Registered investment advisor firms that invest in people, technology and acquisitions to generate and sustain growth usually outperform their peers as they amass new clients and assets, according to a review by TD Ameritrade Institutional.
In exploring the most efficient ways and characteristics correlated with the largest, highest-performing firms, TD Institutional focused on large standout firms, those generating at least $4 million a year in revenue, as well as top-quartile revenue growth and profit margins, and generally managing more than $1 billion in client assets.
The review found that the top-tier firms, among other things, are more active at acquiring other firms. The analysis of data gathered for the annual FA Insight Study of Advisory Firms shows that 80 percent of large, standout advisory firms have initiated an acquisition in the past five years, compared with 47 percent of other large firms. Many of these acquirers, meanwhile, completed more than one deal during this period, the data shows.
The analysis also found that the large standout firms are adding human capital at a much higher rate to fuel and sustain future growth, and as a result, they increased full-time employees by 12 percent between 2016 and 2018. That’s more than three times the 3.5 percent headcount increase reported at other, lower-performing large firms, the analysis revealed.
Large stand-out RIAs generate higher productivity and profitability, the data shows. These firms generate a 75.5 percent gross profit margin, versus 63 percent among other firms, which measures gross revenue less all-direct expenses divided by gross revenue. Gross margin reflects the efficiency of a firm’s revenue generator, including client mix, product mix and service mix.
Top performers are more efficient converting effort into revenue and generating more revenue per revenue-producing employee, the data show. One key driver of outperformance, it noted, is that large standouts are more likely to tie employee compensation to how individuals help the firm meet its strategic goals.