Advisers struggle to add clients

Oct 14, 2012 @ 12:01 am

By Liz Skinner

Here is the good news: Most financial advisory firms are making more money than they were before the recession. The bad news is that they continue to struggle to find new clients.

Even though the S&P 500 climbed nearly 13% during the two-year period through 2011, median assets under management per client among advisory firms rose just 3% to $600,840, according to the 2012 InvestmentNews/Moss Adams Financial Performance Study of Advisory Firms, which was sponsored by Pershing Advisor Solutions LLC.

Despite difficulties in increasing assets, firms were successful in boosting their revenue and profits — by an average of 18% and 24%, respectively — between 2009 and 2011, the survey found.

The improvements in business fundamentals are the result of better productivity, controls on costs, and fee hikes.

The data suggest that many advisory firms are finding it difficult to find new clients, said Kelli Cruz, director of research and consulting at IN Adviser Solutions, which conducted the biannual survey.

“During the market volatility, advisers had to pay more attention to servicing existing clients instead of looking for new ones,” she said. “It's caught up with them and they're not getting the lift in assets under management.”


Firms have compensated for this is by raising fees. About 20% of survey respondents boosted their fees last year, with the average fee hike ranging from 21 basis points to 53, depending on the assets under management.

Median increases in fees were highest among clients who held the least assets. The wealthiest clients saw no change at all, according to the survey.

Of the 436 firms that participated in this year's study, those in the highest quartile — based on 2011 earnings before owners' compensation, 2010-11 annual growth rate of revenue and 2011 revenue per head count — were deemed “top performers.”


Although top-performing firms were no more likely to raise fees than others, those that did increase their fees did so more aggressively — especially with regard to smaller clients.

At top-performing firms that raised their fees in 2011, clients with $500,000 in assets saw an average fee hike of 48 basis points, compared with a 10-basis-point average jump at other firms that raised fees, the survey showed.

Productivity among all respondents — as measured by revenue per professional — increased about 25% to $480,000 last year, from $388,743 two years earlier, the survey showed.

Despite the gains in productivity, financial advisory firms continue to struggle to add new clients. The median number of new clients per firm last year was 14, the same as it was in 2009.

The inability to increase the number of new clients on an annual basis could affect a firm's future value, said Mark Tibergien, chief executive of Pershing Advisor Solutions LLC.

“As practices mature, they rely more on existing relationships rather than creating new ones,” he said. “This has profound implications for the value of advisory businesses and the willingness for younger advisers to buy them.”

For most firms, referrals are the linchpin of new-business development.

Sixty-six percent of survey respondents cited referrals from clients, or such outside professionals as lawyers or accountants, as a top source of new clients and revenue.

Even so, nearly 3 in 4 firms don't have a formal referral process, the survey found.


Advisory firms should create an internal process to handle referrals, said Gabriel Garcia, a director at Pershing Advisor Solutions.

“You should have a process for this just like any operational procedure,” he said. “It's an experience you need to control.”

Advisers also should develop relationships with clients so that the clients are “engaged” and want to help the adviser expand his or her practice, Mr. Garcia said.

“Referrals are how high-net-worth clients want to meet advisers,” he said.

In 2008, amid the economic downturn, the advisory firm Eastern Planning Inc. of Pearl River, N.Y., made a decision to discontinue its formal referral process to allow its advisers to focus on taking care of existing clients.

That program, however, was reinstated a year ago when founder Beth Blecker realized just how much new referrals had dried up.

Over the past year, the firm has attracted 15 referrals, compared with one the previous year.

“I absolutely believe that a formal referral process works,” said Ms. Blecker, who rewarded clients who provided referrals with an evening cruise on the Hudson River.

The Roof Advisory Group Inc. of Harrisburg, Pa., which the survey has identified as one of the top-performing advisory firms last year and in 2009, also has a formal process of reaching out to both clients and other professionals for referrals.

Jeff Roof, founder of the firm, said that most new clients come from referrals from attorneys.

“Last year, we saw about a 20% increase in AUM and revenue,” he said. Twitter: @skinnerliz


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