Many registered investment advisory firms are struggling in the current environment, as much of their revenues are tied to market performance. But there are lessons to be learned from the experiences of RIAs during the last economic crisis, which started December 2007. In fact, a new study by TD Ameritrade’s FA Insight analyzes the financial performance of firms during the Great Recession, especially of “standout firms,” those with above-average revenue growth and operating margins.
What did those firms do differently?
FA Insight found that these top firms kept hiring, growing head count from a median of seven employees in 2007 to 10 by 2009.
They also closely monitored their expenses. For top firms, median overhead expense margin declined from 45% to 42% from 2008 to 2009, while other firms saw this rise to 56% from 46% over the same period. Standout RIA owners also cut their share of total firm revenue from 31% to 19%, compared with around 25% for other owners.
These top firms also continued to grow their client base, with an average annual growth in new clients of 11% from 2008 to 2011, compared with a 0.4% increase for other firms.
The study also found that standout firms invested back in the business, at least selectively, to improve their capacity, and that resulted in better growth in the years that followed. In fact, revenues per revenue generator at top performers grew 22% from 2008 to 2011, while productivity was down 10% at other firms.
“By pursuing a disciplined, consistent approach to business management fundamentals, RIAs can do well for themselves in good times or bad,” said Vanessa Oligino, managing director of business performance solutions at TD Ameritrade Institutional. “Our research shows that standout RIA performance is not magic—it’s a matter of planning, perseverance and focus.”