November 1, 2010

Top Wealth Managers Q2 2010: Lowered Expectations

Will the market dictate what 2011 is like or can wealth management firms impose their own will on their growth?

This year was supposed to a year of growth and dramatic improvement. It was meant to be the year of gaining momentum, adding revenues, restarting careers and returning to prosperity. It was a year of high expectations. Now that the year is three-quarters over, it seems that the some growth materialized but it never really brought optimism with it.

The revenues of the typical (median) firm participating in the Top Wealth Managers Quarterly Pulse Survey published by are on a path to grow by 12.6% in 2010 compared with 2009. Much of that growth, however, occurred in the first quarter of 2010, and it was mostly due to the lag effect of quarterly billing rather than dramatic growth in assets or clients. On median, firms in the survey experienced a decline of 0.6% in assets under management (AUM) in the second quarter of 2010 and only brought in seven net-new-clients for the first two quarters of 2010.

Ambitious plans for 2011

More importantly, firms are not approaching the year with much optimism and the survey shows low forecasts for the remainder of the year, a sense of difficulty in developing new business and a cautious approach to employee decisions. Nonetheless, firms are committed to growth and when asked about their current strategic initiatives, most responded with plans of hiring new advisors and investing in their business development. Firms have lowered their growth expectations and become more cautious in their projections. Still, firms are making progress and starting to look at 2011 with ambitious plans. The question is “If 2010 wasn’t as good as we thought it would be, what will make 2011 different?”

The first half of 2010

Business development was slow for firms of all sizes and market performance made growth even harder. On average, firms added 4% of new assets to their AUM but lost 3% to market performance and 2% to distributions and lost clients. As a result, firms recorded median revenue growth of 12.6%, but it is clear that most of the growth was realized in the first quarter. For comparison, in the 2003 to 2007 period, average growth per year was between 19% and 25%. While medium-sized firms seemed to experience a little faster growth year-to-date, their new-asset acquisition in the second quarter was equally slow with only 3% new AUM and 5% lost to market performance and distributions.

The market is not the only culprit--it seems that clients are reluctant to make significant changes to their financial lives. When asked about their perception of client sentiment, most advisors believe that clients today are more cautious and take longer to change advisors than before. Ten percent of the participants even see clients as more than cautious–they see them as reluctant or even resistant to change. Still, 16% of participants are not seeing a change in client behavior compared to pre-recession levels. There are also signs of increased competition: When asked how many other firms clients evaluated before making a decision, advisors responded that, on median, clients evaluate two other competitors before choosing their firm.

Slow but steady growth

A slower but steady growth pattern may not seem like a problem for wealth management firms, but we have to remember that growth rates have so far only been slow—not steady. What’s more, there is a lot of pent-up expectation at the employee level where staff have been patiently waiting for pay increases and promotions. Slow growth, however, may create problems in terms of the financial affordability for such pay increases. When asked about end-of-year changes to compensation, most firms are planning to pay bonuses at the end of 2010, but only about half of the participants project pay increases beyond the cost-of-living increase. Again, across-the-board pay increases should not be seen as “normal” in any given year but we have to remember that most staff have not seen growth in income for a third year in a row.


As a result of the slower growth, productivity ratios for participants are still behind their pre-recession standard. In 2007, we came to expect ratios of $350,000 in revenue per professional and $200,000 of revenue per staff. The largest firms were reaching as high as $600,000 in revenue per professional and $300,000 in revenue per staff. Today, only the largest firms have revenue per professional of over $350,000 and all firms are dangerously close to $200,000 per staff.

Productivity ratios are always a tug-of-war between increasing client size and the higher expectations that larger clients have of their advisor. On median, the largest firms had $11,935 in revenue per client compared with $9,914 for the medium-sized firms and $8,037 for the smallest firms. At the same time, on median, the largest firms had 23 clients per advisor, compared with 27 for medium-sized firms and 38 for the smallest firms.

What do clients want in an advisor?

The differences in expectations are not just expressed in the amount of time that they expect to spend with their advisor, but also a function of the factors clients consider when choosing an advisor. When we asked advisors to rate the importance of different factors on why clients choose to join their firm, we found that firms still rely heavily on existing client referrals, but also are emphasizing comprehensiveness of their services.

The top three responses were “existing client recommendation,” “comprehensiveness of the service” and “reputation of the firm.” While the top three were unanimously chosen, the rankings were different according to the size of the firm. The largest firms ranked comprehensiveness of the service as the most important factor, while medium sized firms emphasized reputation of the firm and the smallest firms relied on client referrals. Investment performance was a distant four for all types of firms.


Growing the firm

It is always surprising for me how infrequently niche strategies, alliances or unique methods are used to attract clients. It is very typical for all types of professional services firms to rely heavily on referrals, but at the same time this over-reliance on referrals may be at the root of the slow growth. When client sentiment is cautious and the markets are creating headwinds, referrals may be slow to come. What is more, the referral process is not one that advisors can control. Granted, there are marketing strategies for “asking for referrals,” but firms are usually too shy to do that too aggressively. At the same time, if referrals are the primary competitive differentiator, then logically, this gives a disproportionate advantage to the largest of firms.

Any long-term plan is ultimately a sequence of short-term steps, and similarly, any multi-year strategy is a sequence of short-term quarters. The market will always act as the “trade wind” for the wealth management industry; thus a slow quarter of growth when the market is volatile and in decline is not a problem in itself. At the same time, if wealth management firms are to go back to their ambitious growth plans, they will have to find a way to grow faster during times of stagnant markets. The second quarter of 2010 brought lowered expectations and caution, and as you are reading this report most firms are entering into their budgeting and planning cycle for 2011. The question remains—will the market fully dictate what 2011 is like or can wealth management firms find strategies to impose their own will on their growth?

Philip Palaveev is president of Fusion Advisor Network. He can be reached at Data Analysis by Jonathan McQuade.

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