big difference exists between simply growing and growing well. Growth was fairly commonplace

among the record number of FA Insight Study participants in 2014. Nearly three-quarters of firms

characterized their recent growth as “significant.” Just one-third of all firms, however, managed to

achieve “sustainable growth” and avoid any negative side effects as a result of this growth.

Mastering sustainable growth requires growth by design; where purposeful growth takes prece-

dent over growth at any cost. Unmanaged growth can be potentially detrimental to firm value,

while growth by design builds firm value. In addition to maximizing future owner liquidity, firms that

grow by design realize immediate rewards as well. As proof, sustainable growth firms identified in

the study not only achieved higher rates of growth, but they did so while generating greater

productivity, more revenue, and higher profitability.

Sponsored by TD Ameritrade Institutional, The 2014 FA Insight Study of Advisory Firms: Growth by

Design aims to guide the many firm owners who struggle with growth, whether it is in terms of

how to achieve it, how to manage it, or how to sustain it. To better understand these challenges

and identify solutions, FA Insight analyzed detailed survey results submitted from approximately

350 advisory firms.

New Levels of Success—But Will It Last?

On aggregate, advisory firms enjoyed a stellar year in 2013 and the typical firm owner is optimistic

that prosperity will continue through 2014. Market conditions provided tailwinds for pushing firms

to new levels of success. Although many firms continue to fall short of completely adapting growth

by design principles, the research findings indicate improving business practices aided firms as well.

By any measure, 2013 was the best on record for the six-year tenure of annual FA Insight studies.

Generating growth came easy in 2013 as the typical firm expanded its client base at a best-ever

rate of 6.7%. Annual increases in assets under management and revenues in 2013 ranked second

best over the past six years. Productivity also hit a new high in 2013: After bottoming out in 2009,

revenue per professional is up 32%.

Undoubtedly, appreciating security markets, an improving economy, and growing demand for

financial advice are working in favor of advisory firms. Better management practices are also playing

a role. Rapid growth can often stress firms in the form of overworked personnel and exploding costs.

In 2013, however, capacity levels for professionals were largely unchanged and costs, in the form of

median overhead expenses as a share of revenue, were the lowest in 2013 of any

study year.

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Unmanaged growth

can be potentially

detrimental to firm

value, while growth by

design builds firm value.

Growth, rising productivity, and lower costs combined to fuel additional record highs in profitabil-

ity and income generation. Reaching 22% in 2013, the typical operating profit margin was about

twice its level in 2009.

Despite the current industry success, firm owners cannot afford to be complacent. A wide dispar-

ity exists in the performance levels of study participants, with some firms clearly struggling. Even

today’s best firms must remain vigilant in deploying sound management practices, given the level

of competitiveness and rapidly evolving nature of the financial advice market.

Sharpening Your Competitive Edge

Always a useful barometer of industry health and a robust resource for performance benchmark-

ing data, the annual FA Insight study further strives to provide insightful lessons for advisory firms

intent on enhancing or improving their competitiveness. For 2014, FA Insight revisits its Growth by

Design theme, a biennial tradition begun in 2010. As with similar efforts in the past, the current

edition of Growth by Design culls the most relevant lessons for firms to grow well by achieving a

level of sustainable growth that can best maximize shareholder value.

For insight and comparisons, the FA Insight study data set was organized into a few key group-

ings. Similar to past studies, Standout firms represent the top-performing firms at each stage of

firm development based on their ability to grow revenue and generate income for their owners.

Additionally, sustainable growth firms (those reporting significant growth without side effects) are

compared with “growth-at-risk” firms—those firms that struggled as a result of significant growth.

Several key lessons surface based on analysis of these various groupings and the study data

at large.

Strategy Guides Purposeful Growth

Growth by design begins with a well-defined strategic vision. An effective strategic plan moves the

firm forward in a controlled fashion, discourages pursuit of opportunities that are not in alignment

with long-term objectives, and serves as a source of inspiration for team members. Strategic focus

becomes especially important for future growth as firms grow in size and complexity.

Most study participants (85%) reported maintaining a strategic plan. The planning process for a

typical firm, however, appears less than effective. While a clearer strategic focus was expected

to play an important role in future growth for 40% of firms, just 17% of firms could claim that

strategic focus was a key growth driver in the recent past. Further, about three-fifths of plans lack

the implementation detail needed for ensuring these plans best meet their objectives. Firms are

weaker still in motivating team members to progress firm objectives.

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Most study participants

(85%) reported

maintaining a strategic

plan. The planning

process for a typical

firm, however, appears

less than effective.

The tendency of firms to overlook the interim steps required for growth and financial success is

also evident in the comparatively fewer plan objectives that are tied to leading performance indi-

cators. The three most popular objectives all relate to achieving some measure of growth. These

are lagging indicators that depend on other activities or improvements taking place in the firm. In

contrast, leading indicators reveal the firm’s potential to achieve growth and profitability.

Planning is a key distinction for sustainable growth firms, where the planning approach tends to

play a more influential role. Plans more frequently include implementation detail, and team

members are more typically aware of the activities that must be completed in order to achieve

plan objectives.

Placing Priority on Pleasing Clients

FA Insight has long emphasized the importance of building an advisory firm around the client

experience. Clearly good things happen when firms put priority on pleasing clients. When asked

to list the top practices that most contributed to recent growth, providing a superior client

experience received more mentions than any other factor.

Study Standout firms, relative to their peers, are particularly likely to claim “superior client

experience” as a top growth contributor. Consistent with their client-first approach, Standouts

across all development stages are also more likely to consistently implement their client value

proposition with clients.

Proactive Approach to Marketing and Business Development

Good firms focus on superior client service, but the best apply marketing and business develop-

ment initiative to take growth to a new level. For most firms, however, marketing is the most

underdeveloped of all business capabilities. Just 43% of study participants attributed business

development activities as a primary factor driving their recent growth. All too often, firms passively

rely on client referrals and market tailwinds to mask their lack of bona fide marketing capabilities.

Firms devote an average of 2.7% of total revenue on marketing, excluding costs associated with

a firm’s marketing-related personnel. The share of revenue that Standout firms dedicate to mar-

keting is significantly less than their peers across every development stage, suggesting that how

marketing dollars are spent matters much more than how much is spent.

Among study participants, sustainable growth firms place greatest emphasis on marketing and

business development and invest the most effort into ensuring this function is effective. To maxi-

mize return on their marketing investment, sustainable growth firms are more apt to have an

individual dedicated to marketing or new client growth, more apt to develop a marketing plan,

and more apt to report that their marketing plan is effective in attracting new clients.

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Good firms focus on

superior client service,

but the best apply

marketing and business

development initiative

to take growth to a

new level.

Consistent with their more structured business development approach, sustainable growth firms

depend least on traditional client referrals for growth. Instead, sustainable growth firms proac-

tively work to tap referrals from centers of influence, professional organizations, and the referral

networks of strategic partners.

Operational Emphasis Efficiently Accommodates Growth

While strong marketing capabilities are essential for firms to attract new clients, operational

efficiency is a key component for retaining them. Sound operations are also critical for maximizing

a firm’s scarce resources without compromising on the quality of the client experience.

Both the study’s Standout firms and sustainable growth firms show a disciplined approach to op-

erations that keeps costs in check as a firm expands with growth. This approach is rooted in a clear

understanding of who the firm is best suited to serve and how it will provide value. The business is

then structured accordingly.

These better-performing firms are more likely to document workflow processes and have a staff

that understands the processes and implements them consistently. Their technology is more likely

to support workflow processes and to be integrated in order to further drive efficiencies.

As a result, Standout overhead costs are lower per dollar of revenue at every stage of develop-

ment relative to their peers. In comparison to growth-at-risk firms, sustainable growth firms also

maintain lower overhead costs.

Tactics Must Evolve As Firms Develop

Clearly, there are many common best practices shared by Standout firms across the development

spectrum. For firms to truly grow by design, however, firm owners must be aware of where their

firm resides on the development spectrum and how best to evolve their strategies and tactics in

order to transition to a new development phase.

The drivers of past success may not necessarily correlate with what the firm will need to empha-

size for future success. For example, study findings reveal that for the smallest as well as the largest

Standout firms, marketing and business development rises in importance. Operational efficiency is

a more important factor for driving growth in the middle range of the development spectrum.

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For firms to truly grow

by design, however,

firm owners must be

aware of where their

firm resides on the

development

spectrum…

Growth by Design Encourages Sustainable, Valuable Growth

Buoyed by surging security markets and improving management practices, advisory firms are

achieving record growth, productivity, and profit. The market for financial advice is rife with

opportunity, but the industry is intensely competitive and quickly evolving as well.

New modes of service delivery, cooling security markets, and human capital constraints represent

just a few of the many potentially threatening factors poised to test advisory firms. Complacency is

not an option for any firm. Owners must remain vigilant in continually improving the effectiveness

of their firms or risk being left behind as others capture greater market share.

For these reasons, growth by design has never been more relevant. Many firms may be able to

achieve growth but a “growth at any cost” mentality is a recipe for disappointment. Growth is a

necessary but insufficient requirement for maintaining competitiveness. Only growth by design

will produce managed sustainable growth that minimizes stress on a firm’s infrastructure and

builds lasting enterprise value.

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Many firms may be

able to achieve growth

but a “growth at any

cost” mentality

is a recipe for

disappointment.

Table of ContentsAcknowledgments

FA Insight

Investment Advisor

TD Ameritrade Institutional

Executive SummaryThe Virtues of Growth by Design

New Levels of Success—But Will It Last?

Sharpening Your Competitive Edge

Strategy Guides Purposeful Growth

Placing Priority on Pleasing Clients

Proactive Approach to Marketing and Business Development

Operational Emphasis Efficiently Accommodates Growth

Tactics Must Evolve As Firms Develop

Growth by Design Encourages Sustainable, Valuable Growth

MethodologyData Collection and Compilation

Averages and Medians

Chapter 1: Celebrating SuccessA Stellar Year by Any Standard

Productivity Continues Its Ascent While Cost Control Steadily Improves

Record Profitability and Income

Looking Ahead—Stay Focused

Chapter 2: Standouts Set the Pace at Every Growth StageHigher Learning Requires Digging Deeper

Four Stages of Development

Defining the Standouts

Common Practices of Standout Firms

Clients Are First Priority

Better Management of Expenses

Owners Are More Numerous and Younger

Greater Productivity and Profitability

Operators: Transitioning from Rapid Growth to Quality Growth

Cultivators: Building a Foundation for Sustainability

Accelerators: Regrouping for a New Phase of Growth

Innovators: Striving to Take Advantage of Scale

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Chapter 3: Strategic Focus Is Core to Growth by DesignStrategic Planning Is the Foundation for Growth

Identifying Firm Growth Drivers

Connecting Planning Objectives to Growth Drivers

Inorganic Growth—Incorporating M&A into Growth Planning

Chapter 4: Revisiting Sustainable Growth Firms

Avoiding the “Growth at Any Cost” Mentality

Sustainable Growth: Advantages Now and for the Future

Key Business Practices of Sustainable Growth Firms

Strategic Planning Sparks Action

Strong Emphasis on Marketing and Business Development

Reliance on Alternate Referral Sources

Serving Larger Clients

Attention to Operations

Striking the Winning Combination for Sustainability

Chapter 5: Why Marketing Must Be a PriorityAvoiding a Culture of Complacency

Attention to Strategy Maximizes Marketing Return

Who Do You Serve?

Connecting Service, Value, and Price

Adjusting Price to Support Profitability

Chapter 6: Operations and TechnologyUpholding the Value Promise

Effectively Managing Variations in Client Service Delivery

Workflow Processes

Making the Most of Technology

ConclusionBuilding Value with Purposeful Growth

Until Next Year

DisclaimerCopyrightAppendix

Study Terms

General Definitions

Income Statement Definitions

Position Descriptions

Income Statement Tables

Common-Sized Income Statement Tables

Performance Indicator Tables

Survey Details

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Table of FiguresFigure 1: Participating Firms by Gross Annual Revenue

Figure 2: Participating Firms by Affiliation Model

Figure 3: Strong Growth by Any Measure

Figure 4: Record Productivity in 2013

Figure 5: Overhead Expense Margin Drops to New Low

Figure 6: Higher Margins Equate to Greater Owner Income

Figure 7: The Four Stages of Firm Development

Figure 8: Median Financial and Operating Characteristics by Firm Development Stage, 2013

Figure 9: Growth and Income Medians for Standout Firms vs. Others, 2013

Figure 10: Client Experience Propels Standout Growth

Figure 11: Cost Control Is a Standout Standard

Figure 12: Younger Owners in Standout Firms

Figure 13: Larger Standout Firms Achieve Greater Productivity

Figure 14: Standout Clients Are Not Larger, Just More Profitable

Figure 15: Operators Growing Most Rapidly but from Small Base

Figure 16: Standout Operators Less Reliant on Client Referrals

Figure 17: Cultivators Handle More Assets with Refined Client Base

Figure 18: Operational Efficiency Is Important Growth Driver for Cultivator Firms

Figure 19: Accelerator Teams Grow in Size and Complexity

Figure 20: Accelerators Move Beyond Commission Business

Figure 21: Professional Focus on Revenue Generation Is Greatest for Innovators

Figure 22: Process Consistency Becomes an Increasing Challenge with Firm Growth

Figure 23: Concentration of Ownership Increases with Size

Figure 24: Strategic Plans Are Frequently Less Than Ideal

Figure 25: Superior Client Experience Dominates As Top Growth Driver

Figure 26: The Top Three Growth Drivers for Standouts by Stage

Figure 27: Business Development Most Expected to Impact Future Growth

Figure 28: Lagging Indicators Lead Plan Objectives

Figure 29: Nearly One-Quarter of Firms Recently Completed a Merger or Acquisition

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Figure 30: Transaction Activity Largely Meets Expectations

Figure 31: Firms Report Varying Experiences with Growth

Figure 32: More Rapid Growth for Sustainable Growth Firms

Figure 33: Sustainable Growth Firms Show Greater Attention to Plan Implementation

Figure 34: Sustainable Growth Firms Maintain a More Structured Marketing Function

Figure 35: Process Oversight Provides Added Advantage for Sustainable Growth Firms

Figure 36: Sustainable Growth Firms Apply More Deliberate Approach Toward Technology

Figure 37: Marketing Planning Requires Greater Attention and Skill

Figure 38: Standout Firms Allocate Less to Marketing Relative to Peers

Figure 39: Client Referrals Are the Primary Source for New Clients

Figure 40: Target Market Profiling Requires Greater Refinement

Figure 41: Pricing Inches Upward for Mid-Range Portfolio Sizes

Figure 42: Standout Operators Implement Premium Pricing Relative to Peers

Figure 43: Pricing Changes Most Frequently Start with New Clients

Figure 44: Many Firms Fail to Properly Segment Service Delivery

Figure 45: Process Documentation and Consistency Improvements Needed

Figure 46: Standouts Spend Less on Technology

Figure 47: Few Firms Adequately Budget for Technology

Figure 48: Lack of Effective Training Hinders Technology Payoff

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Where Financial Advisors Turn for Advice

Tel 206.826.4382answers@fainsight.comPO Box 1955 Tacoma, WA 98401www.fainsight.com