Positioning advisory firms for today's competitive environment
The following is an excerpt from the Voya Financial Advisors and InvestmentNews white paper — Building a Balance: Scaling your business to serve plan sponsors and wealthy clients.
The financial advice business has never been more competitive, nor has it ever faced more relentless pressure on pricing. Fortunately, a decade-long equity bull market has increased the value of assets managed by advisors, thereby boosting revenue from fees based on assets under management (AUM). This has camouflaged the underlying trend in margin compression, but has not reversed it.
The current environment, therefore, provides an opportune moment for advisors to prepare for a time when markets are less favorable and pricing pressure more keenly felt. Advisory businesses can do this by concentrating on business development and organic growth fundamentals that could help them better weather a market downturn as well as prosper in the face of greater competition.
This paper will focus on the ways that two types of advisory firms can do this. First, for firms that consider themselves primarily retirement plan advisors (RPAs), a case will be made for widening their business model to include personal wealth management services. For advisory firms that consider themselves largely personal wealth and investment managers, a corresponding case will be made for adding a retirement plan advisory component to their current business mix.
Findings from InvestmentNews Research will be used to support these suggestions, and specific strategies will be offered for implementing them.1
The case for widening the RPA business model — and how to do it
In their specialized niche of serving plan sponsors with retirement plans, retirement plan advisors (RPAs) are experiencing cost pressures and competition coming from the consolidation of providers in their market segment. As solo practitioners and small RPA firms find advantages in joining forces with larger competitors, those who remain independent are finding it more difficult to acquire new business from plan sponsors as well as attract additional advisors to their firm.
Adding an individual wealth management arm or expanding a current small advice business that serves individuals can make considerable financial sense for RPA firms. InvestmentNews Research has found that revenue per client at advisory firms with a significant proportion of assets under management dedicated to retirement plan accounts tends to be only slightly less than that of firms with a very small share of plan clients.1 However, it is on the profitability front where an expansion into personal wealth management can make the most sense. This is because RPAs have opportunity for increased profitability by expanding into wealth management business.
According to a recent InvestmentNews Research benchmarking analysis, advisory firms where retirement plans account for less than 5% of total AUM tend to average an operating profit margin of 29.3%, as compared to the average profit margin of 17.2% at firms that consider themselves RPAs.1
1 InvestmentNews Study of Pricing & Profitability 2018, September 2018
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