This is the second in a two-part series from PracticeEdge
that provides a synopsis of independent financial advisor performance
in 2003 based on AdvisorBenchmarking’s May survey of 1,095 RIA
firms. In this issue, we address profit margins and new trends in
client management.
Asset Growth–Just the Tip of the Iceberg
In
last month’s Practice Edge, we shared the good news–average
RIA firm assets under management (AUM) rebounded last year to 1999
levels, rising nearly 23% to $87 million on median at the end of 2003.
Advisorbenchmarking’s research shows that the amount of assets
under management per client also rebounded in 2003, reaching $312,000
on median compared to 2002′s $258,000. But there’s more to
this story. Taking into account this robust AUM growth, the profit
margin decrease during the last year was surprising. Indeed, in 2003,
the median profit margin of advisory firms decreased 2.1% to 25.85%
from 2002′s levels. Since a firm’s profit margin is defined
as net profit divided by revenue, the profit margin decline can be
attributed primarily to faster revenue growth relative to growth in
profit. To illustrate, in 2003 revenue rose 15.35% to a median value
of $917,000, while net profit gained just 12.86% to $237,000. Although
this was the highest level of profit in the past three years, revenue
growth was much stronger than profit growth. Therefore, profit margins
suffered.
Chart 1: Median RIA Profit & Profit Margins
(2001-2003)
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What Affected Profit Growth?
In order to determine
why the profitability growth did not move exactly in step with assets,
let’s take a look at the expense side of the equation. After a
brief halt in 2002, expenses shot up a staggering 10.76% in 2003 to
$710,000 on median. With inflation for the year measuring a moderate
2.27%, this increase was substantial. Much of the increase was due to
an average 4% rise in compensation for staff members, from 21% of
total firm expenses to 25%. With staff levels remaining constant from
the prior year, this increase may reflect RIAs’ desire to reward
staff following a few lean years. Two other areas that saw an increase