Separating the Best From the Rest

Elite advisory firms stand out from the pack in several key ways

Examining ways to improve your practice? Any introspection of your own practice should include an assessment of the most successful practices in the industry. This month's issue of PracticeEdge explores the best practices of those most successful RIA firms, based on the Top Firms benchmark--a proprietary composite made up of 23 firms that have met our stringent performance criteria determined by firm size, growth rate, profitability, and range of services.

When you take a look at these elite firms, it becomes clear that best-of-breed firms stand out in several ways: they are larger, enjoy a higher revenue growth rate, have a higher asset growth rate, have larger profit margins, and achieve greater economies of scale, all of which produce lower expenses per million dollars of AUM.

When Bigger Is Better

The top firms are extremely large, with $413.4 million in assets on median, compared to the $87 million for the average RIA firm. Those included in the top firms' composite benefited from a 25.84% growth in assets last year, compared to 22.54% by the average RIA firm, as shown in chart 1 below. These firms also seem to have inherently larger profit margins. While the difference is not overwhelming--30.73% compared to 26.48%--advisors shouldn't underestimate the importance of profitability. At first glance, these larger margins seem to say a lot about the effect of AUM on their businesses, but they may just be a signal that cost-cutting measures have been successful given the recent rise in expenses. Elite companies make sure that higher expenses are attached to revenue streams, which allows the best financial professionals to develop the ability to control their gross margins.

It's About Time

Other valuable tips can be gleaned from examining how the best-practice advisors spend their time versus average RIA shops. Advisors in the best practices spend more valuable time with clients and prospects--45% of their time compared to 35.5% of time dedicated to client service by the average firm. The additional time with clients likely leads them to deliver superior client service. (See chart 1) Also, the best practices spend more time on both portfolio management and business strategy. Notably, they spend less time on business administration.

Source: AdvisorBenchmarking

When looking to these leading firms for guidance, be sure to take the following into consideration:

o Watch your bottom line. Make sure you're doing everything in your power to control your gross margins and make sure that what you spend money directly benefits your bottom line;

o Consider a change in how you and your team spend your time. Think of ways to minimize time spent on administrative duties so you can spend more time with clients, on portfolio management and focusing on business strategy;

o Consider having a smaller client base with larger clients. Bigger firms have more revenue per client, and serve bigger, but fewer clients.

As you plan for 2005 and look at your business for improvement opportunities, borrowing a few tricks from the best firms in the industry may serve you well. Best wishes as you create your strategies for the coming year.

Maya Ivanova is a research analyst with Rydex AdvisorBenchmarking.com, an affiliate of Rydex Investments. She can be reached at <a

href="mailto:mivanova@advisorbenchmarking.com">mivanova@advisorbenchmarking.com.

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