How RIAs achieve superior financial performance

In addition to financial metrics and top performer analysis, this year’s Financial Performance Study of Advisory Firms includes discussions of marketing and business development, and pricing and segmentation. These topics are critical for an advisory industry facing asset growth and profitability challenges in a post-recession environment marked by low economic growth and continued market volatility. As we see in this year’s results, the industry has recovered financially. Revenue and profitability are up, but mainly on fee increases and greater efficiency, not new assets. Business development shows little progress relative to the emphasis and time commitment it receives from advisers.

The data indicate that the industry has begun to heed the lessons of the recent downturn. Fees are rising in recognition of the need to price advisory services fairly and create stable, financially sound businesses. Firms are showing consistently sharper focus on business development and marketing — reaching and acquiring new clients and assets. And they are beginning to use segmentation to rationalize their service models, ensuring an optimal match between client need and value delivered.

We believe that the results of this year’s financial study are positive, overall. They show an industry back on a solid financial footing and refocused on its top strategic priorities. And just as in our 2010 Financial Performance Study, some firms perform substantially better than others. In many areas, top performers continue to point the way toward success.

Yet in some areas, even top firms are struggling — business development being an area where all firms are challenged. We also highlight issues related to ideal clients and segmentation, where firms are not as disciplined as they might be in defining whom they want to serve. The industry also continues to focus on assets-under-management fees without connecting them to the larger, holistic picture of cost to serve, client profitability and clearly defining a set of services that match specific needs of clients as well as what they are willing to pay for.

Key findings from this year’s study include:

Industry Financials:

• Median firm revenue showed solid gains in 2011, surpassing levels last seen in 2008 — with a similar increase anticipated for 2012.

• AUM levels were flat from 2010, but firms showed meaningful gains in productivity as measured by revenue per professional.

• The industry did a good job at restraining costs, with overhead costs remaining stable at around 40% of revenue since 2003.

• The combined impact of these results was a strong increase in revenue per client and higher margins for the industry.

Top Performers:

• Top performers continued to outpace other firms in client acquisition and retention — not only did they add more new clients; they added more large clients than other firms.

• Their median AUM per client in 2011 remained approximately 33% higher (the same margin of outperformance reported for 2009), and they expanded their lead in revenue per client.

• Top performers significantly outperformed other firms in productivity, with 38% more active clients per professional. Their costs (expense per client) were also 11% lower.

• As a result, top performers produced more than 50% more revenue per professional and had nearly double the operating profit per client.

• This gave top performers substantially higher margins and allowed them to pay 56% higher income to owners, in dollar terms.

Marketing and Business Development

• Marketing and business development continued to be the top choice for aspects of their practices that advisers would change — it has been in the top spot since 2008.

• Despite this emphasis, new-client growth did not increase: Firms added the same median number of clients in 2011 as they did in 2009, and even less than in 2007.

• Referrals continued to be the largest source of new business, though firms were challenged to put in place formal processes for managing referral generation and follow up.

• The role of the dedicated business development officer appeared to be well-entrenched, especially among the largest firms. And there was some evidence that the BDO role was contributing to new-business success — though the mechanism of that contribution was less clear.

• Allocating more time to business development and implementing a new marketing plan have been among advisers’ top growth strategies since 2009, and data suggest allocating more time to business development can have a positive impact.

• On the marketing front, however, there appeared to be little difference in strategies being used across the industry — i.e., top performing firms and all other firms were both using the same marketing tool kit, but top firms were having more success with it.

Pricing and Segmentation

• The same percentage of firms raised fees in 2011, compared with 2009, with the average increase ranging from 0.21% to 0.53%.

• Fee increases were predominantly on lower tiers of clients, and top-performing firms raised fees more than other firms, particularly for their smallest clients.

• Larger firms most often defined ideal clients by assets, and smaller firms were more likely to use the quality of the relationship (“people we enjoy working with”) as their top criterion.

• A majority of firms segmented their client base, but segmentation strategies were focused primarily on asset levels and revenue.

• Most firms said that they did not adjust services based on profitability, and client profitability fell toward the bottom of the list of segmentation criteria.

For more information on the results of the study, order your report copy here.

Related Topics: IN Research, The Adviser's Consultant, Wealth Management