BENCHMARKING THE FINANCIAL PERFORMANCE OF ADVISORY FIRMS

Transcription

1 BENCHMARKING THE FINANCIAL PERFORMANCE OF ADVISORY FIRMS IN PARTNERSHIP WITH PRODUCED BY SPONSORED BY

2 ACKNOWLEDGMENTS InvestmentNews InvestmentNews is the premier provider of news, data, research and events to the fi nancial advisory industry. Through our weekly newspaper, website, data centers, benchmarking reports and conferences, we provide industry-leading tools and resources that allow fi nancial advisers to learn more about their businesses, clients and competition. About this study InvestmentNews Research The mission of InvestmentNews Research is to provide fi nancial advisers with the industry s most informative practice management studies and benchmarking reports. Our benchmarking studies are a leading source of market intelligence for advisory fi rms and industry partners, such as custodians, broker-dealers, service providers and professional organizations. The survey was conducted between March 27, 2018 and June 25, The data collected was analyzed and assessed by the teams at InvestmentNews Research and The Ensemble Practice. In total, qualifi ed data was used from 385 fi rms who supplied detailed fi nancial information for their organizations, including data on clients, assets under management, revenue, profi t & loss statement, growth strategy, marketing, fees, staffi ng, and recruiting, as well as compensation information for newly hired or promoted staff members. Disclaimer and Copyright The data reported in this study was provided directly by participants to InvestmentNews Research. InvestmentNews Research was not engaged to and did not audit or review this information and, accordingly, does not express an opinion or any other form of assurance on it. The data contained in this report may not be a statistically valid representation of the entire market of fi nancial advisory fi rms; rather, it is representative of the fi rms that elected to participate in this survey. The material in this report is copyrighted by InvestmentNews. No portion of this report may be reproduced or distributed without the express written consent of InvestmentNews. In 2009, InvestmentNews acquired two bellwether benchmarking studies from Moss Adams LLP the Adviser Compensation & Staffi ng Study and the Financial Performance Study of Advisory Firms. We continue to improve and expand these two critical industry studies, while we have also introduced new studies on technology and succession planning that support the growth and development of fi nancial advisory fi rms. Led by VP and InvestmentNews Publisher Suzanne Siracuse, Associate Publisher Mark Bruno, Senior Manager of Research & Data, Matt Sirinides, and Research Associate James Gallardo, our studies are supported and driven by a team with over 40 years of combined experience and exposure to the ever-evolving fi nancial advisory business. In addition to our research studies, InvestmentNews Research also produces regular webcasts and regional workshops that arm advisers with actionable insights. Our events allow advisers to hear directly from some of the industry s leading experts - and also network with other advisers who are looking to improve their practices and grow their businesses. Custom research: One of the core capabilities of InvestmentNews Research is providing custodians, broker-dealers and RIAs with custom benchmarking reports and white papers that leverage our deep data and analytical expertise. For more information about custom research requests and InvestmentNews Research, please contact Mark Bruno at and mbruno@investmentnews.com, or visit research.investmentnews.com/dashboard. Acknowledgments 2018 InvestmentNews Research

3 ACKNOWLEDGMENTS (CONT D.) Acknowledgments Pershing Advisor Solutions LLC BNY Mellon s Pershing and its affi liates provide a comprehensive network of global fi nancial business solutions to advisors, broker-dealers, family offi ces, hedge fund and 40 Act fund managers, registered investment advisor fi rms and wealth managers. Many of the world s most sophisticated and successful fi nancial services fi rms rely on Pershing for clearing and custody; investment, wealth and retirement solutions; technology and enterprise data management; trading services; prime brokerage and business consulting. Pershing helps clients improve profi tability and drive growth, create capacity and effi ciency, attract and retain talent, and manage risk and regulation. With a network of 23 offi ces worldwide, Pershing provides business-to-business solutions to clients representing more than 6 million investor accounts globally. Pershing LLC (member FINRA, NYSE, SIPC) is a BNY Mellon company. The Ensemble Practice The Ensemble Practice LLC is the premier business consulting fi rm for the fi nancial advisory industry. It is committed to helping independent fi nancial advisers create multi-professional ensemble fi rms with strong organic growth and sustainable profi tability. The Ensemble Practice works with the top wealth management fi rms in the country. The fi rm also hosts the G2 Leadership Institute a training program for the future leaders of advisory fi rms. The fi rm is founded and led by Philip Palaveev, a highly regarded industry expert, thought leader and author of the book The Ensemble Practice. For more information visit InvestmentNews Research

4 TABLE OF CONTENTS Executive Summary...3 Figure 1: Average Revenue of All Participants vs. Super Ensembles Over the Last Five Years... 3 Figure 2: Median Revenue Growth Rate Over the Last Five Years... 4 Figure 3: Percent of Firms Hiring Advisers by Position in 2017 and Figure 4: Median Year-Over-Year Revenue and AUM Growth by Firm Category... 4 Figure 5: Competitive Source of New Clients... 5 Figure 6: Average AUM Growth From Acquisitions by Firm Category... 5 Figure 7: Average AUM per Client and Revenue per Client by Firm Revenue Size... 5 Figure 8: Average Pre-Tax Income per Owner Over the Last Five Years... 6 The Trends Shaping the Industry...7 Revenue and Income Growth...7 Figure 9: Median Revenue Growth Rate Over the Last Five Years... 7 Figure 10: Average Pre-Tax Income per Owner Over the Last Five Years... 7 Profi tability and Productivity...8 Figure 11: Average Operating Profi t Margins Over the Last Five Years... 8 Figure 12: Percent of Firms Hiring Advisers by Position in 2017 and Figure 13: Revenue per Staff and per Professional Over the Last Five Years... 9 Sources of Growth...9 Figure 14: Sources of AUM Growth in 2016 and Growth and Growth Strategies Revenue and AUM Growth Figure 15: Median Revenue and AUM Growth in 2017 by Firm Category Sources of Growth Figure 16: Sources of AUM Growth in Figure 17: Competitive Source of New Clients Figure 18: Average AUM Growth From Acquisitions by Firm Category Growth Strategies Figure 19: Growth Tactics Implemented Over the Last Two Years Figure 20: Business Development and Marketing Activities Pricing and Services...15 Fee Trends Figure 21: Percent of Firms That Changed Fee Schedule In the Last Two Years, Top Performers vs. All Participants Figure 22: Direction of Fee Change at Top Performers Typical Pricing Structures Figure 23: Percent of Firms Using Fee-based Pricing Models...16 Advisory Fee Clients...16 Figure 24: Average Advisory Fee Percentage on Assets, by Client AUM...16 Figure 25: Median Percent of Total Firm Clients by Client AUM, Top Performers vs. All Others Figure 26: Percent of Firms Including Service in Standard Fee, Top Performers vs. All Participants Figure 27: Median Operating Profi t per Active Client, Top Performers vs. All Other Participants The Advantages of Size...19 The Client Advantage Figure 28: Average AUM and Revenue per Client by Firm Revenue Size The Productivity Advantage Figure 29: Median Productivity Ratios, by Firm Category...20 Figure 30: Pre-Tax Income per Owner by Firm Revenue Size...20 Figure 31: Operating Profi t Margin and Overhead as Percent of Revenue by Firm Revenue Size...20 The Recruiting Advantage...21 Figure 32: Median Starting Compensation for Lead and Service Advisers by Firm Category...21 The Growth Advantage...21 Figure 33: Median Revenue and AUM Growth in 2017 by Firm Category...21 Super Ensembles...23 Profi tability...23 Figure 34: Operating Profi t, Direct expense and Overhead Expenses of Top-Performing vs. All Other Super Ensembles...23 Productivity...23 Figure 35: Productivity Ratios of Top-Performing vs. All Other Super Ensembles Figure 36: Staffi ng Structure of Top-Performing vs. All Other Super Ensembles Enterprise Ensembles...25 Growth...25 Figure 37: Median Revenue Growth Rates of Top-Performing vs. All Other Enterprise Ensembles...25 Figure 38: Average Revenue and Operating Profi t of Top-Performing vs. All Other Enterprise Ensembles...25 Profi tability...26 Table of Contents 2018 InvestmentNews Research

5 TABLE OF CONTENTS (CONT D.) Table of Contents Figure 39: Operating Profi t, Direct expense and Overhead Expenses of Top-Performing vs. All Other Enterprise Ensembles...26 Figure 40: Average Operating Profi t Margins by Firm Category...26 Productivity and Capacity...26 Figure 41: Median Productivity of Top-Performing vs. All Other Enterprise Ensembles...27 Figure 42: Median AUM and Revenue of Client Relationships For Top-performing vs. All Other Enterprise Ensembles...27 Figure 43: Capacity (in Terms of Clients per Professional and Clients per Staff) of Top-Performing vs. All Other Enterprise Ensembles...27 Figure 44: Perception of Adviser Capacity at Top-Performing vs. All Other Enterprise Ensembles...28 Future Super Ensembles?...28 Figure 45: Median AUM and Revenue of Client Relationships at Enterprise Ensembles and Super Ensembles...28 Ensembles...29 Growth...29 Figure 46: Average Assets Under Management for Ensembles Over the Last Three Years...29 Figure 47: Median AUM per Client and Revenue Yield on Assets For Top-Performing vs. All Other Ensembles...29 Profi tability...29 Figure 48: Operating Profi t, Direct expense and Overhead Expenses of Top-Performing vs. All Other Ensembles...30 Staf fi ng...30 Figure 49: Staff Structure and Headcounts by Annual Revenue For Ensembles...30 Productivity...30 Figure 50: Revenue per Professional and Clients per Professional of Top-Performing vs. All Other Ensembles...31 Figure 51: Revenue-based Productivity Ratios by Ensemble Category...31 Solo Practices...32 Owner Income...32 Figure 52: Median Pre-Tax Income per Owner For Top-Performing vs. All Other Solo Practices...32 Figure 53: Clients per Professional For Top-Performing vs. All Other Solo Practices...32 Staf fi ng...33 Figure 54: Median Total Staff Headcount of Top-Performing vs. All Other Solo Practices..33 Productivity...33 Figure 55: Revenue per Professional and Revenue per Staff For Top-Performing vs. All Other Solo Practices...33 Figure 56: AUM per Client and Revenue per Client For Top-Performing vs. All Other Solo Practices...33 Growth...34 Figure 57: Median Revenue and AUM Growth in 2017 by Firm Category...34 Profi tability...34 Figure 58: Median Operating Profi t Margin by Firm Category in 2016 and Appendix...35 Glossary...36 Income Statement Defi nitions...36 Position Classifi cation Defi nitions and Descriptions...38 Other Terminology...40 Average Common-Sized Income Statement - Fiscal Year 2017 All Participants...41 Top Quartile Performers vs. All Others...43 All Firms by Affi liation Model...45 Practice Profile - All Participants Business Profile...47 Clients, Assets Under Management, and Revenue...49 Growth Strategy...51 Business Development and Marketing...53 Services and Pricing InvestmentNews Research

6 FOREWORD 2018 INVESTMENTNEWS STUDY OF PRICING & PROFITABILITY Foreword by Gabriel Garcia, Managing Director, BNY Mellon s Pershing Advisor Solutions We are pleased to present the InvestmentNews 2018 Pricing & Profi tability Study, our annual advisor benchmarking study. For more than two decades, this survey has engaged independent advisory fi rms, who have generously shared detailed information about their business practices and fi nancial results. The roots of this survey go back to the 1991 International Association of Financial Planners when our CEO Mark Tibergien conducted a survey while at Management Advisory Services and later Moss Adams. This long-running effort to formulate clear industry performance benchmarks has shaped many of the practice management approaches that are still relevant to advisory fi rms today. This year, you ll notice a small but important change. The study formerly titled Financial Performance has been updated to more precisely describe its new research focus. The breadth and depth of the research has remained intact, but delves deeper into the data that matters most to your advisory fi rm. At a high level, this year s fi ndings paint a positive picture for the advisory industry revenue growth is on the rise, large fi rms are continuing to grow, and strategic M&A activity and a bit of healthy competition amongst fi rms is driving industry evolution. In 2017, the median revenue growth for all participating advisory fi rms was 11.7%. This is signifi cantly higher than the growth rates reported for 2016 (5.0%) or 2015 (6.9%). In fact, this result may signal a return to the double-digit annual revenue growth rates reported by fi rms for 2014 (13.5%) and 2013 (15.5%). The study results also reinforce what industry insiders intuit: that large fi rms are not only getting larger, but continue to win the lion s share of high-asset clients. Super Ensembles (those with over $10 million in annual revenue) generated over $18 million in revenue, on average, in 2017 more than quadruple what the average fi rm generated. In fact, the study found that Super Ensembles are outpacing other fi rms in all areas: from growth and profi tability, to recruiting and productivity, to client quality. As advantages continue to accrue to larger fi rms, their capacity to acquire other fi rms and practices has expanded. As a result, smaller fi rms are witnessing the signs of a maturing industry in which merging with other fi rms may represent the best (perhaps the only) path forward. One indication of the relative disadvantages of smallness is the fi nding that revenue for Solo practices (those with only one professional) grew revenue by 6.3% in 2017 barely half of the 11.7% average growth rate for all fi rms. The study also reveals that independent fi rms increasingly are competing against each other for clients. Firms reported that in 2017 about a third of their new clients (34.6%) came from competing Registered Investment Advisors or Broker-Dealers. This is a signifi cant shift from 2015, when only 10% of new clients were won over from other advisors. You will discover many more high-level insights in this study, along with extensive details and data that reveal the inner workings of fi rms of all sizes across the country. As with past studies, our goal is to provide you with clear, actionable information that you can use to fi ne-tune your fi rm for better results, or explore exciting new business approaches to achieve enduring success in the years ahead InvestmentNews Research 1

7 EXECUTIVE ALL PARTICIPANTS SUMMARY EXECUTIVE SUMMARY The independent fi nancial advisory industry continues to grow and achieve new heights of size and profi tability. However, the gap in performance between the largest and smallest fi rms is increasing and competition is intensifying. Growth has created appetite to hire more professionals and employees at every position. Advisory fi rms were very active recruiters in Competition did not just focus on clients but also on recruiting and retaining the best professionals; fi rms devoted a lot of budget and time to increasing their capacity to better service clients. Each year for more than 25 years, this survey has reached out to the industry to collect extensive information about the business practices and fi nancial performance of independent advisory fi rms. The survey goes out to the entire independent fi nancial advisory industry, and while participation is voluntary and non-random, the results are statistically signifi cant and speak to the trends that shape and impact the industry at large. For the 2018 edition of the study, 385 fi rms provided a complete set of income statements, as well as information around staffi ng, compensation, strategy, marketing, services, fees, and other data, allowing us to examine the shape and direction of the industry. Participation was particularly strong in the categories populated by the largest fi rms: the Super Ensembles and Enterprise Ensembles. We defi ne Super Ensembles as fi rms with over $10 million in revenue and Enterprise Ensembles as fi rms between $5 million and $10 million in revenue. Super Ensemble Multi-professional fi rms with at least $10 million in annual revenue. (n=43) Enterprise Ensemble Ensemble Solo Multi-professional fi rms with between $5 million and $10 million in annual revenue. (n=46) Multi-professional fi rms with $5 million or less in annual revenue. (n=250) A fi rm with a single client-facing professional. (n=46) The results of the survey leave no doubt that the industry is growing. The typical fi rm is no longer a small practice. The average participant size in the survey has increased to just over $4 million in revenue (Figure 1). The distance between the largest fi rms in the industry and the average fi rm is also very signifi cant. Super Ensembles had on average over $18 million in revenue in 2017 more than four times the size of the average fi rm. Figure 1: Average Revenue of All Participants vs. Super Ensembles Over the Last Five Years $25,000,000 $20,000,000 $15,000,000 $10,000,000 $5,000,000 $0 $15,684,000 $3,042,000 $18,213,000 $3,241,000 $19,263,000 $3,778,000 $16,567,000 $3,821,000 $4,220, All Firms Super Ensembles $18,594,000 This performance gap between Super Ensembles and the average fi rm is a trend that permeates the survey results. Super Ensembles have distinguished themselves as industry leaders and are outpacing their peers in many areas: growth, recruiting, profi tability, client quality and productivity. The result is an industry that is becoming more competitive and more consolidated. This process can be described as maturation, and it compels every fi rm to consider whether it can best achieve its vision by going it alone or joining forces with others. At the same time, the industry has experienced another growth spurt. The revenue of fi rms participating in the study increased by 11.7% on median in 2017, which is a high rate of growth compared to the relatively low growth rates over the previous two years (Figure 2). Asset growth was also very strong in 2017, indicating that high levels of revenue growth will continue in 2018, since assets added in 2017 will have a full year to bill. The result has been optimism throughout the industry and a growing appetite to hire and create capacity. Executive Summary 2018 InvestmentNews Research 3

8 EXECUTIVE SUMMARY (CONT D.) Executive Summary Figure 2: Median Revenue Growth Rate Over the Last Five Years 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 15.5% 13.5% 6.9% 5.0% 11.7% Increases in profi tability gave fi rms a sense of confi dence, and many used the opportunity to hire additional professionals and create capacity for even more growth in the future. Nearly half of the fi rms in the survey hired Support Advisers, and one-fi fth hired Service Advisers. Lead Advisers were also in high demand, with 11% of fi rms hiring for the position in the past year (Figure 3). Figure 3: Percent of Firms Hiring Advisers by Position in 2017 and 2018 Growth and opportunity were pervasive in the industry in 2017, but smaller fi rms are in danger of falling behind. Firms with only one professional (or Solo practices) grew revenue by 6.3% on median in 2017, which is relatively low compared to the 11.7% for all fi rms (Figure 4). Super Ensembles grew revenue by 12.8%, mid-sized Enterprise Ensembles by 11.1% and smaller Ensembles by 12.1%. Figure 4: Median Year-Over-Year Revenue and AUM Growth by Firm Category 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 11.7% 16.8% 6.3% 14.4% 12.1% All Firms Solos Ensembles Enterprises Super Ensembles Revenue Growth 16.9% 11.1% AUM Growth 17.6% 12.8% 17.5% 60% 50% 40% 30% 20% 10% 0% 1.1% 1.8% Practicing Partner 11.1% 8.8% Lead Adviser 4.0% 14.6% Business Development Specialist 10.5% 19.7% Service Adviser 14.2% 49.4% Support Adviser We are also starting to see intensifying competition among independent fi rms. Firms are reporting that more than a third of their new clients came from another independent fi rm, with approximately the same proportion coming from wirehouses and other broker-dealers (Figure 5). For comparison, in 2015 fi rms reported that only 9.9% of their new clients came from other independent fi rms. Historically, self-directed investors have been the primary source of new clients. In 2017, they accounted for less than a third of new clients InvestmentNews Research

9 EXECUTIVE SUMMARY (CONT D.) Figure 5: Competitive Source of New Clients 30.8% 34.6% New clients from independent financial adviser (RIA or IBD) New clients from wirehouse, regional BD, insurance BD, bank or trust Perhaps the biggest difference between fi rms small and large, however, comes from the clients they are able to attract. The data clearly shows that the size of an advisory fi rm is very closely correlated with the size of its average client relationship (Figure 7). Simply put: the largest fi rms work with the largest clients. This correlation is very strong in terms of both revenue and AUM. It has also been very consistent from year to year in the study. In statistical terms, 95% of the change in average client size across participating fi rms (R-squared) can be explained by the difference in the annual revenue each fi rm generates. 34.6% New clients previously self-directing investments or without a financial adviser The ability to acquire fi rms is becoming a critical part of the growth strategy for many fi rms, and acquisitions were an important contributor to growth in However, the ability to acquire fi rms or to recruit advisers with established books of business has been almost exclusively the domain of Super Ensembles. While, on average fi rms reported adding 2.2% in new assets from acquisitions, most of those assets went to Super Ensembles. Solo practices reported almost no acquisitions, and Enterprise Ensembles and smaller Ensembles reported only 0.7% and 1.3%, respectively (Figure 6). Figure 6: Average AUM Growth From Acquisitions by Firm Category Super Ensembles Enterprises 0.7% 3.4% Figure 7: Average AUM per Client and Revenue per Client by Firm Revenue Size $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,0000 $0 $9,533 $9,650 $8,795 $7,899 $3,205,000 $2,342,000 $2,227,000 $4,286 $4,510 $1,240,000 $1,447 $1,022,000 $1,223,000$1,218,000 $428,000 $677,000 $186,000 $250,000 $500,000 $1,000,000 $2,000,000 $3,000,000 $5,000,000 $7,000,000 $10,000,000 $15,000,000 >$15,000,000 Average AUM per Client Firm Revenue $14,038 Average Revenue per Client $12,873 $17,237 The ability to attract larger clients results in higher productivity, better leverage and higher profi tability. In turn, the higher profi ts and bigger budgets allow larger fi rms to pay more and attract better talent. The cycle then reinforces itself. $20,000 $16,000 $16,000 $12,000 $12,000 $8,000 $4,000 $0 Executive Summary Ensembles Solos All Firms 0.2% 1.3% 2.2% Growing profi tability and income in the industry as a whole has benefi ted all fi rms. It also appears that much of this growth has translated into owner profi ts. In 2017, owners earned an average of $623,000 in personal pre-tax income (Figure 8). Pre-tax income per owner is a simplistic measure of success that combines both compensation and profi ts to the owners. Pre-tax income per owner in 2017 was 11.8% higher than the previous year and the highest in the history of the study and is a number that closely matches growth in revenues. 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 2018 InvestmentNews Research 5

10 EXECUTIVE SUMMARY (CONT D.) Figure 8: Average Pre-Tax Income per Owner Over the Last Five Years $700,000 $600,000 $500,000 $465,000 $526,000 $570,000 $557,000 $623,000 $400,000 $300,000 $200,000 $100,000 $ Executive Summary The Ancient Greek philosopher Heraclitus said that change is the only constant in life. The same is true for the advisory industry it is always changing and evolving. The changes are not drastic, but consistent. Year after year, we fi nd that the relatively small but incremental advantages accumulated by the top fi rms in the industry produce a dramatic and lasting effect. The data in this study is comprehensive and covers many of the decisions that advisers and owners of advisory practices seek to make on an ongoing basis. We hope that the study continues to bring insight to those decision-makers and allows them to build bigger and better fi rms InvestmentNews Research

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