Big advisory firms on their way to getting bigger are beating the competition by M&A, hiring talent, and adopting new technology, according to research conducted by TD Ameritrade Institutional.
The findings, shared at this week’s TD Ameritrade’s Elite LINC conference, reveal that “standout” firms — those with revenues of at least $4 million a year and which manage more than $1 billion in client assets — spend more money on themselves to grow and sustain that growth.
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Specifically: Standouts more actively try to acquire businesses than their competitors. In the past five years, 80% of them have initiated an acquisition compared to 47% of other large firms. Many went through at least one deal in that time frame.
2018 was a record year for M&As industrywide. Transactions jumped 24%, with RIAs initiating 72% of total acquisitions, according to the FA Insight 2018 report on M&As. Mercer Advisors topped the list with nine transactions in 2018.
But not all acquisitions are a guarantee of profitability,
Standout RIAs also prioritize investing in technology and are more likely to adopt financial planning software, digital document management systems and online client portals — tools that boost efficiency, according to TD Ameritrade’s findings.
Some 93% of standouts have acquired financial planning software compared to 73% of other firms; 64% adopted digital document management systems compared to 57%; and 71% invested in online client portals compared to 52%.
On average, RIAs spend 3.2% on technology.
“We tell advisors to focus first and foremost on building scale and increasing efficiency by investing in technology tools that can automate routine processes and through strategic use of outsourcing solutions,” said Vanessa Oligino, director of Business Performance Solutions at TD Ameritrade.
Perhaps counterintuitively, FA Insight’s 2018 Study of Advisory Firms found that automating functions that serve existing customers does not damage client relations. Rather, it has the potential to deepen such relationships by opening up avenues of service.
“Advisors need to create a solid foundation for future growth and that allows their associates to be more productive,” according to Oligino. “If you don’t have that foundation, the other stuff doesn’t really matter. Individuals and firms can feel tapped out. Their growth hits a wall.”
Enhancing efficiency through technology is not the only key to being a standout. Hiring also sets up a foundation for a sustainable future. The standouts in the study hired over three times as many employees than other firms and grew the number of full-time employees by 12% in between 2016 and 2018. By contrast, other large firms hired at a pace of 3.35% in that same time frame.
In addition, standouts generate more revenue per revenue-producing employee. Large firms make about 63% in gross profit margins. Standouts outperform with margins at 75.5%.
