Schwab survey of advisers shows the path to growth

The financial advisers with the fastest-growing businesses aren’t succeeding by accident.

Those advisers who have a proactive strategy for attracting client referrals and hire the greatest number of support people per professional are building the most profitable businesses, according to a Schwab Institutional survey of its independent registered investment advisers.

According to the survey, assets under management at participating firms grew about 20% last year, while revenue increased by 16%.

The study included responses from 1,500 advisers who manage a total of more than $425 billion. In total, Schwab Institutional supports 5,500 independent advisers, who manage about $556 billion in assets.

The study also found that the average wealth of Schwab adviser clients was $1.04 million in 2006, an increase of 42% from the amount in 2003. The number of clients per firm rose by about 8% a year over that time, according to Schwab Institutional, a division of San Francisco-based Charles Schwab & Co. Inc.

Thanks in part to aging baby boomers, “It’s no secret advisers have had phenomenal success from a growth perspective,” said David Welling, vice president of marketing and adviser business management for Schwab Institutional. “Some of these firms woke up overnight two to three times the size they were five years ago.”

About half of new-asset growth was from new clients. Advisers are bringing in wealthier clients and are being more selective about the clients they accept, Mr. Welling said.

The best-managed advisory firms are setting growth goals three to five years ahead of time and planning ahead for when they will need additional advisers, he said. The market for seasoned advisers is tight, and firms want to hire strategically, and not be in an emergency.

“That may even mean they have to stop accepting new clients for a time,” Mr. Welling said.

Of course, growth typically requires more clients. The survey showed that about 88% of new clients came from referrals, with 59% being referred by existing clients and 29% coming from certified public accountants, lawyers and other professionals.

The firms with the fastest growth are generating up to three times the number of referrals as the average firm, according to the survey.

The top 20% of firms, based on growth, standardize the referral process by tracking who gives them referrals and noting whose referrals are resulting in new clients most often, Mr. Welling said.

“Chances are, 15% to 20% of clients are the ones who refer your new ones,” he said. “You have to know who these folks are.”

Advisers who take years to develop personal relationships with CPAs, lawyers and other professionals positioned to refer financial business to them are more successful than those who focus on reciprocity, or the “I’ll scratch your back if you scratch mine,” approach, Mr. Welling said.

Cultivating professionals who will refer clients takes time and effort on the part of the adviser. Firms that have three or four professionals who regularly steer business their way may have met with 200 to have found these few successful relationships, Mr. Welling said.

The advisory firms that stand in the top 15% in terms of productivity and profitability generally have 50% to 80% higher revenue per professional employee than other firms, he said. These firms delegate routine and mundane tasks to support staff so that advisers can concentrate on client interaction.

“They create leverage in that way,” Mr. Welling said.

The tasks delegated often include processing, trading, re-balancing and performance reporting.

The most profitable firms also have made strategic investments in technology to automate routine functions, including customer relationship management systems that track details such as when client was last called and by whom, or the name of their lawyer.

Technology has long been used to make the back office more efficient, but CRM systems help create a relationship with the firm, not just an individual, because information in the systems allows anyone to serve the client, Mr. Welling said.

CFS Investment Advisory Services LLC in Totowa, N.J., has used a CRM system for about 10 years to keep compliance records and detailed client information.

“These systems are critical, be-cause knowing your client and staying in touch with your client might be more important than what you actually do for the client,” said Gregory H. Makowski, a principal at CFS, which manages about $500 million in client assets.