If this year's Adviser Benchmarking Study had a tagline, it would be “the best defense is a good offense.” The InvestmentNews 2018 Pricing & Profitability Study, sponsored by BNY Mellon's Pershing, paints a positive picture for the advisory industry: revenue growth is on the rise, large firms are continuing to grow, and strategic M&A activity and a bit of healthy competition among firms is driving industry evolution. The horizon looks bright – but we all know that expecting the unexpected is part of the game when it comes to financial services. Over the course of this article series, I will provide my perspective on how we can leverage these findings to navigate any path forward by focusing on key areas like adviser capacity, training, strategic marketing and a disciplined sales process.
Let's jump right in to the standout finding – rising revenue growth rates. There was a significant rise in revenue growth rates among registered investment advisers in 2017. Among firms that took part in the study, median revenue growth was 11.7%, compared with 5.0% in 2016 and 6.9% in 2015. The last time we saw double-digit revenue growth rates was in 2014 (13.5%). AUM growth was also a robust 16.8%, on average, for firms in 2017. Average operating profit margins were up slightly in 2017, too: 24.9% compared with 24% in 2016 and 24.7% in 2015.
That's all pretty great, so what motivated my earlier tagline? When you look more deeply into these numbers, their shine dulls a bit. For example, growth in AUM has been driven primarily by recent market performance, which means that this positive momentum could taper off after next year if the markets turn. Although teams' business development efforts certainly contributed as well, this contribution was less than half the growth generated by the market gains.
In addition, firms are more likely than ever to be attracting new clients from other firms. In 2017, firms gained about a third (34.6%) of their new clients from competing RIAs or broker-dealers. This is a major shift from 2015, when only 10% of new clients came from other advisers, and tells us that the RIA industry may be moving closer toward a “zero sum” state – when a firm adds a client, another firm loses a client. Note in the pie chart that only about a third of new clients were former self-directed investors.
Another finding that demands a close look is the uptick in hiring and the downtick in productivity in firms in 2017. Close to half (49%) of firms said they hired support advisers last year, a dramatic increase from the 14% in 2016. In a similar increase, about 20% of firms hired service advisers in 2017, a large jump from 10% in 2016. All of this hiring has helped build firm capacity, but this capacity-building also has taken a toll on productivity: average revenue per lead advisory dropped 7.7% last year, to $440,000. This indicates that firms need to look very closely at how they're building capacity and how well they're measuring productivity across the firm. Similarly, the InvestmentNews 2018 Pricing & Profitability Study, which draws on input from nearly 400 firms of all sizes to capture both big-picture trends and granular data on income, staffing, compensation, strategy, marketing, services, fees and other factors, tells a story of an industry that has the potential to build on its successes through prudent planning and wise execution.
In future articles, I'll dive deeper into some of the other findings in the study, including the need for proper adviser training programs, developing a marketing and branding strategy and refining your sales process.
BNY Mellon's Pershing Advisor Solutions provides a comprehensive array of practice management resources, programs and personalized support to help advisory firms manage and grow their business. You can engage with our consultants in multiple ways — receive guidance for implementing one of our programs, attend a Pershing event or practice management forum, or take part online through our webcasts. You can learn more at pershing.com.
About the Author
Gabriel Garcia is a Managing Director for BNY Mellon's Pershing Advisor Solutions in the Relationship Management group. Mr. Garcia works with registered investment advisers (RIAs) interested in developing and growing their practices, helping them to manage business issues they face. He engages advisers to help them make informed decisions around maximizing Pershing's resources and evolving their firms to become more scalable, profitable and productive. Mr. Garcia spent his previous 15 years with Charles Schwab & Co., where he held several leadership positions in sales, training and consulting. His last six years were spent working directly with RIAs. Overall, Mr. Garcia has 20 years of experience in financial services and has consulted with more than 100 firms ranging in AUM from $50M to $3B. He also is a frequent speaker at industry and national conferences. Mr. Garcia earned a Bachelor of Science degree in Finance and Business Administration from Radford University. When he's not in the office, he enjoys CrossFit and spending time with his family at the Jersey Shore. You can follow Gabriel on LinkedIn at www.linkedin.com/in/gabrielgarciapas.
This content is made possible by BNY Mellon's Pershing; it is not written by and does not necessarily reflect the views of InvestmentNews' editorial staff.