Advisers boost assets by 21%, helped by new clients, market gains

It's a good time to be an adviser, new InvestmentNews study shows, as assets, revenue, profit margins all climbed last year.

Sep 16, 2014 @ 11:20 am

By Liz Skinner

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The latest performance results are in, and 2013 was a great year to be in the financial advice business.

Financial advisory firms boosted assets under management last year by 21% to an average of $502 million, the 2014 InvestmentNews Financial Performance Study of Advisory Firms found. That's up from $414 million in 2012.

AUM, in fact, has increased an average of 20% every year since 2009.

(Read a Study Excerpt: Meet the next wave of $1B advice firms)

About 12% of last year's increase was due to new assets from new clients, 10.6% from investment performance and 4.3% from new assets from existing clients. About 2.9% of assets walked away with clients who left over the year, and 3% of assets were lost from existing clients' asset reductions, such as through distributions, according to the new study, which analyzed financial information and other data submitted by more than 300 firms.

“Unless a firm is growing by at least 10% a year from new business development, there is a risk of rising and falling with the market and just stagnating,” said Philip Palaveev, chief executive of The Ensemble Practice, a business management consulting firm that partnered with InvestmentNews on the study. “The top firms in the industry are adding 17% to 18% by attracting new clients.”

Not surprisingly, the increase in AUM translated to a rise in revenue.

Firms generated an average of $3 million in revenues last year, an increase of 17.6% from 2012, according to the benchmarking study, formerly conducted by Moss Adams.

It also shows that operating profit margin grew last year to an average of 28%, up from 26% in 2012 and 24.6% in 2011.

The average income for a typical owner-adviser before paying taxes was an enviable $465,151 last year. That hasn't really changed since 2012 but it's a 41% increase from 2009 levels.

Of course, that doesn't mean advisers can let down their guard, Mr. Palaveev warned. The report suggests there may be some owner income flattening out among smaller advisory firms, he said.

The industry's largest firms, so-called “super ensembles” with at least $10 billion in AUM, are among the fastest growing advisers and offered the highest in owner income. These firms had an average $1.45 million in owner income, while the firms with a solo adviser offered the lowest income, an average of $305,029, according to the report.

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(Source: 2014 InvestmentNews Financial Performance Study of Advisory Firms)

(Related Read: The real reason behind advisory firms' big gains in AUM)

When comparing the top-performing 25% of firms against all others, the average spent on professional compensation for the top tier is 35.7%, compared with 40.5% for the other firms, the study found. That suggests a portion of profitability of the top performers could be coming from saving on professional compensation, which could have implications down the road, Mr. Palaveev said.

“If the most profitable firms are underinvesting in human capital, long term they may not be able to keep up with growth, especially if they were to lose any of their key people,” he said.

Mr. Palaveev said firms should ask themselves: “If revenue were to fall by 20% and the number of client calls doubled, which is what happens in an event like in 2008, could you handle it?”

(Is your compensation up to par? Use our National Compensation Database to find out)

David Blain, managing partner of Bluesky Wealth Advisors, said he thought about this issue after the market problems in 2000/2001 and made changes that led his firm to actually add revenue during the 2008 economic crisis. Many of the firm's clients today pay a flat fee, and others pay a mix of AUM-based fees and a retainer, helping to eliminate some of the market risk. His firm, which manages about $250 million in assets, keeps plenty of cash on hand in case it's needed in a market downturn to retain its employees, he said.

Bluesky Wealth may even be overstaffed, but was able to add to AUM during the last recession because it had the people to answer the increased number of calls from clients and turn a flurry of calls from concerned prospects into clients, Mr. Blain said.

Firms that market themselves as providing active investment management and charge based on the AUM model should be worried about the future, especially if the markets take a turn for the worse, he said.

"It's a very good time for the industry right now, but advisers should be paying attention or they'll be left behind," Mr. Blain said.

In the study, 95% of firms set fees based on assets managed, 29% charged a flat fee or tiered fees, 24% charged an hourly rate, 23% had project-based pricing and 1% charged a value-based fee where clients pay for the outcome they receive. The firms could select more than one answer.

About 31% of advisers said they had made changes to fees in the past two years, and of those, 73% raised their fees and 27% lowered charges, according to the InvestmentNews study.


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