The Route to Profitability: Manage Your Staff

Financial-advisory businesses have been growing at a breakneck pace for the past five years. But suddenly, they’re having a much harder time managing that growth, according to a recent study released by Moss Adams. In 2005, the annual median revenue of firms surveyed by the Seattle-based research firm totaled $1.4 million, almost double median revenue of $780,000 in 2001. Meanwhile, the median number of clients has grown to 164 from 145 in that time, and median assets have jumped to $90 million from $60 million.

Financial-advisory businesses have been growing at a breakneck pace for the past five years. But, suddenly, they’re having a much harder time managing that growth, according to a recent study released by Moss Adams. In 2005, the annual median revenue of firms surveyed by the Seattle-based research firm totaled $1.4 million, almost double median revenue of $780,000 in 2001. Meanwhile, the median number of clients has grown to 164 from 145 in that time, and median assets have jumped to $90 million from $60 million.

But this is the first year Moss Adams has seen dramatic growth in top-line revenue without corresponding improvements in profitability and productivity. In 2000, principals in the advisory firms collected, on average, $253,010 in pretax income per owner (compensation plus firm profits). But by 2005, income per owner had grown to $272,761—an increase of just 8 percent.

So what’s the hang up? In order to serve larger numbers of wealthier clients in a more demanding environment, practices have added more staff, says Moss Adams. And while the added leverage has boosted revenues across the industry, the cost of these new hires “has wreaked short-term havoc on the economics of many practices.”

That’s because not all of these new hires are (immediately) as productive as the principals at the firm. While revenue per client has risen over the past five years, the average number of clients served by a single advisor has declined, the Moss Adams report found. Unfortunately, the latter was more pronounced than the former. In fact, average revenue per advisor has declined by 7 percent over the past five years.

Advisory practices were rewarded with higher revenue growth, but declining profitability. On average, practices with a gross margin (revenues minus professional compensation) higher than 60 percent recorded revenue growth of 58 percent over five years; practices that made a bigger investment in staff (and let gross margin fall below 60 percent) recorded almost double that, or around 104 percent growth over the period.

In the meantime, overhead costs are also up. In fact, in 2005, advisory firms spent more on overhead (42 percent of revenue) than they spent on professional compensation (40 percent). Of total overhead expenses for all firms in 2005, 13 percent of revenue was spent on administrative, support and management staff salaries. The remaining 29 percent was scattered across many categories, such as rent, marketing, IT and others.

The good news is that the profitability crunch probably won’t last, says Moss Adams. “We do not believe this is a chronic condition, however. Rather, this a period of reinvestment for the industry in order to ratchet up to the next level of growth. It is a period when good management, more than ever, will distinguish profitable firms.”

Moss Adams emphasizes that the problem isn’t too much staff; it’s poorly managed staff: badly timed hiring, the wrong people in the wrong jobs, vague job descriptions, no career tracks and poor motivation. “To succeed in this new world of larger firms, solo practices and ensembles alike will have to find solutions for these staffing problems. The independent-advisory industry has entered a new phase—one in which future success will be driven by the effective management of a firm’s human capital.

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