Top of the Heap

Pick up the sports section of USA Today and you’ll find Jeff Sagarin’s rankings of college football teams. Like Sagarin, AdvisorBenchmarking uses statistics to identify top players in our roster of advisory firms.

At AdvisorBenchmarking, one of the most frequent questions we hear from advisors is, “How do you determine which RIA firms are ‘top firms’?” We’ll answer that question and more in this month’s and next month’s issue of PracticeEdge. In part one of this two-part series, we review the statistics we use to identify the top firms. Next month, we’ll dig a little deeper and identify what drives their success and how you can incorporate some of their business-building best practices.

In order to identify the ‘top’ firms, we apply a multi-criteria scoring model that factors in four variables: size of firm, growth rate, profitability, and range of services offered. Based on this screening, a Top Firms’ Benchmark-comprising the firms that met our tough performance criteria-is created. We then compare the most successful RIA firms with the rest of the marketplace. Let’s look at our four variables in turn.

Size of Firm

The top firms had $625 million in assets on median, compared to $124 million for the average RIA firm.

AUM Growth Rate

Top firm assets are increasing more than twice as fast as those of average firms, based on our 2005 study research. The top firms have attained a 36% asset growth rate versus their slower growing colleagues’ 18% growth rate.

Over all, however, advisors’ expectations on growth may be unrealistic. When asked to quantify expected AUM annualized growth in the next five years, one in three advisors (33%) in our survey believe AUM growth will be in the 11% to 20% range. Similarly, 32% believe AUM growth will be more than 30%, while 22% believe growth will be in the 21% to 30% range.

Profitability

Because the top firms tend to be larger, they tend to have economies of scale that translate into better profitability. Top firms recorded a median profit margin of 36%, while the average RIA shop only saw a profit margin of 29%.

Range of Services

Top firms are able to offer as many as six services on median, compared to only four by average ones. Specifically, the most common services offered by these top firms are investment management, financial planning, estate planning, advanced tax planning, and insurance planning. Many of the firms in the top firms’ benchmark also offer more advanced services, such as executive compensation consulting and charitable gift planning. This wide array of services is a clear indication that there is a robust presence of wealth management services among top firms. Before you decide to add more services, a word of caution-too many services might actually harm your business (see Practice Edge March 2006). It takes a lot more manpower to offer more services–top firms function with a total of seven professionals, whereas smaller firms have to get by with fewer.

Overall, top firms have broader services, higher asset growth rate and higher profit margins. There is no “guaranteed method” for practice management success, but by studying the best practices, you may be able to borrow “tried and true” ideas from the winning firms. In the next issue of PracticeEdge, we will dig a little deeper into the best practices of top firms and identify possible opportunities that average firms can utilize. Stay tuned!

All registered investment advisors are invited to participate in the latest Rydex AdvisorBenchmarking survey of RIAs. Advisors who participate will receive a customized Practice Analysis report, learn best practices of the most successful advisors, gain access to trend analysis, and will get a complimentary copy of the 2005 Annual Survey. To participate, visit