Editor’s Note: We want to remind all RIA firms that the annual Top Wealth Managers survey is open.. Participation in the annual edition is the first step to inclusion in the Top Wealth Managers annual rankings. The AdvisorOne Top Wealth Managers rankings are used extensively throughout the industry by clients and professionals alike. We announce the Top Wealth Managers surveys in the Inside Wealth Management newsletter. Subscribe (at no cost) here, to see when they are underway so you can participate.
Click here to participate in the annual survey.
In Part 2 of our special report,“Top Wealth Managers Quarterly Pulse Part 2: Recruiting Picks Up,” Philip Palaveev and Jonathan McQuade report on recruiting and client acquisition trends evident in wealth management firms.
See the quarterly rankings of the Largest 100 Top Wealth Managers.
For one Top Wealth Manager’s view on training new advisors, please see “What’s Your Plan for Training New Financial Planners?”—Kate McBride
Optimism and enthusiasm are the most fragile of feelings. They arrive slowly, flee quickly at the first sign of trouble and it takes a long time to entice them back. If statistics show anything, optimism has every reason to return and enthusiasm should already be back.
The overall results from 2010 as indicated in the AdvisorOne Top Wealth Managers Quarterly Pulse Survey, Fourth Quarter 2010, indicate that wealth management firms experienced strong growth, renewed flow of new clients and productivity levels that are close to or exceeding the pre-crisis levels. Still, firms are cautions when it comes to recruiting staff, and conservative with marketing and technology budgets.
Memories of 2008 and 2009 are still evident, and political and natural disasters still keeping owners of wealth management firms awake at night.
One-hundred and sixty-two of the nation’s premier wealth management firms submitted information for the fourth quarter Top Wealth Managers Pulse survey. Registered investment advisor (RIA) firms that have their own SEC or state registration, and $50 million or more in assets under management (AUM) may participate in the surveys, which are conducted quarterly and annually and are the first step in eligibility for the Top Wealth Manager rankings.
(The annual Top Wealth Managers survey, now in its 11th year, will be available this week on AdvisorOne. Subscribe (at no cost) here, to the Inside Wealth Management newsletter to see when they are underway so you can participate.)
Best Annual Growth Rate Since 2007
On average, wealth management firms recorded a 20.1% growth in AUM in 2010. This growth consisted of new client additions of 13% of the total AUM and 12% growth from market performance. This was offset by 5% decline from clients lost or client distributions.
These results mark the first time since 2007 that this survey is reporting double-digit percentage growth in new client additions and the first time in which new client additions are outpacing market performance in a year when the firm is experiencing net growth. The strength of new business development across the wealth management industry speaks to the optimism of individual investors as well as the systematic marketing effort of the firms during the last two years.
Growth Sources and Expectations
On average, firms added 28 new clients to their roster of 263 existing clients. At the same time, they lost on average 10 clients due to natural attrition or client dissatisfaction, resulting in a net total of 281 clients at the end of 2010. To put those numbers in perspective, gross percentage growth in clients was 11%, while net growth was 7% in the number of new clients. The fact that 11% growth in clients resulted in 13% growth in AUM suggests that firms are gradually upgrading their client base—that is, new client relationships are, on average, larger than existing client relationships.
The growth in revenue in 2011 has rekindled ambition across the industry and firms are projecting an increase in revenue of between 15.8% for the mid-sized firms to 19.7% for the largest firms. Firms with less than $500 million in AUM are projecting 17.6% growth
in revenue. This optimism is not unfounded considering the results from 2010 but it is interesting that the largest firms are projecting the fastest growth.
Mathematically, large firms’ size should make it more difficult for them to grow by the same percentage as the small firms. For example, one $10 million AUM client alone can create 5% growth for a firm with $200 million in AUM, while a $2 billion-in-AUM firm will need 10 such new clients.
Historically though, we have observed this phenomenon in most years since 2003: The largest firms are growing faster than the rest of the industry. In 2010, for example, the largest firms grew by 21.0% compared with 16.8% for the smallest firms.
A significant part of the size advantage of the largest firms is their ability to attract the largest clients. The advantage is exponential—while the smallest firms work on average with clients who had $1.5 million in 2010, mid-sized firms worked with clients who had a little over $3 million in AUM and the largest firms worked with clients who had well over $12.6 million. Larger client relationships allow firms to leverage the fixed cost of creating certain capabilities, such as research, tax expertise, etc., and allow for a more team-centric service model utilizing various levels of professionals. From a marketing perspective, the larger relationships are good reference accounts and result in referrals that are similarly large in size.
The size of the typical client relationship is one of the key drivers of productivity (client service model and the efficiency of implementing that model being the other two) and therefore it is no surprise to see that large firms have advantage there too. The firms with over $1 billion in AUM had $835,984 in revenue per client and $436,437 in revenue per staff, compared to $476,236 in revenue per client and $233,360 in revenue per staff for the smallest firms.
It must be noted however that this survey did not collect actual revenue information for the participants. The revenue levels were approximated based on the AUM of the firm, the size of the typical relationship and average pricing data.
Look for Top Wealth Managers Quarterly Pulse Part 2: Recruiting Picks Up, and the quarterly rankings of the 100 Top Wealth Managers next week in the Inside Wealth Management enewsletter.
We want to remind RIA firms that the annual Top Wealth Managers survey is open now through May 10. Click here to take the annual survey. Participation in the annual edition is the first step to inclusion in the Top Wealth Managers rankings. The AdvisorOne Top Wealth Managers rankings are used extensively throughout the industry by clients and professionals alike. We announce the Top Wealth Managers surveys in the Inside Wealth Management enewsletter. Subscribe (at no cost) here, to see when they are underway so you can participate.