Paying Yourself First

A revealing look at best practices and RIA income levels--PracticeEdge, the monthly best practices newsletter for November

Ever wonder how your salary matches up to that of your peers? Ever looked at how much you reinvest in your business and speculated on how that amount compares to the amount your competitors and the industry's best firms reinvest in their businesses? This month, we take a look at how much average advisors invest in themselves and how much they invest back in their businesses. We also delve into how these numbers compare to the industry's top firms by reviewing the percentage of expenses dedicated to income. The results may surprise you.

As an independent business owner, you are in the unique position of having some control over your income level. You decide how your expenses are allocated and have discretion over what you pay yourself. Advisors handle these choices in a variety of ways. Some advisors pay themselves as much as they can, while others try to put their income back to work in the firm. Our data (see Chart 1 below) shows that among 41% of surveyed advisors, 30% to 60% of expenses go to paying their salary. Conversely, an analysis of top firms* uncovers a completely different approach. A significant number of advisors in the "top firm" category are actually able to reach higher income levels by reinvesting their income in the actual business. Thus, the majority (67%) of top advisors pay themselves below 30% of expenses. In comparison, only 38% of average advisors choose to pay themselves less than 30% of expenses. This imbalance shows that in order to successfully execute a high growth strategy, organizations would do well to make significant investments in their firm's personnel and infrastructure--thereby increasing long-term profitability and owner take-home pay.

It's important to note, of course, that the top advisors oftentimes are the largest ones and therefore even by paying themselves a lower percentage of total expenses, they are able to pay themselves a far higher salary than advisors associated with the smaller practices (see chart 2: Median Pre-Tax Income by Owner by Asset Size).

The right faces in the right places

Another choice that you're faced as a business owner is staff structure--both the number of staff members you have and the division of job types. Our research reveals that the industry's top firms are far more likely to have staff structures more able to support the substantial growth of clients and/or revenue.

We examined the staff operations at top firms and then compared them to other firms, highlighting the drivers of success in each of those areas. One interesting find involves the average advisor's everyday workload. Since each professional can only manage a finite number of clients, as a firm grows it most certainly has to add additional professional employees, rather than administrative staff.

The average top firm employs a total of 13 employees, comprised of three principals, four specialists, four client service staff members and two administrative personnel. The average RIA firm employs nine individuals broken down into two principals, two professionals/specialists, three client services/support staff and two administrative employees (as shown in chart 3 below). If you think about in percentages, the average RIA firm dedicates more than half (55%) of its staff to support and administrative functions, compared to the top firms' allocation of 38% of staff to the same functions. Or if you look at it in ratio format, top firms have 1.4 professionals for every non-professional employee; average firms, in contrast, only have 0.8. The higher ratio of professionals (including both principals and specialists), to non-professionals (client-services/admin) is undoubtedly responsible for the top firms' ability to serve existing clients and bring in new ones.

The message is clear. When creating the strategic goals for your firm, take into consideration not just your firm's practices but also the best practices in the industry. Just adding new staff members and increasing owner income doesn't mean your practice's profitability will rise. To enhance your success, it's also important to focus on a reinvestment strategy, build effective staff operations and learn from best practices in the RIA industry.

*Top firms are defined as those with AUM over $200 million or be in the top 10 percentile in terms of assets, have an AUM growth rate higher than 25% in 2004, have net profits in excess of $250,000 and offer at least four services. Out of the 353 firms that participated in the survey, 19 firms met these criteria.

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