This two-part series of Practice Edge provides a synopsis of the financial performance of independent advisors in 2003 based on AdvisorBenchmarking's May survey of 1,095 RIA firms. In this issue, we discuss the growth in assets under management those advisors have seen, as well as the changes in revenues and the revenue mix. In part two next month, we shed more light on profit margins and the notable new trends in clientele and client management.
Assets Under Management
If assets under management (AUM) were the only measure of success, 2003 had to be one of the best years for independent advisors since we began tracking the industry's performance five years ago. Following steep declines in the previous three years, advisors saw their AUM rebound by nearly 23% from 2002 levels to $87 million on median at the end of 2003.
At this asset level, advisory firms on average manage exactly the same amount of money today as they did in 1999 when the stock market was at an all-time high, as shown in chart 1 below. While flat asset growth in a four-year span hardly seems a cause for celebration, one must not forget that the S&P 500 Index was down 19.58% over the same period. There is even more encouraging news: With 24% asset growth in 2003, the three-year asset decline between 2000 and 2002 was effectively reversed in a single year, demonstrating the industry's ability to recoup losses fast when bolstered by a strong stock market.
As would be expected, advisors' revenue soared following those ballooning assets. In 2003, responding advisory firms saw their revenues rise 15.35% from the prior year to a median $917,000.
As with the reversal in assets, a single year of strong revenue growth corrected the deterioration of the preceding three years. The strong showing in 2003 brought revenues to levels higher than even 1999 ($917,000 vs. $902,000), as shown in chart 2 below. While the 1.66% increase for the entire period is actually a decline when taking inflation into account, it is still better than the asset performance highlighted earlier, which merely remained flat.
Impact of AUM on revenues
Despite the positive revenue growth in 2003, one might wonder why revenues grew at a pace lower than the assets under management (15.35% vs. 22.54%). The answer is simple: Advisors do not generate all their revenues from managing money. Last year, AUM fees made up only 78.65% of total revenues, with the remainder coming from financial planning fees (20.15%) and a small slice (1.2%) from commissions.
This diminishing dependency on AUM to generate revenues is not new to the industry and in fact is quite a positive trend, as it diversifies the revenue stream across multiple sources and reduces advisors' dependency on the stock market for revenue. The trend proliferated especially during the bear market between 2000 and 2002, where the weighting of AUM fees in the revenue mix declined from 85.39% to 74.25%, as shown in chart 3 below.
In all, 2003 was a great year for independent advisors. As always, you should examine the above numbers and compare them to your own. In the next issue, we will discuss the ramifications of the survey's results for advisors' profit margins and clientele, so stay tuned.
Ramy Shaalan is Vice President of AdvisorBenchmarking.com, an affiliate of Rydex Global Advisors. He can be reached at firstname.lastname@example.org