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October 18, 2002 at 08:00 PM
Wisdom has it that advisors’ time is best spent on managing client relations and servicing their needs. In an era when advisors can outsource everything from asset allocation and investment management to marketing and office operations, building better relations with clients and spending more time with them may be the true value component of any practice. To be sure, AdvisorBenchmarking.com conducted a survey of 163 advisors last June. The results indicated advisors spend on average 32.22% of their time on client relations, more than they spend on either financial planning (28.54%) or marketing their services (12.01%). Moreover, bigger practices spend nearly half their time servicing clients, more than they spend on financial planning and marketing combined. (See Chart 1 below.)
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Some will argue, however, that the market’s paltry performance in the last 31 months has triggered investors to seek more than just a good relationship manager. The need for better investment returns is increasingly becoming the driving force when choosing a new advisor, or replacing one, for that matter. Perhaps the best evidence demonstrating that growing appetite for better and absolute returns is the dramatic increase in the use of hedge funds by advisors, from 5% in 2000 to 21.96% in 2001 and the first half of 2002. On the flip side, the dismal market performance is seen by others as yet another reason why advisors should do just the opposite: direct their time and energy to client management and away from managing investments themselves. Holding clients’ hands and steering them through the market’s rough seas are critical to retaining those clients.
Clearly, both sides have valid arguments. We’re not here to deem one approach better than the other because neither one really is. The suitability of each approach to your practice is a function of your needs, abilities, and, most important, your business goals.
In an effort to determine how each style might impact your business however, we analyzed the financial performance of advisors who chiefly focus on either style. The focus was determined through a series of survey questions that assessed how much time advisors dedicate to each function. In addition, other qualitative factors that distinguish each style were also examined, such as frequency of trading and frequency of client meetings. The results shown below in Chart 2 further confirmed that each style has its pros and cons, providing a different financial model for the practice.
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On the other hand, investment-focused advisors do reap some benefits of the alpha they add through managing clients’ money themselves. This is not to say that they always generate above-market returns, as we have not examined their underlying investment performance extensively. But other evidence shows that because of the money management services they offer (versus outsourcing to TAMPS, for example) they can justify the high fees they charge: 194 basis points on average versus the 125 charged by client-focused advisors. As a result, investment-focused advisors’ profit margins are also higher (31.34% vs. 24.51%) and, consequently, their net profits are bigger than those of the client-centric advisors. Further, investment-focused advisors seem to be growing their practices at the strong rate of 21.25% a year. Part of this robust growth may be attributed to the above-average capital appreciation of their managed assets, due to above-market returns. But their smaller existing asset bases ($150.24 million versus $228.14 million) also provide for higher percentage growth rates.
