From the September 2012 issue of Investment Advisor • Subscribe!

A Changed Industry: Insights From the 2012 Top Wealth Managers Survey

Staffs are larger and average AUM is up, but the wealth management industry still faces several challenges

Illustration by <a href="http://www.gettyimages.com">Astrid Dininno/GettyImages</a> Illustration by Astrid Dininno/GettyImages

The wealth management industry is rapidly changing and has entered into the mature stages of its evolution. The average wealth management firm is not only much larger, but is also a more prominent competitor with a well-established brand, presence and reach into the very top levels of the high-net-worth market.

Many firms are owned by institutional investors, such as private equity and publicly owned firms. New structures of ownership and branding are emerging, providing new resources and capabilities while altering the competitive landscape. Finally, the patient efforts of organically grown firms have paid off in building large, competitive organizations.

The criteria for being a top firm are rising, the expectations of clients are growing and the competition is intensifying. Our industry is changing, and the top wealth management firms find opportunity in that change.

Results from the 2012 Top Wealth Manager Survey

This is the 12th year that AdvisorOne.com and Investment Advisor (and its predecessor publications) have surveyed the wealth management industry, which we define as registered investment advisory firms that provide wealth management services to individuals. The average participant in the 2012 Top Wealth Manager Survey has $978 million in assets under management (AUM), employs a team of 52 people and works with an average client with $4.7 million in assets. In contrast, nine years ago, the average participant had $371 million AUM and a staff of 13. This tremendous growth has resulted in the emergence of new local, regional and even national brands that are in contention for the most desirable clients and are achieving high levels of awareness in their target markets. (Data for the 2012 Top Wealth Managers was self-reported by the firms themselves online at AdvisorOne.com this summer, with firm data as of Dec. 31, 2011. Each participant firm was given the opportunity to confirm their submissions. See the About the Top Wealth Managers Survey sidebar on page 54 and the Top Wealth Manager home page at AdvisorOne.com for additional information and findings from the survey, along with profiles of the top 10 firms.)

While assets are growing steadily, management challenges persist:

  • Growth, net of market, is relatively slow.
  • We may be seeing early signs of fee pressure.
  • Many firms may be adding smaller clients to supplement their growth.
  • There are no significant productivity gains in the last three years; the only way to grow further is to hire more people.

Still, 2012 is another year of growth and change for the top wealth managers in the country. It is a year to make a difference. In an industry that is rapidly consolidating and becoming more competitive, the top firms are distancing themselves from the pack by combining a well-thought-out, competitive strategy with a careful, internal cultivation of culture and people. We will see their plans in the financial information and other data provided in this survey.

What It Takes to Be at the Top

The size of a firm is by no means an absolute measure of business success, but being one of the largest firms in any industry is a high recognition. The largest firms usually enjoy a competitive advantage in resources, brand recognition and negotiating leverage, and have more opportunities to attract top talent and form alliances with other premier brands.

Every year, the Top Wealth Manager Survey lists the top 100 participating firms by AUM size and average AUM per client (see page 56 for the top 25. The full list is available at AdvisorOne.com). This prestigious list includes the top firms in the country and is widely followed by the industry, media and clients. The bar to be considered a top wealth manager is being raised higher and higher each year.

While, on average, the top 100 firms had $634 million in AUM in 2008, the average for this year’s top firms in the survey was $2.457 billion in AUM. The cut-off point for this year’s survey was $590 million, meaning that the number 100 firm on the list this year was almost as big as the average firm just three years ago (2008).

The top 100 firms displayed remarkable results—their average assets per client are $10,778,253, significantly greater than the survey’s average asset per client of $4,697,614. These large firms have revenues per professional of $544,447 compared to $459,698 for the survey’s average firm. They also employ an average of 47 people in the firm, 24 of whom are professionals, compared to the average firm, which has a total staff of 22 employees; of those, 12 are professionals.

This level of success seems to come from a variety of strategies, but most of the top 100 group appears to fall in three categories of firms:

1. National or Regional Brands. There are a number of firms that market nationally and service a very high number of clients with a high number of professionals. Such firms include Edelman Financial, The Mutual Fund Store, Ronald Blue & Co., United Capital and Brookstone Capital. Built through acquisitions or gradual expansion into new markets, these firms have hundreds of advisors and a desire to expand their brand recognition in order to reach a broader audience. While their average client size may not be the highest, they record some of the best financial results in productivity and growth.

2. Ultra-High-Net-Worth Firms (multifamily offices). Many top firms in the survey follow a strategy of pursuing the very top clients and providing them with exclusive services. They do not have thousands of clients or hundreds of advisors, but rather serve as a well-kept secret for an exclusive clientele. Firms such as Treasury Partners, Athena Capital and SCS Financial maintain average assets per client over $100 million and achieve remarkable success in their selective strategy.

3. Regional Super Ensembles. This group of firms is experiencing strong organic growth. They are patiently adding assets and professionals year after year while achieving excellent client retention. They do not work only with the super-rich, and their average AUM is not as high as that of multifamily offices.

Their results in terms of growth and sustainability, however, are very impressive and many of them are expanding regionally by opening multiple offices. This category includes some of the longest standing and most prestigious firms in the independent wealth management industry—Aspirant, Dowling & Yahnke, Hewins Financial, Blue Ocean, Bingham, Osborn & Scarborough and many others. Also included in this category are accounting firms such as Plante Moran, Moss Adams, HBK, Wipfli and others.

There are many strategies for success, but all firms in the survey have exhibited tremendous growth over the last 10 years, seizing the opportunities in our changing industry. Still, profitable growth continues to be the highest priority for wealth management firms.

Growing Profitably

On average, firms in the survey grew their assets under management by 9.4% in 2011. Considering the S&P was almost perfectly flat (0% growth) for that same year, this result is not entirely disappointing. However, it is far from the more than 25% annual growth experienced each year from 2004 to 2008. This environment of slower growth and higher levels of competition is likely to be the future of the industry. Slower growth changes the context for management decisions dramatically—investing in the business does not pay off as quickly, valuation of the businesses may decline, and the financial and legal risks to owners increase while their income may stay relatively flat.

It is interesting to note that the fastest growing firms are actually the largest. Firms with over $3 billion in AUM were the only ones with double-digit growth. Much of that growth came from acquisitions or recruiting of wirehouse teams. At the same time, the lower ranges of the client market—the clients with less than $5 million in AUM—also contributed to this growth.

While it is very difficult for wealth management firms to admit they have an interest in working with smaller relationships, there are indications of their willingness to lower their minimum fees and reach down-market. In fact, the average revenue per client for firms of all sizes declined between 2010 and 2011.

Even the largest firms’ revenue per client declined from $35,356 per client to $31,925 per client. In addition to working with smaller relationships, firms may be experiencing more pricing pressure. If we compare the revenue “yield” (the revenue of the firm in a year divided by the average AUM in that year), we find there are some small signs of decline.

The average yield was 76 basis points in 2010 compared to 74 in 2011. Such minor declines are evident in most sizes of firm. While they are not yet statistically significant, the combination of declining revenue per client and declining yield may be something to watch in the future. Based on recent conversations, most firms tend to report that they are moving upstream and not feeling pricing pressure.

The reality of the market may be different. In order to grow, firms may need to allow some room for compromise.

No Productivity Gains

Growth in itself is of little value if it does not increase profitability. While maintaining margins will certainly add to the bottom line, most firms also hope to increase their productivity as they grow, thus leveraging the results. Unfortunately, we have not seen any significant changes in productivity since 2008, when the economic crisis began.

Productivity gains are critical for wealth management firms since without them, the only way to grow is by continuing to add new professionals and staff at a fixed rate of return. This process of staff additions in concert with revenue growth can be slow, and finding the right people can be challenging.

What is more, existing professionals in the firm have fewer opportunities to grow into owner responsibilities if the professional leverage is limited. Productivity gains made that process much easier in 2006 and 2007, when surveys such as the 2008 Moss Adams Survey of Financial Performance were reporting revenue per professional of over $780,000.

In today’s industry, those numbers seem awfully high, perhaps even out of reach. Instead, we see a continued trend for increases in the level of client service during signs of fee compression—especially at the very high end of client size range.

The Siren Call of the UHNW Client

Working with wealthier clients and larger portfolios seems to be the intuitive solution for achieving higher productivity. But our 2012 Top Wealth Manager data suggests that at some point, the very wealthy clients seem to require more in service than they add in revenue.

If we split the participants in the survey by the average size of their client accounts, we will find an inflection point near $20 million in AUM per client. Firms that have an average client size over $20 million reach very high levels of total AUM, an average of $4.1 billion, but a relatively lower average revenue size of $4.8 million compared to AUM.

In contrast, firms that work with relationships between $5 million and $20 million have total AUM of $1.8 billion, but have $7.4 million in revenue. If we calculate the relationship between revenues and assets, we can clearly see the inflection point. Firms with large relationships have a yield (revenue to AUM) of 18 basis points while medium-sized firms have a yield of 40 basis points.

The high cost of the relationship is also visible in the ratio of clients per advisor. Firms with over $20 million per relationship have eight clients per advisor on average; firms who work with smaller relationships, those under $5 million in AUM, have 59 clients per advisor. This is where the lack of leverage becomes apparent.

While average client size is vastly different, the revenue result is about the same. Firms working with the largest clients have revenue per professional of $474,612, while firms working with small relationships have revenue per professional of $456,863; slightly smaller but not qualitatively different. It seems the optimum trade-off between size and productivity is between $5 million to $10 million in AUM.

Where Wealth Management Begins: Client Retention

We mentioned that growth is a priority, but in wealth management, everything starts with a focus on existing clients. It should be of no surprise that first and foremost, advisors want to focus on retaining their client relationships.

This is true for firms of every size. Retention fuels growth through existing client referrals. In fact, we can look at the first four items on the chart below as a continuous cycle—retention creates referrals from existing clients, which brings revenue growth to the firm. An increase in revenue then brings an increase in profitability.

Unfortunately, this cycle can be very slow and interrupted by market movements or other events. Referrals from clients alone are not enough for meeting most growth goals, and revenue alone is not enough to grow profitability.

Productivity issues may be the reason why when participants were asked in the survey what help they would want to receive from custodians, their top two responses were technology and practice management. This is where some of the needs diverge between the largest and smallest firms. The largest firms had significant interest in products, alternative investments and education on new investment vehicles, while smaller firms assigned the least importance to alternative investments and other product information.

Of the participants in the study, 47% use Charles Schwab as their primary custodian, 20% use Fidelity, 11% use TD Ameritrade, 7% use Pershing and the remaining 15% are split among multiple firms. Most firms, however, use multiple custodians with, on average, 77% of their assets being held with the primary custodian.

Primary custodian market shares remain consistent across all segments, with the exception of Pershing and TDA. These two custodians traded their spots on the list with the largest participants using Pershing as their primary custodian (13%) versus TDA (4%).

What’s Next for Wealth Management?

The 2012 Top Wealth Manager survey shows an industry in a period of prosperity, high AUM and attracting very high-end clients. The industry is also changing: The size of the average firm has grown, and the bar to be one of the top firms is higher than ever before.

What is more, the nature of wealth management firms is changing. Many are owned by large public companies or national brands, and many are much larger firms than the respective local offices of their traditional competitors, wirehouse firms and trust companies. You can see advertisements from several firms on national TV, radio or in magazines.

The word independent, too, is becoming harder to define and use. Yet, the more things change, the more they stay the same. Success comes to those firms that can create a long-term, sustainable growth strategy and patiently build on their strong client relationships. The challenges remain the same—finding the optimal balance between the size of the client relationship and the cost of service, while creating a productive service model that relies on teams and the most experienced professionals.

The Top Wealth Managers in the AdvisorOne.com survey provide an example for the entire industry to follow—a path to growth and success in business and client service.

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