Building Economies of Scale in Your Financial Advisory Firm

Kenton Shirk

Kenton Shirk

03.04.20 in Marketing & Practice Management

Marketing and Project Management

Many large firms (i.e., those that have surpassed $1 million in revenue per lead advisor) face a common struggle: managing the size of their client base. When you find yourself at this critical point, activities like strategic planning and business development tend to fall by the wayside. Fortunately, there are steps you can take to get back on track and start building economies of scale in your financial advisory firm.

Measure Your Firm’s Productivity

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 2019 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 $253,258 per head count. In other words, each person at the firm, regardless of role, can support $253,258 in revenue.

Lay the Foundation

Next, it’s time to start laying the foundation—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 seek the latest idea, your firm may struggle to gain traction. So, 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.

Create a Sound Business Infrastructure

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 must shift their focus to client interactions, business development, strategic oversight, and leadership. To do so, you must 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 Prefered Portfolio Services® platform and our new Custom Trading Services 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.

Overcoming Growing Pains

The framework discussed here can be a powerful tool to help you assess opportunities when building economies of scale in your financial advisory firm. Of course, there are other growing pains that firms of every size will experience as they add to their client base. Keep an eye out for our next post, where one of our Commonwealth advisors discusses how he overcame some common obstacles and shares his secrets to success.

This material is for educational purposes only and is not intended to provide specific advice.

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