We’re two years into the Covid-19 pandemic, and things that we used to think of as unimaginable and unprecedented have now been seamlessly woven into our normal daily routines: Zoom meeting faux pas, home cooking conquests, podcast addictions, Peloton workouts. As comedian Shelby Wolstein put it, “Times are starting to feel precedented.”
And yet despite the disruption, advisory firms have had a smashing time. Markets favored them throughout 2021. Many firms enjoyed revenue growth that took them by surprise and allowed them to surpass their targets. It also required them to go on hiring sprees. That created its own set of challenges.
Fast-track growth is exhilarating, but it comes with equal parts apprehension and anxiety as firms anticipate how to accommodate new opportunities, and we know there are always casualties that accompany breakneck growth.
It’s not that growth isn’t good. In fact, it’s better than good, it’s necessary. But growing safely and sustainably requires a watchful eye.
De Pardo Consulting co-authored the 2020 “Growth by Design” study by TD Ameritrade FA Insight, a research report that surveyed financial advisors on a range of practice management topics. The report divided participants into two cohorts: “sustainable growth firms” and “growth at risk” firms. The sustainable growth firms reported 11% revenue growth in 2020 and 25% growth in assets under management, while the growth-at-risk firms reported 7% revenue growth and 20% AUM growth.
The key distinction between these two groups was that the firms at risk, while performing well, reported at least one negative side effect directly related to the growth. Growing, after all, sometimes comes with subtle but often harmful consequences.
For instance, 51% of these firms reported that their talent had become overworked. A further 29% of the firms experienced staff turnover associated with the growth, a result few can afford in an industry suffering from an acute talent shortage. A noteworthy 46% reported growing inefficiencies and 37% experienced increased operational errors, as talent struggled to keep pace with the rate expansion.
These people challenges confirm what we already know: Increased pressure on talent during periods of expansion creates vulnerabilities across a firm.
In December 2021, research from the University of Oregon painted a dramatic picture of what happens when talent comes under pressure. The study, called “Private Equity and Financial Adviser Misconduct,” was written by researchers Albert Sheen, Youchang Wu and Yuwen Yuan, and it examined the rate of misconduct in firms acquired by private equity both before and after the deals were done.
The authors asked the question: Does a strong profit and growth motive mitigate or exacerbate advisor misconduct? The marquee finding was astounding: Private equity acquisitions lead to a 147% increase in the rate of advisor misbehavior.
The population of advisory firms studied managed retail clients only. Growth in assets under management per advisor was analyzed as well, and the results indicated that aggressive expansion was consistent with elevated levels of misbehavior. The firms that had been bought were model citizens before, representing just 40% of the industry misconduct average before they were bought out. The rate of misconduct subsequently increased—in line with the industry average—after the buyouts were completed.