Q&A on Growth Drivers for Advisors with Catherine Williams and Marco Di Maggio

Dimensional offers a wide variety of practice management tools and resources to help advisors succeed. One prominent example is the annual Global Advisor Study, which surveys advisors in 14 countries on key aspects of their practices and provides survey respondents with valuable peer-level insights. This unique multiyear dataset is also the basis of a recent research paper “What Drives Growth for Financial Advisors? Evidence From a Multi-Year Survey,” coauthored by Professor Marco Di Maggio of Harvard Business School and Dimensional researchers. In this Q&A, Catherine Williams, Dimensional’s Head of Practice Management, talks with Marco about the main findings of this paper and their implications for advisors.

Catherine: Marco, we have been running the Global Advisor Study for many years, but this is our first time putting multiple years of data together to conduct a systematic analysis, so obviously I am very excited about this research. Before we jump into the results, can you talk about what inspired you to take on this project in collaboration with our Research team?

Marco: Absolutely. As you know, financial advisory firms play a central role in shaping individuals’ investment decisions and financial well-being, and the industry has been growing at a staggering pace. However, the existing research has focused on the impact of financial advice on investors’ behavior, and very little is known about the types of services and practices that help these firms grow. The survey data collected by your team allows us to fill this gap by analyzing the inner workings of financial advisory firms.

Catherine: I’m glad that the survey data we’ve collected over the years has sparked interest from top academics like yourself. With our survey being one of the largest of its kind globally, the scale probably also helps when conducting systematic analysis. Can you give our readers a sense of the dataset you looked at?

Marco: In this paper, we focus on advisory firms in the US, with the majority being independent fee-only advisors. We study survey years 2015 to 2019 because the unique COVID-19 situation may impact the data in 2020. To your point about the scale of the survey, on average, we have about 900 firms each year that collectively serve 191,000 clients and manage about $250 billion. The sample provides a broad representation of advisory firms across US states, clienteles, asset size, and age.

Catherine: Now let’s dive into your research. We know that advisory firms assess their performance in many ways. Some care more about revenue growth or revenue per advisor, and others may pay more attention to client or employee retention. In this paper, as you mentioned at the beginning, you focus on growth, right? What are your main findings?

Marco: Correct. We examine how the growth in assets under management (AUM), revenue, or number of clients is related to advisors’ service offerings, client sources, and practice management challenges.

Let me illustrate our key findings with two real firms that participated in the survey. Over our sample period, 2015 to 2019, one firm (let’s call it the high-growth firm) more than doubled its initial AUM of $250 million and achieved an average annual growth rate of 22%. In contrast, another firm (let’s call it the low-growth firm) saw its AUM stay relatively flat, growing at 4% per year. So, what did the high-growth firm do differently?

Well, let’s start with service offerings. The high-growth firm had more clients receiving education planning and retirement planning services than the low-growth firm. The high-growth firm also increased the number of services, whereas the low-growth firm offered fewer services over time.

This is representative of what we find in the paper. Firms offering a larger variety of services tend to grow more. Specifically, a 10-percentage-point increase in clients receiving education planning, retirement planning, insurance services, or account aggregation is associated with about a half-percentage-point of additional growth in AUM, revenue, and clients in the same year.

In addition, investment solutions play an important role. The use of model portfolios, a greater number of model portfolios, and the use of small-account solutions are associated with stronger growth.

Catherine: The depth vs. breadth of service offerings is often an important tradeoff advisors need to make when structuring their practices. It’s interesting that your results confirm the importance of having a broader portfolio of services and investment solutions when growing an advisory firm. Intuitively, that breadth provides advisors with the opportunity to serve a broader set of clients with diverse needs. Furthermore, areas such as retirement planning create deeper, longer-term engagement with clients.

I also see that the two firms in your example differ in their number of clients gained from referrals. Can you elaborate on that?

Marco: That’s right. The low-growth firm gained few clients from referrals. In contrast, referrals served as an increasingly important client source for the high-growth firm.

Again, this is consistent with the results in our paper. The most important channels for sourcing clients are referrals from existing clients and referrals from centers of influence, or COIs (such as CPAs, attorneys, and insurance agents). We find that gaining 10 more clients from client referrals is associated with an increase of 1–2 percentage points in AUM, revenue, and client growth in the same year and an increase of 0.5–1 percentage point in later years. Interestingly, referrals from COIs appear to have twice as large an effect on growth as referrals from existing clients. COIs’ greater impact might be due to their industry-specific knowledge as well as their experience working with multiple advisors. Lastly, we find firms that gain new clients from multiple sources and meet with more prospects also grow more.

Catherine: At Dimensional, we recognized the importance of referrals as an engine of advisor growth a long time ago and have been helping advisors navigate the referral process for a while. It is nice to see that your systematic examination of multiyear data supports the lasting benefits of referrals.

Interestingly, we often see a “referral gap” between the reported appetite to refer in the Global Investor Study and the clients an advisor actually gains. This is a topic we frequently engage with advisors around, and your results will further inspire advisors to bridge that gap.

In terms of the different channels for referrals, what was surprising to me in your study was that referrals from COIs can have twice as large an effect on growth as client referrals. This will probably motivate many advisors to reconsider their collaboration with COIs.

OK, having covered client services and client sources that are positively associated with growth, can you talk about challenges that may negatively impact growth?

Marco: Going back to our example, the low-growth firm struggled with fee compression, the rising average age of their client base, and developing a marketing strategy, none of which were top challenges for the high-growth firm. Indeed, our analysis shows that practice management challenges like these are associated with weaker growth. In particular, among all the challenges studied, the rising average age of the client base and a lack of a succession plan or exit strategy appear to be the most detrimental. Compared with advisors who do not struggle with these challenges, those who do struggle exhibit 5–9 percentage points lower AUM, revenue, and client growth in the same year.

Catherine: The fee compression is an interesting one because, while it might be a top challenge for some firms, we’ve not seen overall fees decline in our study. In fact, between 2018 and last year, we actually see fees increased slightly. That said, we do observe some profitability compression as firms offer more services and the cost of doing business increases. This is something we will continue to watch in our study.

You mentioned that the most pressing challenges have to do with getting the next generation of clients and advisors into the business. While I am not surprised by this finding, it is great that you are able to quantify their effects through a comprehensive analysis of real data. The magnitude of these effects probably explains why deals and succession are frequent topics in our discussions with advisors. It also inspires us to continue helping advisors explore current trends and opportunities in the M&A landscape and best practices around M&A activities, including firm culture, due diligence, and succession planning.

Marco, thanks so much for sharing your paper with our readers today. Any parting thoughts?

Marco: The pleasure is mine. By taking advantage of Dimensional's multiyear survey data, I’m glad that we were able to put hard numbers on many practice management topics relevant to advisors. I hope advisors will find the results useful when they strategize for growth.

Catherine: Absolutely. This research nicely complements many other practice management offerings we have and can serve as a compass for advisors to explore different pathways for growth. I’m excited about helping advisors leverage those insights to grow their business!