Call them optimistic. Financial advisors are expecting more robust growth in return on assets under management in 2013 that in 2012 even though many in Russell Investments’ latest quarterly survey failed to meet ROA growth expectations this year.
Forty-nine percent of advisors responding in Russell’s Financial Professional Outlook study reported that they had not experienced the kind of growth they had anticipated. Twenty-one percent said their ROA had grown more than expected and 28% said their ROA growth had fallen short of predictions.
On average, advisors had looked forward to 7.6% growth in ROA this year, but realized 7.2% growth.
In 2013, however, they said they expected 8.4% growth in ROA on average. Sixty-seven percent of respondents said the current ROA on their books of business was 80 basis points or less.
“Return on assets is one important metric for goal-setting around business growth,” Sam Ushio, practice management consultant for Russell’s U.S. advisor-sold business, said in a statement.
“Based on our research, we believe that a reasonable aspirational ROA level is around 70 to 90 basis points on the overall business. If an advisor is earning less, it may indicate that they are still using a transactional business model,” Ushio said. “At a deeper level, a lower ROA may reflect an advisor’s tendency to discount the value they deliver to clients, which often correlates with confusion on the competitive landscape.”
Ushio said 62% of respondents were focusing on deepening client relationships to help grow ROA across their businesses. Fifty-eight percent also reported that they were proactively seeking new clients to grow ROA, as well as asking for referrals (53%), moving clients into fee-based relationships (43%) and moving client cash off the “sidelines” (32%).
Asked in which of their client segments they expected to see the most ROA growth in 2013, 64% of advisors indicated clients nearing or very near retirement.
Among respondents who expected most growth from clients five to 20 years from retirement, 53% said would increase ROA by asking for referrals, while 52% said they planned to move clients to advisory-based relationships.
The most popular strategy for increasing ROA of advisors expecting most growth from clients less than five years from retirement was focusing on client service and deepening relationships (60%).
Ushio noted that many high-net-worth investors try to diversify by working with more than one financial advisor, but by strengthening client relationships advisors can encourage their clients to consolidate their assets.
Not surprisingly, advisors and their clients talked about tax implications throughout 2012. In the latest Russell survey, taxes were the top subject of advisor-initiated conversations (36% of advisors), while 23% of advisors said clients had broached the topic.
Advisors also pointed to generating income from portfolios (30%) and clients running out of money in retirement (30%) as the issues they were most often bringing up to clients.
“Helping to manage tax efficiency can be a great way for advisors to demonstrate the value they deliver to clients,” Ushio said. “Advisors should try to refocus client questions about the fiscal cliff into meaningful conversations around potentially maximizing after-tax wealth and helping to improve the odds of meeting their long-term financial goals.”